Better Thinking. Better Results. Where does my Recovery Come from? Presented by: Bob Schoonmaker MTIA/ATA Annual Meeting August 9, Win, Lose, or Draw: Strategic Options for Rural Carriers

Better Thinking. Better Results. Overview Review various elements of: – RAG proposal/Consensus proposal – NPRM Discuss some implications and strategies General considerations 2

Better Thinking. Better Results. Lower Rate of Return Joint Plan proposal is for 10% rate of return Better than the 8.5% proposed by the State Joint Board members Impacts vary between companies depending on mix of rate base and expenses 3

Better Thinking. Better Results. Rate of Return-Implications Interstate revenue requirement reductions typically in 5% to 10% range May have implications for future state proceedings Will typically reduce earnings levels 4

Better Thinking. Better Results. Corp. Ops. Expense Limit Current formula for HCL only RAG proposal would extend it to all elements of interstate Formula – three step based on access lines – adjusted for inflation 5

Better Thinking. Better Results. Corp. Ops. Expense Currently only impacts about 60 study areas Number of study areas likely to increase in the future as access lines decrease 6

Better Thinking. Better Results. Corp. Ops. Expense-Strategies Monitor company position in relationship to limits Possibly more careful accounting to correctly apply costs to other accounts 7

Better Thinking. Better Results. Limits on Loop Gross Adds RAG proposal component Attempt to meet FCC staff concerns about perceived “gold-plating” Applies to loop plant only 8

Better Thinking. Better Results. Basic Formula Current investment – Loop plant investment adjusted to current $’s Multiply by ratio of loop depreciation reserve to loop plant in service=Future allowable investment Allocate over five years – If investment for next year < allocated amount, all is included in USF calculation 9

Better Thinking. Better Results. Other elements Allowed 5% of existing loop plant in service for maintenance related replacements, minor extensions Waivers for unusual situations If loop plant is less than $4 million, all can be replaced in one year Greenfield plant adds in addition to formula Exceptions for ARRA projects 10

Better Thinking. Better Results. Gross Adds Limit-Strategies If implemented: – Familiarity with formula – Review depreciation rates for appropriate levels – Plan projects over time to stay within limits – Careful accounting for “greenfield” additions 11

Better Thinking. Better Results. CAF for ROR Broadband Rev. Req. – % BB take rate * Interstate CCL Req. – Middle Mile costs – DSL Rev. Req. – Loop cost shifted from state Rev. Req. – Less Benchmark * DSL lines LSS Support Transitioned ICLS Support Grandfathered HCL Support 12

Better Thinking. Better Results. CAF for ROR details BB Take rate – DSL lines + naked DSL lines divided by – Access lines + naked DSL lines Middle mile costs – Cost for ISP to connect to Internet backbone 13

Better Thinking. Better Results. CAF for ROR details Loop costs shifted from state – Twelve year transition – BB take rate greater than 25% Transitioned ICLS – voice related – CCL * 1-BB take rate less – SLC * 1-BB take rate 14

Better Thinking. Better Results. CAF for ROR details Grandfathered HCL – HCL based on current formulas less – Loop costs shifted from state Benchmark * DSL Lines – Benchmark has a variable component and a fixed increasing component – Designed partly to meet budget constraints 15

Better Thinking. Better Results. CAF for ROR - Strategies BB Take Rate very important – Shifts Rev Req from state to interstate – Impacts ICLS and HCL phase outs – No “hard cap” on CAF Broadband pricing Customer education Marketing Efforts 16

Better Thinking. Better Results. Shift of Loop costs to Interstate Very important over long term 12 year transition Reduces revenue requirement burden on state as BB take rate increases One company – eight years – 2/3 reduction in intrastate rev. req. with 75% BB take rate 17

Better Thinking. Better Results. ICC Reform-Interstate Interstate rates – no greater than current adjusted for 10% return for two years – Term local switching to $0.005 in two more years – Term local switching to $ in three more years 18

Better Thinking. Better Results. ICC Reform - Intrastate Intrastate rates – Match interstate transport rate structure-1 st yr. – Term reduced to interstate in 2 years – Term switching reduced to $0.005 in two more years – Term switching reduced to $ in three more years 19

Better Thinking. Better Results. RM - Interstate Orig Switched Rev Req less billed for originating Term Switch Rev Req less billed for terminating (Possibly partial SLC increase offset) 20

Better Thinking. Better Results. RM - Intrastate Base Year billed terminating * % change in interstate rev req. Less billed for terminating Less reduction for benchmark increases (possibly split with interstate) Less intrastate earnings over 10% 21

Better Thinking. Better Results. RM – Benchmark Components Components – R1 rate – Mandatory R1 EAS charges – Federal SLC – R1 – State SLC – R1 – State USF surcharges – R1 22

Better Thinking. Better Results. Benchmark - Strategies Separate touch call rate – combine it with local service Possibly combine feature/custom calling rates with local service If rates are low – consider modest increases 23

Better Thinking. Better Results. RM – Benchmark Adjustments Benchmark is $25 If components > $25 then no adjustment If components < $25, then $0.75 increase for six years ($4.50 max) or until benchmark is reached. (SLC increase or imputed) 24

Better Thinking. Better Results. RM - Other RM continues indefinitely (until future change) RM is revenue req. based for interstate and pseudo rev. req. based for intrastate Provides a level of protection for lost minutes 25

Better Thinking. Better Results. Support in competitive areas RAG plan calls for competitor to initiate proceeding at state PSC to prove level of competition. No specific procedure about how costs would be allocated within an exchange Still on the FCC staff and cable TV list of items 26

Better Thinking. Better Results. Broadband Provisioning Speed requirements and issues – Upload vs. download – Specific speeds Serving “all” Americans – Cost limitations – Technology limitations in rural areas 27

Better Thinking. Better Results. Broadband Provisioning-Proposals ABC Plan – speed – 4 Mbps down,.768 Mbps up ABC Plan – Cost restriction on serving “all” in order to meet budget – remainder served through satellite NPRM – speed 4 down, 1 up NPRM - $3,000 HCL loop cost limit 28

Better Thinking. Better Results. Broadband Provisioning-Strategies Engineer for minimum of 4 Mbps down,.768 Mbps up Market will likely want much more Document costs to meet very remote customers – look for technology alternatives 29

Better Thinking. Better Results. Other items in NPRM Limits on other operating expenses Reverse auctions Combine LSS with HCL Phase out corp. op. expense completely Change support percentages Eliminate Safety Net additive 30

Better Thinking. Better Results. Other items in NPRM Eliminate parent trap rule Limit per line on HCL recovery Price cap instead of ROR Increased accountability items – File audited financials with FCC – File SEC and RUS reports with FCC – Report ICC revenues and expenses to FCC 31

Better Thinking. Better Results. Summary Still a lot of work to do FCC and Congressional contacts need to continue Need to start planning for potential changes Final order will likely be different to some extent from proposal 32

Better Thinking. Better Results. Definition of Broadband “Broadband” will be a supported service What will “broadband” be defined as? How to avoid Title I vs. Title II issues Net neutrality order includes definition which was determined to be Title I 33

Better Thinking. Better Results. Net Neutrality Definition (a) Broadband Internet access service. A mass-market retail service by wire or radio that provides the capability to transmit data to and receive data from all or substantially all Internet endpoints, including any capabilities that are incidental to and enable the operation of the communications service, but excluding dial-up Internet access service. This term also encompasses any service that the Commission finds to be providing a functional equivalent of the service described in the previous sentence, or that is used to evade the protections set forth in this Part. 34

Better Thinking. Better Results. Definition Implications Need to distinguish between Title I definition and limit to the transmission component which can be a Title II “telecommunications service” Rural CAF plan assumes “middle mile” costs will be part of USF and CAF. 35

Better Thinking. Better Results. Fund Size Constraint Very clear that constraining CAF to the amount of existing high cost support is high priority to FCC Fund reductions: – CLEC phase-out – Wireless acquisition phase-outs – Interstate Access Support-phase out – Rural component reductions – Competitive Areas 36

Better Thinking. Better Results. Fund Increases Broadband support to lessen rural-rural divide Mobility (and satellite) fund Broadband speed increases Increase broadband coverage Lifeline-Linkup increases Access restructure mechanism 37

Better Thinking. Better Results. Fund Size Implications Limitations imposed by competing interests Difficulty of pricing out the future Technology limitations Conflicts between industry segments Policy/political implications Bias against wireline voice technology 38

Better Thinking. Better Results. Transition to IP Networks “Inevitable” technology change – more efficient Accelerate in next several years Major changes – Interoffice networks and interconnection – Last mile and telephone instruments – Numbering/addressing issues 39

Better Thinking. Better Results. IP Transition-Implications Switching needs, conversions, timetable Interoffice trunking changes – Transition network connections – Tandem switching changes Last mile – Customer instrument or NID changes 40