Finding the Right Balance for Rural America: Telecom Policy, Politics and Predictions August

The Twists and Turns Toward Broadband USF Reform Congress directed publication of the National Broadband Plan (NBP) in the ARRA (Stimulus Bill) FCC released the NBP in March 2010 – USF Proposals estimated to have dramatic adverse consequences for RLECs: 50% of RLECs cash-flow negative by 2015 Another 40% of RLECs cash-flow negative by 2020 – Reverse auctions – Apparent preference for wireless – Lack of clarity on ICC Substantial RLEC Advocacy/Pushback Followed Boucher-Terry – Summer 2010 – Endorsed by many as compromise, but then only saw limited action in House E&C Subcommittee – Nothing on horizon in ? 2

FCC’s Notice of Proposed Rulemaking (NPRM) “Beyond the National Broadband Plan” Divides Reform into Near- and Longer-Term Approaches Near-Term USF – Recapture IAS and CETC Funds to Create a “Phase 1” CAF to Stimulate Broadband Deployment in Unserved Areas – Addresses Perceived “Incentive” Issues for smaller rural carriers Limit recovery of capital and operating expenses Limit recovery of switching costs Modify High-Cost Loop support Longer-Term USF – Target Funding Disaggregate geographic areas Competitive Bidding, with some potential use of models for Right of First Refusal Possibility of continued use of “Evolved” RoR in certain areas – Impose New Accountability Requirements Reporting and Record Retention Internal Controls Performance Goals and Measures 3

FCC’s NPRM (cont.) Near-Term ICC – Address “phantom traffic” and access stimulation Shut down opportunities for arbitrage Recover costs, reduce transactional costs associated with chasing payment – VoIP? Longer-Term ICC – Transition rates to low/zero rates and/or flat-rated charges – Implement Recovery Mechanisms Costs or Revenues? Benchmarks for end-user recovery – Ultimate objective – include ICC replacement support in CAF Contributions have been left out once again, despite being essential to near- and long-term solutions 4

5 Rural Group Reform Plan – Early 2011 Modernization: – Urge immediate action on short-term ICC reforms – Start rate transitions with restructure mechanisms over 3 to 5 years – Seek balance between enabling opportunity for recovery of existing investments and promoting new investments Fiscal Responsibility/Efficiency: – Defend efficiency and effectiveness of existing framework, but suggest surgical improvements such as future investment constraints and corporate expense caps – Promote sufficient budget “headroom” for new broadband investment Accountability: – Impose strict, but reasonable, broadband-oriented Carrier-of-Last-Resort requirements on USF recipients – Require that recipients be ETCs Market-Driven Policies: – Highlight that USF is already effective and efficient in encouraging broadband deployment in many rural markets, even if reform is also necessary – Detail harms/risks of NPRM proposals and propose alternatives to sustain broadband deployment in rural markets

Rural Group Reform Plan (cont.) Proposal: Compare actual costs to an urban benchmark – CAF Funding would be based upon difference – Includes components to encourage adoption, enhanced efficiency incentives, and accountability measures – Reflects increasing use of loop plant for interstate broadband services; includes middle mile and Internet transmission costs too – Reasonable transition – phases out legacy USF mechanisms over time to provide predictability and stability – Designed to complement reforms to stimulate and sustain broadband deployment throughout rural America At bottom, the key is sustainability – long-term objectives vs. short-term “fixes” – It does no good to address unserved areas if broadband will disappear where it is today or if broadband won’t stay where it is deployed next. 6

Since the NPRM RLECs Have Pressed Forward with Aggressive Advocacy in Recent Months – Multiple FCC and Hill Briefings on RLEC Reform Plan and Potential for Inclusion in a Broader Framework – “Save Rural Broadband” Campaign – PR, economic and network studies, etc. – “Data Advocacy Challenge” – Individual Member Meetings on Concerns About NPRM Proposals At same time, RLECs have recognized need to engage in “industry discussions” – Clear Priority of both FCC Chairman and Capitol Hill – Decisions Made Without You are Often Decisions Made Against You – Narrow Open Issues and Seek Greater Certainty 7

The “Consensus Framework” Important Breakthrough in Late July 2011 – Landmark set of compromises after months (years, really?) of effort – Not a Single Plan – 2 separate and distinct plans designed to work in parallel Rural Group Reform Plan – Proposal is to use the baseline plan as filed in April 2011, but with adjustments to interstate rate-of-return and ICC transition ABC Plan – Proposal is to use the baseline plan as filed in July 2011, as calibrated to work in parallel with the RLEC Reform Plan Key Aspects of the Consensus Framework – Promotes sustainable broadband deployment throughout rural America – Addresses FCC Chairman’s reform objectives – Responds to political/economic climate surrounding USF Reform – Seeks to re-establish regulatory certainty For RLECs in Particular, Key Features of the Consensus Framework Include: – Maintaining the baseline of the Rural Group Reform Plan – Preserving rate-of-return cost recovery – Requiring sufficient restructure funding as a condition for ICC reductions – Maintaining the ability to charge for transport and tandem switching functions – Addressing ICC arbitrage in a meaningful, clear-cut way – Enabling a near-term budget period with reasonable budget targets and growth 8

Next Steps Still Many Miles to Travel... – The Consensus Framework is just another step in the process – Lots of work to do in seeking adoption of the Consensus Framework – The NPRM is still very much “Alive and Kicking” FCC Public Notice on Consensus Framework and Other Proposals for USF/ICC Reform – Comment cycle likely to be short – FCC aiming for Order by October/November timeframe? Capitol Hill Briefings – Protect the Delicate Balance – Many on Capitol Hill wanted an industry proposal, but it wasn’t easy to get here – lots of trade-offs – If any “dial is turned” as review proceeds, the Consensus Framework could quickly fall apart Looking Even Further Ahead – Contributions Reform – can we tee this up next? 9