1. The Texas Universal Service Fund: in Transition Kathy Grant NASUCA Summer Meeting San Antonio June 28, 2011

2. Page 2 The Texas Universal Service Fund The Texas Universal Service Fund (TUSF) was established in 1987; it originally consisted of three programs and has since expanded to nine – the largest of which are the Lifeline Program and two programs supporting carriers who serve high cost areas: the Texas High Cost Universal Service Plan for large carriers such as AT&T and Verizon, and the Small and Rural ILEC Universal Service Plan. The Fund also supports Relay Services for hearing-impaired customers and other such programs. Qualified Lifeline customers receive a $4.92 discount per month on their access line, reimbursed to carriers by the TUSF. The two Plans supporting carriers assist telecommunications providers in providing basic local phone service at reasonable rates in the areas of Texas that are the most costly to serve.

3. Large Company High-Cost Support Plan 2009 – 2012 The PUC was ordered to review the large-company plan in 2008 -- the case ended in a settlement between all parties. In the settlement, the high-cost support that carriers receive was significantly reduced over a four-year period: 2009 through 2012. In exchange, those companies are allowed to increase access line rates by a maximum amount each of the four years (for AT&T, it was up to $2) in exchanges still receiving THCUSP funds. For AT&T, the settlement meant a reduction in TUSF support from more than $100 million in 2008 to an estimated $38 million in 2012. Page 3

4. The Financial Outlook The TUSF is expected to go “into the red” by late 2012 because the cost of the nine programs is not declining as quickly as the receipts into the Fund. Part of the issue is the unprecedented landline loss over the last several years. (AT&T has gone from 9.3 million lines in 2000 to 5.2 million lines in 2010.) The TUSF rate assessed on customer bills today is 3.1 percent of intrastate telecom charges. In the past it has been as high as 5.65 percent. The PUC had considered raising the customer assessment, but instead sought direction from the Texas Legislature in the recent session. Page 4

5. Senate Bill 980: A TUSF review Senate Bill 980 – passed this spring - calls for a complete review and evaluation of the entire TUSF by the PUC in 2012. PUC will look at: Determining issues relevant to each telecommunications provider’s need for universal service fund support. Adjusting the support to carriers. Adjusting the customer charge for TUSF on phone bills. Implementing any other changes it determines are necessary and in the public interest. It’s clear that the TUSF will have to change in order to continue to meet its mandate to support affordable, universally available telephone service in Texas. Page 5