0. Universal Service Fund Survey of Current Issues
A Brief History
And
Survey of Current Issues * 5
Doug Kitch, CPA Alexicon, Inc. Principal
October 17, 2016

1. Agenda History, 1934 – 1996 What is Universal Service?
Recent Changes – USF in the Broadband World
Why Does USF Matter?
Challenges for Small Companies
Tribal Implications

2. USF History,
The 1934 Telecommunications Act created and tasked the FCC with “regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all the people of the United States a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges.”
The Act did not specifically mention “universal service” nor did it provide guidance as to how the FCC was supposed to accomplish and fund this goal.
Mechanisms included implicit subsidies (i.e., via cost allocation rules and access charges); and, in 1988, the Universal Service Fund (USF—now known as the high cost loop support, or HCLS, program)

3. USF Background,
The 1996 Act, for the first time, added the words “universal service” to the United States Code, set forth detailed guidelines that the FCC and states are to consider in efforts to preserve and advance universal service, and requires regulators to make existing and future mechanisms “explicit.”
Quality services to be available at just, reasonable, and affordable rates
All regions of the nation should have access to advanced telecommunications and information services
Consumers throughout the nation, including low-income consumers and those in rural, insular, and high cost areas, should have access to telecommunications services that are reasonably comparable to those offered in urban areas at rates that are reasonably comparable to those charged in urban areas
Both states and the federal government should develop specific, predictable, and sufficient support mechanisms to preserve and advance universal service

4. Definition – What is Universal Service?
The most important regulatory consideration was to make local telephone service available to all Americans at a reasonable cost.
This morphed into similar services being available at reasonably comparable rates
Now, universal access to broadband is the national goal, which involves changing definitions of “broadband”
For example, speeds of 10/1 mbps (downstream/upstream) is the new universal service funding standard (25/3 is the metric for determining if all Americans have access)

5. National Broadband Plan
The American Recovery and Reinvestment Act (ARRA) of required the FCC to issue a National Broadband Plan (NBP). The FCC’s NBP (March 2010), among other things, called for:
Reforming current universal service mechanisms to support deployment of broadband and voice in high-cost areas…
“Many Tribal communities face significant obstacles to the deployment of broadband infrastructure, including high buildout costs, limited financial resources that deter investment by commercial providers and a shortage of technically trained members who can undertake deployment and adoption planning. Current funding programs administered by NTIA and RUS do not specifically target funding for projects on Tribal lands and are insufficient to address all of these challenges. Tribes need substantially greater financial support than is presently available to them, and accelerating Tribal broadband deployment will require increased funding.”

6. Recent Activity - Overview
In response to the NBP, the FCC released the USF Transformation Order in November 2011
Preserves and advances universal availability of voice service
Adds broadband to the list of universal services to be supported
Established the Connect America Fund (CAF)
Total budget - $4.5b ($2b for RoR programs)
Began statistics-based cost recovery constraints (QRA, scrapped by Chairman Wheeler)
Adopted cap on support
$3,000/line/yr ($250/mo)
Adopted rate floor
Local rates must be at a minimum level or carrier loses support
Adopted model-based support for price cap carriers (Connect America Cost Model)
Adopted broadband public interest obligations (speed, latency, capacity)
Speeds initially set at 4/1 mbps, now 10/1 mbps
Reformed intercarrier compensation regimes
Eliminate Local Switching Support; adopted CAF ICC
Provides specific support for Mobile voice and broadband
$50m one time “shot in the arm” for Tribal carriers
“Up to” $100m/yr ongoing, annual funding (out of $500m total; will be done after CAF Phase II)
Adopts new accountability requirements (i.e. further compliance, record retention, Tribal engagement, etc)

7. Recent Activity – Overview
On March 30, 2016, the FCC adopted the RoR USF Reform Order.
Two paths for all RoR carriers:
Model-based path
Revised legacy/cost-based mechanism
Based on Alternative Connect America Model (ACAM)
Began with price cap model, modified for RoR; based on “greenfield build”
Provides fixed amount of support for 10 years
Decisions due November 1
Legacy Path
Replaces ICLS with CAF BLS (broadband loop support),which provides support for standalone broadband service
Retains HCLS
Adopts operating and capital expense limitations
Broadband Buildout Obligations for both paths
Restrictions on support in areas with unsubsidized competition
Interstate authorized rate-of-return transition to 9.75% over six years

8. RoR USF Reform Order - Specifics
Model-based (ACAM) Path
Theory – provides support based on the most efficient, forward-looking network
Model developed with certain engineering assumptions
Inputs based on various industry data used
Census block-driven
Support module calculates and distributes support
Term of support – 10 years
Carriers with >90% 10/1 buildout not eligible
Certain census blocks are not eligible for support
Low relative costs ($52.50 per location threshold)
Those covered by unsubsidized competition
Where incumbent provides 10/1 using fiber or cable
Deployment obligations depends on current speed, household density, and ACAM funding
Deployment obligations to be met over 10 years
Support transition for carriers electing ACAM path but with higher current support

9. RoR USF Reform Order - Specifics
Revised Legacy Mechanism Path
ICLS renamed CAF BLS
CAF BLS designed to support standalone broadband costs
Currently included in interstate special access costs
Assumes carriers will recover $42/mo from end users for broadband only lines
Operating expense limits
Regression based on operating cost per housing unit
Applies to all opex accounts (except depreciation and income taxes) used in determining HCLS and CAF BLS
1st year – 50% of total reduction
Effective 1/1/2017
Capital Investment Allowance
Based on inflation adjusted loop plant
Adjusted for current broadband deployment
Effective 1/1/2017 for CAF BLS and 2019 for HCLS
Buildout obligations
To be met over five years
No support for census blocks with unsubsidized competition
$2 billion budget retained
FCC adopted budget control mechanism
What about “CAF Reserves”?

10. RoR USF Reform Order: By the Percentages
5%: approximate percent of funding reductions due to budget control mechanism
9.75%: the level the rate of return will drop to over 6 years
25%: Tribal Broadband Factor for additional funding
50%: phase in of operating expense cap reductions beginning January 2017
80%: threshold which if broadband deployment/availability is less than this, a percent of CAF BLS funding must be used on deployment
85%: Competitor must serve this percent and certify on form 477 to disallow funding for unsubsidized competition in a given census block
85%: percent of Tribal population in rural areas without access to speeds of 25/3
90%: carriers with broadband availability above this threshold not eligible for ACAM funding
95%: required number of locations to be deployed to by end of year 10 years under ACAM

11. Why Does Universal Service Matter?
Original goal – universal voice service – has largely been met
Overall, over 96% of the population has access to basic voice service
While there are still pockets of the population without affordable, basic service, between wireline and wireless service, the voice service problem has been solved
Theory – the nation-wide network becomes more valuable as more of the population gains access
Other programs contribute to success
Lifeline
Schools and Libraries (E-rate)
Rural Health Care
State programs
Arguably, universal broadband service is even more important
Access to global markets
Long distance education
Long distance medicine
Connection to wider world
The challenge has been and will continue to be to close the digital divide (comparable access in rural and urban areas)

12. Challenges for Small Companies
Closing the digital divide
FCC defines “broadband” as service (NOT for funding purposes) providing at least 25/3 mbps
FCC 2015 Broadband Progress Report Americans Without Access to 25/3 Speeds

13. Challenges for Small Companies
High cost areas
Sparse populations
Lower incomes
Difficult terrain
Lack of economies of scale
Increasing cost of regulation
Reporting burden

14. Implications for Tribal Areas
“Tribal governments, and by extension, Tribally-owned and operated carriers, play a vital role in serving the needs and interests of their local communities, often in remote, low-income, and underserved regions of the country. Tribally-owned and operated carriers serve cyclically impoverished communities with a historical lack of critical infrastructure. Reservation-based economies lack fundamental similarities to non-reservation economies and are among the most impoverished economies in the country. Tribal Nations also cannot collateralize trust land assets, and as a result, have more limited abilities to access credit and capital.”
-FCC’s November 2011 Transformation Order
NTTA proposal – Tribal Broadband Factor
Tribally-owned carriers
FCC recognition of unique situations:
Adopted Tribal Engagement rules
Tribal Bidding Credits
Tribal Coefficient
NBP & Transformation Order all littered with examples
Considered Tribal carrier-only RoR
Tribal Mobility Funds

15. USF Reforms and Service in Tribal Areas
Recent USF Reform Activity
Support for standalone broadband should benefit customers in Tribal areas
On the negative side:
Operating Expense Cap
Capital Investment Allowance
Continuation of corporate operations expense cap
Now four transitions of capping: HCLS; CAF BLS; Budget Control; Opex/Regression caps
No recognition of higher costs in Tribal areas
Reduced rate of return / not providing for higher RoR for Tribally-owned carriers

16. Tribal Operating Expenses
NTTA and its members advocated for special recognition of additional operating costs on Tribal lands:
Time and expense related to gaining rights of way access and easements from the BIA
Service to allotted lands
Obtaining cultural clearances
Compliance with unique Tribal environmental policies
Tribal 911 system challenges, including the lack of a master street address guide (MSAG)
Hiring policies requiring the employment of Tribal members that increase workforce recruitment and training costs
Compliance with Tribal council reporting and audits
Costs necessary to protect and advance Tribal sovereignty and self- determination

17. Tribal Broadband Factor
Additional 25% support for use in broadband deployment
Applies to HCLS and CAF BLS
Not applicable for ACAM takers
Available to all RoR carriers serving Tribal areas
Estimate – 112 carriers would qualify (have at least one housing unit in a Tribal census block)
Support available over a ten-year term
Participation is voluntary

18. Consideration for Tribal Areas/”Getting in the Game”
The Case for Tribally-owned carriers
Focus is on serving reservation areas and closing the digital divide
Trust of the population
Sensitive to unique Tribal issues
Two paths
Purchase ILEC lines
Act as competitive carrier
ILEC path
Negotiations
Financing
Navigating maze of state and federal regulations
Operations
Experience and FCC waiver analysis from previous successful Tribal carriers
Competitive Path
Technology Choice
Winning customers
Regulatory and legal challenges
Hybrid Path
Warm Springs Telecom
FCC petition pending

19. Summary Universal service has changed significantly
From voice over a single network to broadband over multiple platforms
Support for Universal Service has evolved
Implicit subsidies to recovering actual, higher than average costs, to cost models
Challenges in the broadband world remain the same
Ensuring universal deployment
Enhancing affordability
Increasing education

20. Questions?
Doug Kitch, CPA
(719)