1. Finding the Right Balance for Rural America: Telecom Policy, Politics and Predictions August 2011 1

2. 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 2011-2012? 2

3. 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

4. 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. 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

6. 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

7. 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

8. 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

9. 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