Finding the Right Balance for Rural America: Telecom Policy, Politics and Predictions

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

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?

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

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

5. 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 Rural Group Reform Plan – Early 2011

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.

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

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

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?