1. Different approaches before and after Telecom Act Before Telecom Act –Implicit cross subsidies –Based on rate of return approach –ILECs only receivers/IXCs only payers After Telecom Act –Explicit subsidy payments –Based on economic costs (except for small ILECs) –ILECs and CLECs receivers/all providers payers

2. Different types of LECs Large ILECs (including RBOCs) –New Cost Proxy Model –CALLS plan Small ILECs (mostly rural) –Actual costs (no Cost Proxy Model) –Continuation of former support programs –Part of the MAGS plan CLECs –Depends on the status of the ILEC with whom they compete

3. The Loop Cost recovery: 75% from state and local 25% from interstate --SLC and CCLC (unless you are a small high cost ILEC)

4. The Switch Cost recovery: weighted DEM from interstate jurisdiction for small ILECs (under 50,000 lines, usually “Ma and Pa” local telcos)

5. Before the Telecom Act

6. Before Telecom Act of 96 Universal service support paid by –IXCs (based on presubscribed lines) LifeLine and LinkUp Universal service fund –LECs (who left the CCLC pool) Long term support

7. High Cost Loops Universal Service Fund (former USF) –Support for loops in excess of average loop cost Small company: 65% of amount between 115%--150%; 75% of amount over 150% Larger company: 10% of amount between 115%--160%; 30% of amount between 160%--200%; 60% of amount between 200%-- 250%; 75% of amount over 250% –Based on national average of actual loop costs of all ILECs –Before breakup of AT&T—recovered through intra-company cost shifting—no need for separate fund –Before end of NECA CCLC pool—recovered through NECA pool—no need for separate fund –Before Telecom Act of 1996—fund paid into only by the IXCs; payments made only to ILECs

8. Averaged CCLC Long term support payments –Paid by ILECs who left the CCLC pool –Paid into the CCLC pool so that averaged CCLC would be charged by the smaller high cost companies –Support received by ILECs in the CCLC pool

9. Example Average-to-low cost LEC: –Loop cost covered by Interstate jurisdiction (25%) –SLC and CCLC State jurisdiction (75%) –State access charges –Contribution from intraLATA long distance –Local service charges

10. Example High cost LEC –Loop cost covered by Interstate jurisdiction –SLC and CCLC –Long term support –Universal service fund State jurisdiction –State access charges –Contribution from intraLATA long distance –Local service charges

11. Weighted DEM Recovered by small (under 50,000 line) companies through: –Access charges (specifically local switching rates) if filed own tariff –NECA switched access pool if participated in NECA pools Paid by IXCs through access charges

12. After the Telecom Act

13. Telecom Act adds new categories to the list –Schools and libraries –Rural health care providers Telecom Act continues LifeLine and LinkUp Telecom Act injects competition into universal service –Eligible Telecommunications Carrier

14. The challenge Non-discriminatory, pro-competitive high cost support –Whose costs do you use? ILECs? CLECs? –What costs reflect competitive rather than monopoly marketplace? The answer: a Cost Proxy Model

15. The cost proxy model approach Calculate nationally averaged forward-looking cost per line: $21.92 Establish benchmark for support: Has been 135% of national average, or $29.59 (10/16/03 changed by FCC to two standard deviations above the national average) Calculate state averages—only for non-rural carriers For states that exceed the benchmark, multiply the amount over $29.50 by 76%--multiply the result by number of lines served and that is support for the state; if state average is below $29.59, no support for that state Federal support is targeted to the highest cost wire centers in that state

16. Issues with the proxy model Lots of arguments over the inputs Huge shifts in subsides among states –Maine ILECs got no support under old system; get $10.2 million under proxy model; California ILECs got $6.3 million under old system, get nothing under proxy model –Hold harmless provision – phased out $1 per line per year Applied only to the non-rural carriers –small “Ma and Pa” companies stayed under old system and even get more support if showed growth in lines or more investment

17. So what do we have now? One fund, called a Universal Service Fund, that includes payments for a host of universal service programs Paid into by all telecommunications carriers Funds received by a host of entities, including ILECs, CLECs.

18. What’s in the fund? Low Income Support Programs Rural health care support (capped at $400 million annually) Schools and Libraries support (capped at $2.25 billion annually)

19. What’s in the fund? High cost program –Continuation of old support programs High cost loop--Continuation of former USF fund Local switching support (DEM –New support programs Interstate access support--created by CALLS plan and originally capped at $640 million annually Interstate common line support Non-rural forward looking cost support (from Proxy Models)

20. Contribution Factor Latest factor is 12.9% Levied on interstate and international revenues

21. USF expenditures, December 2009 $7,256,367,000

22. USF disbursements 1998-2008 Over $34 Billion in High Cost support Over $7.5 Billion in Low Income support Over $266 Million in Rural Health Care Over $23 Billion in Schools an Libraries Ohio has received a little over $1 Billion

23. So what are the controversial issues? Some carriers make money on their contribution—owe the fund 12.9% but collect more from consumers Who is eligible to be an ETC? –Wireless providers getting about $1 billion in support a year How are the schools and libraries using their support? Increase the base for USF –June 2006 FCC raised the wireless safe harbor percentage from 28.5% to 37.1% –Extended duty to contribute to interconnected VoIP providers; 64.9% safe harbor Looking for other bases to calculate universal service needs –By telephone number? –Reverse auctions? Should broadband be added as a supported service?

24. What about inter-carrier compensation? Efforts to decrease inter-carrier compensation result in suggestions for even more USF funds –Missoula Plan—decrease intrastate and interstate access charges and the result is a need for an additional $2.225 billion in support—hasn’t been passed but does illustrate the problem