THE NEW FCC NPRM THE CHALLENGES, THE RESPONSES AND THE PLAN OF ATTACK A Briefing Provided By The Rural Broadband Alliance STEPHEN G. KRASKIN and DIANE SMITH STEPHEN G. KRASKIN and DIANE SMITH February 11, 2011 February 11, 2011

TODAY’S DISCUSSION HIGHLIGHTS OF WHAT IS IN THE NEW NPRM OverviewOverview FCC ProposalsFCC Proposals Access – long term and short term USF – long term and short term Our Responses and PositionsOur Responses and Positions Our Thoughts On StrategyOur Thoughts On Strategy 2

Here They Go Again... Like the movie “Groundhog Day” Like the movie “Groundhog Day” Familiar content in a new box Familiar content in a new box This time they mean it... (sort of) This time they mean it... (sort of) Do we really want them to do more or less? Do we really want them to do more or less? 3

LOGISTICS Short comment cycle Short comment cycle State comment opportunity State comment opportunity Intent to act this year on some specific Intent to act this year on some specific Framework Divides Consideration Of Existing, Transition, and “End Game” Framework Divides Consideration Of Existing, Transition, and “End Game” 4

FCC Sets 5 Basic Tenets Modernization Modernization Fiscal Responsibility Fiscal Responsibility Accountability Accountability Market-driven approaches Market-driven approaches No “flash-cuts” – a “sensible transition” No “flash-cuts” – a “sensible transition” 5

LONG TERM FOCUS INTERSTATE ACCESS Begin to phase down access and move network support provided by access to explicit USF recovery mechanism. Provide a “glide-path” with consideration of reducing large carrier rates quicker. Provide a “glide-path” with consideration of reducing large carrier rates quicker. 6

LONG TERM FOCUS INTRASTATE ACCESS Objective – reduce intrastate rates; end arbitrage gaming Alternatives: Provide states a “carrot” to move intrastate access to parity with interstate; or consider how to mandate state access reductions. 7

LONG TERM FOCUS Revenue Cost Recovery Mechanism Recognition that cost recovery mechanism will be implemented to offset access revenue loss. Recognition that cost recovery mechanism will be implemented to offset access revenue loss. Reduced rates will begin 2012 Reduced rates will begin

NEAR TERM ACTIONS Intercarrier Compensation 1.“Access Stimulation” – proposes that any carrier with a revenue sharing arrangement will default interstate access rate to the lowest interstate access rate of any incumbent operating in the same state. 9

NEAR TERM ACTIONS Intercarrier Compensation 2. “Phantom traffic” by proposing to require signaling information. 3. VoIP Treatment - asks for comment on 3 proposals: a. bill and keep b. using a rate lower ($.0007) c. apply access 10

UNIVERSAL SERVICE General Considerations Initial proposed inclusion of 4 Mbps down and 1 Mbps up, subject to comment and revision Initial proposed inclusion of 4 Mbps down and 1 Mbps up, subject to comment and revision “Everyone will have to adapt” “Everyone will have to adapt” Focus on legacy investment and transition mechanisms Focus on legacy investment and transition mechanisms 11

UNIVERSAL SERVICE Long Term Considerations “End Game” – support only from new Connect America Fund “End Game” – support only from new Connect America Fund Current focus is not on “end game” details Current focus is not on “end game” details Initiate consideration of three possible long term approaches: Initiate consideration of three possible long term approaches: a. Reverse auctions b. Models c. Rate of return with incentives 12

UNIVERSAL SERVICE Beginning The Connect America Fund Phase out Interstate Access Support for Price Cap carriers over 2-3 years Phase out Interstate Access Support for Price Cap carriers over 2-3 years Phase out Identical Support to CETCs Phase out Identical Support to CETCs over 5 years Retarget these funds to unserved and underserved 13

UNIVERSAL SERVICE Beginning The Connect America Fund Funding proposal could be for any area Overlapping with existing incumbent Distribution could be reverse auction Continued wireless prejudice (most “bang for the buck”) Possible Wireless Opportunities? 14

UNIVERSAL SERVICE Near Term Proposals For Rate of Return Carriers 1. Reduce reimbursement rates for high cost fund – fund is capped – change in distribution. No immediate cap on ICLS 1. Reduce reimbursement rates for high cost fund – fund is capped – change in distribution. No immediate cap on ICLS 2. Consider elimination of local switching support (LSS) to recognize movement to soft switch 2. Consider elimination of local switching support (LSS) to recognize movement to soft switch 3. Benchmarks – guidelines for capital and operational expenses may be established 3. Benchmarks – guidelines for capital and operational expenses may be established 15

UNIVERSAL SERVICE Near Term Proposals For Rate of Return Carriers 4. Consider limitation of fund availability in highest cost to serve areas; last 256,000 estimated cost of $ 14 billion; alternative use of satellite; carrier and state role in determination. 4. Consider limitation of fund availability in highest cost to serve areas; last 256,000 estimated cost of $ 14 billion; alternative use of satellite; carrier and state role in determination. 5. Streamline study area waivers and encouragement of study area consolidation within a state. 5. Streamline study area waivers and encouragement of study area consolidation within a state. 16

UNIVERSAL SERVICE Near Term Proposals For Rate of Return Carriers 6. Elimination of “parent trap” rule that limits USF for an acquired exchanges to the level of USF available to the former owner. (Sleeves out of vest?) 6. Elimination of “parent trap” rule that limits USF for an acquired exchanges to the level of USF available to the former owner. (Sleeves out of vest?) 7. Encourage efficiencies by encouraging use of shared facilities and resources (leads to questioning investment - “used and useful” 7. Encourage efficiencies by encouraging use of shared facilities and resources (leads to questioning investment - “used and useful” 17

RESPONSES Recognize that FCC has divided issues into: Recognize that FCC has divided issues into: 1. Short term impact on existing investment and expenses 2. Transitional mechanisms 3. Long-term 18

RESPONSES Qualitative and quantitative response needed to proposals that would jeopardize existing cost recovery Qualitative and quantitative response needed to proposals that would jeopardize existing cost recovery Clarity required to provide reasonable mechanism to recover additional investment while FCC debates long-term Clarity required to provide reasonable mechanism to recover additional investment while FCC debates long-term 19

RESPONSES Concern with the possibility that initial CAF could go to another provider in your area – rural incumbent is designated ETC COLR Concern with the possibility that initial CAF could go to another provider in your area – rural incumbent is designated ETC COLR VoIP – at minimum, retro must be access. Going forward, should be left as access to offset USF pressure VoIP – at minimum, retro must be access. Going forward, should be left as access to offset USF pressure 20

RESPONSES Ensuring that cost recovery mechanism to replace access is sufficient Ensuring that cost recovery mechanism to replace access is sufficient Too much new investment cost recovery for rural left in intrastate jurisdiction Too much new investment cost recovery for rural left in intrastate jurisdiction Rural carrier CETCs should have recovery based on costs as promised Rural carrier CETCs should have recovery based on costs as promised 21

RESPONSES Potential Reductions In High Cost Funding and Removal of LSS jeopardize universal service Potential Reductions In High Cost Funding and Removal of LSS jeopardize universal service Proposed use of expense benchmarks must include opportunity to recover actual “used and useful” costs Proposed use of expense benchmarks must include opportunity to recover actual “used and useful” costs FCC Should Not Disregard Need For Universal Fixed and Mobile FCC Should Not Disregard Need For Universal Fixed and Mobile 22

RESPONSES Best “bang for buck” requires long term considerations – short term wireless in lieu of fixed is not long term investment-wise Best “bang for buck” requires long term considerations – short term wireless in lieu of fixed is not long term investment-wise Targeted Funding should not ignore carrier responsibilities – rural incumbents make common carrier service commitments others are unwilling to make Targeted Funding should not ignore carrier responsibilities – rural incumbents make common carrier service commitments others are unwilling to make 23

RESPONSES FCC USF long term plan should not assume that USF size cannot grow. FCC USF long term plan should not assume that USF size cannot grow. FCC should not delay or ignore fixing “contributions.” FCC should not delay or ignore fixing “contributions.” Public interest requires new contribution mechanism to ensure “fair share” based on value of connection Public interest requires new contribution mechanism to ensure “fair share” based on value of connection 24

STRATEGY Evaluate proposals in the context of impact on rural consumers Evaluate proposals in the context of impact on rural consumers Impact on ability to invest in infrastructure Impact on ability to invest in infrastructure Impact on job creation Impact on job creation Impact on job loss Impact on job loss IDENTIFY CONSTRUCTIVE ALTERNATIVES IDENTIFY CONSTRUCTIVE ALTERNATIVES 25

FOCUS ON OBJECTIVE Ensure that an explicit universal service funding mechanism provides carriers committed to the provision of universal service with revenues that are sufficient to enable the company to recover the costs, including a reasonable return on investment, that it incurs in the provision of a universal broadband network to rural consumers at rates and conditions comparable to those charged to consumers in urban areas. 26

Build On What We Have Achieved We changed the tone and then the direction We changed the tone and then the direction No longer leaving rural behind No longer leaving rural behind No longer ending legacy mechanisms without recognition of need for cost recovery No longer ending legacy mechanisms without recognition of need for cost recovery No longer assumes end of ROR No longer assumes end of ROR 27

Strategic Fronts 1. Protect to the extent possible cost recovery of established investment and operational expenses incurred to provide universal service Reliance on rules, policy – need for stability, predictability. Emphasize impact on jobs, infrastructure investment 28

Strategic Fronts 2. Obtain a mechanism to ensure stability for recovery of needed additional investment and operational expenses during the transition to the “end game.” Lead the way on “accountability,” “fiscal responsibility,” and “modernization.” 29

Strategic Fronts 3. Long term – take advantage of the fact that the FCC is deferring focus. Use advocacy in Fronts 1 and 2 to lay a foundation for the long term answer that works best for rural carriers and consumers – consistent with our RBA objective 30

QUESTIONS ????? ????? 31

NEXT STEPS Frame responses to the NPRM and provide to associations Frame responses to the NPRM and provide to associations Work with associations to emphasize Front 1 (recovery of existing investment) and Front 2 (mechanism to recover additional expenses needed to provide broadband universal service Work with associations to emphasize Front 1 (recovery of existing investment) and Front 2 (mechanism to recover additional expenses needed to provide broadband universal service 32

NEXT STEPS Work with industry advisors to “operationalize” the RBA’s Work with industry advisors to “operationalize” the RBA’s Transitional Stability Plan Build factual data to support positions: rural economic development impact; demonstrate that bigger provider is not more efficient provider Build factual data to support positions: rural economic development impact; demonstrate that bigger provider is not more efficient provider 33

NEXT STEPS We won’t stop at FCC comments We won’t stop at FCC comments Eye on the Hill and legislative concerns Eye on the Hill and legislative concerns Rebuild more than the Congressional “Farm Team” Rebuild more than the Congressional “Farm Team” 34

NEXT STEPS Build the Rural Economic Development Team – not only members of Congress with rural interests - include urban business interests that need rural infrastructure Build the Rural Economic Development Team – not only members of Congress with rural interests - include urban business interests that need rural infrastructure Begins with the grassroots: specific message, specific “asks,” specific targets, and reach out to new allies Begins with the grassroots: specific message, specific “asks,” specific targets, and reach out to new allies 35

OUR TEAM, OUR EFFORT AND OUR “ASK” POLICY AND STRATEGY POLICY AND STRATEGY FCC AND HILL FCC AND HILL State Commissions State Commissions Industry Communications Industry Communications Other parties Other parties Community Interest Community Interest OUR “ASK” OF YOU 36