1. www.gvnw.com Better Thinking. Better Results. Primer on CACM Bob Schoonmaker, President GVNW Consulting, Inc. March 21, 2013

2. www.gvnw.com Better Thinking. Better Results. Cost Model History Responses to 1996 Act Forward-Looking Cost for USF and for Unbundled elements HAI Model – Sponsored by AT&T and MCI BCPM Model – Sponsored by Qwest and Sprint Synthesis Model – Adopted by FCC 6/6/2016 2

3. www.gvnw.com Better Thinking. Better Results. Synthesis Model FCC Adopted for USF for Non-Rural companies Loop portion developed by FCC employees Remainder largely based on the HAI model Data sets from the mid-1980’s 6/6/2016 3

4. www.gvnw.com Better Thinking. Better Results. Rural Task Force Charter was to determine how cost models could be applied to rural LECs RTF recommendation –Synthesis model was not an appropriate vehicle for USF for rural companies –Modifications to existing USF formulas as the basis for rural USF for five years –Those modification lasted nearly 10 years 6/6/2016 4

5. www.gvnw.com Better Thinking. Better Results. Changes over time HAI and/or Synthesis models used in various state proceedings – Unbundled loops, wireless compensation proceedings Model and data base became more outdated Computing power and data processing capabilities enhanced substantially 6/6/2016 5

6. www.gvnw.com Better Thinking. Better Results. More recent modeling National Broadband Plan Assessment Model (BAM) Cost Quest Broadband Analysis Toll (CQBAT) Connect America Cost Model – Version 1 (CACM) Each of these model has been developed by CostQuest Associates 6/6/2016 6

7. www.gvnw.com Better Thinking. Better Results. BAM Developed for FCC to provide assessment of cost of future USF for voice and broadband for the National Broadband Plan Estimated costs for both wireline and wireless networks to provide 4/1 service 6/6/2016 7

8. www.gvnw.com Better Thinking. Better Results. CQBAT Developed for the ABC Coalition (Price Cap Companies) to provide a basis for Connect America II coverage Filed with the FCC in early 2012 – focus is wireline network cost of providing broadband service only for CAF II 6/6/2016 8

9. www.gvnw.com Better Thinking. Better Results. CACM First version released in November, 2012 Version 3 released March 11, 2013 Derivative of CQBAT Provided under FCC direction through a USAC contract with CostQuest Also for use in CAF II FCC has not adopted this model at this point in time – put out for comment 6/6/2016 9

10. www.gvnw.com Better Thinking. Better Results. CQBAT vs. CACM Differences CACM includes voice service costs –Carrier grade IP voice –Gateway at each end user location CACM V2 has updated 2010 census data CACM V3 has updated res locations, June 2012 broadband map Improved brownfield capability Fixed wireless competitors 6/6/2016 10

11. www.gvnw.com Better Thinking. Better Results. CAF II for Price Cap Carriers Primarily developed for CAF II for price cap companies. CAF II was supposed to start in 2013 Based on model support (CACM) –Cost in census block less floor cost –Exclude high cost census blocks –Calculate total for the state –Right of first refusal to price cap companies 6/6/2016 11

12. www.gvnw.com Better Thinking. Better Results. CAF II for Price Cap Carriers (Cont.) Price Cap Company commitments –Statewide voice service in all its area –Achieve 85% 4/1 statewide by end of 3d year –Achieve 100% 4/1 by end of 5 th year –To be determined % of 6/1.5 by end of 5 th year 6/6/2016 12

13. www.gvnw.com Better Thinking. Better Results. CAF II for Price Cap Carriers (Cont.) If model support refused, areas will go to reverse auction After five years will go to reverse auction There will be a loss of support in census blocks with a non-subsidized competitor 6/6/2016 13

14. www.gvnw.com Better Thinking. Better Results. CACM for ROR carriers (?) No proposed use – yet! Possible uses – –ROR broadband support –Alternative to Regression analysis –Alternative to Current support method –Voluntary use by ROR carriers Exchanges subject to Parent Trap rule Identify high cost census blocks Other 6/6/2016 14

15. www.gvnw.com Better Thinking. Better Results. Greenfield vs. Brownfield Greenfield –All new investment to provide the services –Operating expenses to support all investment Brownfield –Uses existing C&WF investments and other investments that would be reused in broadband network –Lower level of operating expense support 6/6/2016 15

16. www.gvnw.com Better Thinking. Better Results. Greenfield vs. Brownfield (cont.) Greenfield supporters – USTA, Price-cap carriers Brownfield supporters – ACA, individual cable providers –Arguments also about appropriate definition –Brownfield would require significantly less support 6/6/2016 16

17. www.gvnw.com Better Thinking. Better Results. CACM – Major Sections Cost Model –Develop costs at Census Block level –Can be aggregated to higher levels –Develops FTTd and FTTp Support Model –Where will support be provided –Driven by budget –Low end benchmark –“Extremely high cost boundary” 6/6/2016 17

18. www.gvnw.com Better Thinking. Better Results. CACM – Major assumptions Investment costs/unit primarily from surveys of price cap carriers ROR – 9% in current version Based on housing units – assumes 90% take rate Costs unitized by active customers Depreciation – FCC depreciation rates 6/6/2016 18

19. www.gvnw.com Better Thinking. Better Results. CACM – Major assumptions (cont.) Capital and Operating costs varied by region – by 3 digit zip regions Cost classification by size of study area Plant mix varied by state and by three density areas Costs modeled from customer demarc to the internet cloud 6/6/2016 19

20. www.gvnw.com Better Thinking. Better Results. CACM – Major data sources 2010 Census block maps and data 2010 or latest TIGER road maps Version VI of the National BB Map GeoResults residence and business locations Residences geocoded but randomly placed on roads where geocode info isn’t available. 6/6/2016 20

21. www.gvnw.com Better Thinking. Better Results. CACM – Major data sources (cont.) GeoResults exchange map boundaries NECA USF data – 2008-2011 ARMIS data – plant mix Standard & Poor’s Industry Survey Some proprietary data from PC carriers Data for all LECs is included in the data bases 6/6/2016 21

22. www.gvnw.com Better Thinking. Better Results. CACM – SA Size groups Large – > 4,000,000 lines Medium – >1,000,000 to < 4,000,000 Small – > 4,000 to < 1,000,000 Extra Small – >1,000 to < 4,000 Extra Extra Small - < 1,000 6/6/2016 22

23. www.gvnw.com Better Thinking. Better Results. Use of Size Groups CapEx – Inputs available to differentiate purchasing power – all set at 1.0 OpEx – Inputs are available by size groups – Input factors are differentiated based on analysis of NECA cost data and other factors 6/6/2016 23

24. www.gvnw.com Better Thinking. Better Results. Density Groups HAI and Synthesis Model had nine density groups CACM uses only three density groups; urban, suburban, and rural Used for plant mix and plant sharing assumptions 6/6/2016 24

25. www.gvnw.com Better Thinking. Better Results. Structure Sharing % of structure – pole lines, buried trench, conduit cost borne by telco Rural areas –Aerial – 48% –Buried – 96% –Underground – 96% 6/6/2016 25

26. www.gvnw.com Better Thinking. Better Results. Loop Design - Synthesis Customers spaced equally along roads within CB or CBG Clusters developed – placed on grid Distribution and Feeder cable developed based on assumed 90 degree cable design to return to CO from center of grid cluster 18,000’ copper loop design 6/6/2016 26

27. www.gvnw.com Better Thinking. Better Results. Synthesis Loop Design - Example 6/6/2016 27

28. www.gvnw.com Better Thinking. Better Results. CACM Loop Design Customers located by actual location or randomly on roads 12,000’ CSA design – FTTd Distribution and Feeder plant placed on actual roads 6/6/2016 28

29. www.gvnw.com Better Thinking. Better Results. CACM Loop Design Depiction 6/6/2016 29

30. www.gvnw.com Better Thinking. Better Results. Business Locations Base data from GeoResults and from Census Block data Overlay ZIP code maps and census blocks Identification of locations by census blocks Size identification leads to determination of level of telecom services Included in feeder and distribution development 6/6/2016 30

31. www.gvnw.com Better Thinking. Better Results. “Farming” of costs Costs accumulated at the end user locations based on plant units serving that location. Example: –Section 1 – 2 EU – 100’ – each gets 50’ –Section 2 – 4 more EU – 120’ – each gets 20’ –Section 3 – 10 more EU – 160’ – each gets 10’ 6/6/2016 31

32. www.gvnw.com Better Thinking. Better Results. “Farming of costs” - Summary 6/6/2016 32

33. www.gvnw.com Better Thinking. Better Results. Middle Mile Costs No available public source of level 3 Internet connection points Assumes Internet connection at nearest tandem switch Develops the cost of rings to connect central offices to the tandem switch Does not include any Internet connection costs 6/6/2016 33

34. www.gvnw.com Better Thinking. Better Results. Middle Mile Costs (cont.) Operating expenses added based on the investment Allocated to offices based on % of total access lines served. 50% of cost each for broadband and special access Model has input area for middle mile cost as an expense, but investment developed cost would have to be removed. 6/6/2016 34

35. www.gvnw.com Better Thinking. Better Results. Operating Expenses Network Operations –Plant Specific –Plant Non-specific General and Administrative Customer Service and Marketing Bad Debt Expense 6/6/2016 35

36. www.gvnw.com Better Thinking. Better Results. Network Operation Expenses Ratios of OpEx to TPIS developed from NECA data Development of per loop factors for each Adjustment for forward looking viewpoint Further adjustments for density, size of company, etc. 6/6/2016 36

37. www.gvnw.com Better Thinking. Better Results. General and Admin Expenses Regression analysis developed between G&A and investment from NECA data Further developed costs per loop Adjusted for forward looking Adjustment factors applied to regression analysis factors 6/6/2016 37

38. www.gvnw.com Better Thinking. Better Results. Customer Service & Marketing Estimated to be 12.8% of revenue for coalition companies in 2010 Applied 12.8% to $46.00 assumed ARPU 2d Analysis from ARMIS data Averaged the two to come to $5.93 per customer 6/6/2016 38

39. www.gvnw.com Better Thinking. Better Results. Bad Debt Expense $0.92 per customer based on estimated 2% of $46.00 ARPU 2% based on analysis of industry specific 10K reporting data and industry knowledge 6/6/2016 39

40. www.gvnw.com Better Thinking. Better Results. Property Tax Location Index Average property tax rates researched Net plant used as proxy for tax base to arrive at estimated property taxes Ratio developed to G&A expenses to develop the property tax index Adjustment made by state 6/6/2016 40

41. www.gvnw.com Better Thinking. Better Results. Support Module Calculates support available at census block level based on factors Telco unserved areas vs. all areas Excluding competitive areas (most excluded anyway by benchmark) Lower level benchmark – high cost cut off Reports by company and by CBG 6/6/2016 41

42. www.gvnw.com Better Thinking. Better Results. Access to CACM Have to execute various proprietary agreements outlined in the Third Supplemental Protective Order issued December 11, 2012. Agreements very strict on use of data Access to the model through the internet Have the capability to change inputs, etc. but it isn’t simple. 6/6/2016 42

43. www.gvnw.com Better Thinking. Better Results. CACM - Observations Overall the model is much more sophisticated than the Synthesis Model in the network cost development and the cost development by Census Block Model results still depend very much on the inputs Support results will depend on overall budget amounts 6/6/2016 43

44. www.gvnw.com Better Thinking. Better Results. CACM – Observations (cont.) Major areas that should be reviewed include: –Sharing assumptions –Plant Mix assumptions –Small company purchasing adjustment factors –Operating expense factors and development Forward-looking cost adjustments –Average factors vs. unique circumstances 6/6/2016 44

45. www.gvnw.com Better Thinking. Better Results. CACM – Observations (cont.) Early testing – comparison to actual data shows differences both positive and negative Operating expenses may be understated Inputs do not include General Support Assets except Land and Building 6/6/2016 45

46. www.gvnw.com Better Thinking. Better Results. CACM – Observations (cont.) Needs to be more work done to test applicability to ROR companies before any determination of whether and/or in what circumstances the model might be appropriate for ROR companies. 6/6/2016 46

47. www.gvnw.com Better Thinking. Better Results. THANK YOU!! HAVE A GREAT DAY!! Bob Schoonmaker 719-594-5809 bschoonmaker@gvnw.com 6/6/2016 47