Intercarrier Compensation: A Rural Perspective

1. Intercarrier Compensation:A Rural Perspective 2006 Annual Meeting August 8, 2006

2. Agenda • Key RLEC Issues for 2006 • Universal Service • Intercarrier Compensation Reform • Overview of the NARUC ICC Task Force Process • Review of the “Missoula Plan” • Definitions of “Tracks” • Rate transitions and revenue replacement • Interconnection rules and compensation obligations • Conclusion • Question and Answer Session

3. 2006 – A Critical Year • 2006 will be a critical year for the RLEC industry • Multiple events with significant impact • FCC Intercarrier Compensation FNPRM • Post-RTF Universal Service Program • USF Collection Mechanism • 1996 Telecom Act Re-Write • Consolidation of the RBOCs and IXCs • Brand X Ramifications • Policy ideas with negative implications for RLECs • Bill & Keep • USF mechanisms that are not based on costs • Unregulated IP Interconnection • Giving VoIP and IP-enabled services a free ride • How much of your cash flow comes from USF and Intercarrier Compensation? • It will all be in play

4. Rural Realities • Policy Realities: • 1996 Act: Rural consumers shall have comparable services and comparable prices to urban areas • Economic Realities: • It is costly to serve remote, sparsely populated rural areas • RLECs rely heavily on USF and ICC for cost recovery

5. Universal Service Issues • Growth in the fund • Support for Competitive ETCs • Reform of USF Distribution Mechanism • USF Collection Mechanism • Post-RTF funding • Proxy Models • State Block Grants • Legislative Initiatives

6. Intercarrier Compensation

7. The Intercarrier Compensation Problem: • Disparate charging mechanisms based on: • Jurisdiction (intrastate, interstate) • Nature of the call/technology (local, long distance, Internet) • Type of carrier (LEC, IXC, CMRS, ISP, end-user) • System is neither economically rational nor sustainable • Disparities leading to arbitrage and/or fraud • Phantom traffic • Inability to differentiate between interstate, intrastate and local traffic

8. Small ILEC Intrastate ( 5.1) CLEC Interstate ( 1.8) Large ILEC Intrastate (2.5) CLEC Intrastate (3.0) Small ILEC Interstate (1.8) Recip Comp (Voice 0.2) CMRS to ILEC (InterMTA 0.6) Large ILEC Interstate (0.6) Recip Comp (ISP 0.1) CMRS to ILEC (IntraMTA 0.2) Current Intercarrier Compensation Rates AVERAGE RATES (Cents per MOU) LONG DISTANCE CALLS LOCAL CALLS WIRELESS CALLS High (¢/min): 1.5 8.9 9.9 34.9 6.8 35.9 0.3 0.1 8.9 0.3 Low (¢/min): 0.5 0.3 0.4 0.7 0.2 0.4 0.0 0.0 0.2 0.0

9. ICC Reform Time Line April 2001 – 1st FCC NPRM - Two FCC Staff papers promoting Bill & Keep (COBAK, BASICS) June 2003 – Intercarrier Compensation Forum (ICF) formed - Goal to move ICC to Bill & Keep January 2004 – “Group of 8” formed to work with ICF July 2004 – NARUC ICC Task Force formed Fall of 2004 – - ICF files Bill & Keep reform plan - ARIC and EPG file ICC reform plans 2001 2002 2003 2004 2005 2006 February 2005 -Rural Alliance (RA) Formed March 2005 – 2nd FCC NPRM - Requests recommendations on ICC reform - RA, ICF and 101 other parties file comments January 2006 – NARUC forms “Group of 11” to negotiate consensus ICC solution March 7, 2006 – Compromise solution framework presented to NARUC April 21, 2006 – Parties must indicate support for forwarding framework to the FCC July 2006 – Missoula Plan sent to NARUC, NARUC files with FCC, FCC requests comments on Plan

10. The Rural Alliance • Formed in February of 2005 to present a unified voice for the RLEC industry on ICC reform • Over 350 RLECs, consultants, state and national RLEC associations have supported the RA’s advocacy • Rural Alliance Steering Committee • Six Members representing different RLEC market segments • Tom Conry, Farmers Mutual Cooperative Telephone Company (IA) • Bob DeBroux, TDS Telecom (WI) • Wendy Fast, Consolidated Telephone Co. (NE) • Pat Morse, FairPoint Communications (KS) • Ken Pfister, Great Plains (NE) • Jack Rhyner, TelAlaska (AK) • Four Advisory Members • National RLEC Associations (ITTA, NTCA, OPASTCO, WTA) • Other Advisors • CHR Solutions, Fred Williamson & Assoc., GVNW, JSI, McLean & Brown, NECA, Parrino Strategic Consulting, TELEC Consulting Resources

11. NARUC ICC Task Force • The Task Force conducted twelve workshops between 7/04 and 1/06 • Second meeting in Missoula, MT (thus the “Missoula Plan”) • Most industry segments participated • Two Major Advocacy groups emerged • Intercarrier Compensation Forum (AT&T, et. al.) and Rural Alliance (RA) • In January of 2006, NARUC created two smaller groups to attempt to develop consensus plans • A “Group of 11” formed to create an overall solution framework including three “Tracks” (Paul Cooper and Bob DeBroux represent RA) • An Interconnection Group to work out interconnection and transport obligation details (Ken Pfister and Charlie Cooper represent RA) • On April 21, 2006 a sufficient number of Task Force participants indicated support for moving the plan forward to the FCC • On July 24, 2006 NARUC forwarded the Plan to the FCC • On July 25, 2006 FCC requested comments on the Missoula Plan

12. Why Was RA Involved? • The ICF plan would have had a devastating impact on rural carriers and their customers • Elimination of originating compensation • Mandatory Bill & Keep • Increased transport compensation obligations for RLECs • NARUC created, and the FCC is supporting, a collaborative forum to develop workable solutions to ICC problems • The RA became an essential player in the process and has made great progress in promoting RLEC issues • We have achieved significant improvements over the ICF plan • FCC Chairman Martin has indicated that he understands RLEC issues, but won’t give us all we might ask for

13. What Were RA’s Key Objectives? • A “Multi-Track” Approach that recognizes RLEC differences • Cost-based ICC rates • A sustainable and non-portable Intercarrier Compensation Restructure Mechanism (RM) • Reasonable Interconnection Rules that limit RLEC obligations to carry traffic beyond their networks

14. What is the Missoula Plan? • A comprehensive multi-year plan for intercarrier compensation reform • Establishes categories of carriers and three separate carrier Tracks • Transitions down to new intercarrier compensation rates within each Track • Provides for revenue recovery associated with rate reductions • Federal SLC cap increases • ‘Lifeline’ customers are exempt from SLC increases • Establishes a new Restructure Mechanism • Establishes default rules for interconnection • Establishes “Early Adopter Fund” • Creates an incentive regulation option for qualifying rural ILECs • Provides interim and long-term solution to intercarrier compensation related disputes within the industry - Phantom Traffic - Jurisdiction - Intra MTA Wireless Traffic - Virtual Foreign Exchange Traffic - IP-PSTN

15. Who Supports the Missoula Plan? • AT&T • BellSouth • Cingular Wireless • Commonwealth Telephone Company • Consolidated Communications • Epic Touch • Global Crossing • Iowa Telecom • Level 3 Communications • Madison River Communications • Rural Alliance

16. What happens next? • The FCC has now put the plan out for public comment • We know that several industry segments will oppose the Plan • CTIA • Consumer Groups • Others? • The Rural Alliance is developing an advocacy plan to leverage the strength of the RLEC industry • State associations will play a key role • As much advocacy as possible will be done as the “Missoula Group”

17. Definition of the Tracks • Track 1 • All study areas affiliated with an RBOC • Price Cap non-rural, and RoR rural study areas not part of a CRTC* • Price Cap rural study areas > 1 million loops • 92 Study Areas with 146.2 million loops • Track 2 • Price cap rural study areas < 1 million loops • Price cap non-rural study areas of CRTCs • RoR non-rural study areas not affiliated with an RBOC • RoR rural study areas > 10K loops that are part of a Holding Company that also has Price Cap or non-rural study areas • 158 Study Areas with 12.5 million loops • Track 3 • RoR rural study areas < 10K loops that are part of a Holding Company that also has Price Cap or non-rural study areas • All other RoR rural study areas • 1,185 Study Areas with 7.3 million loops * Covered Rural Telephone Company – Generally similar to a “Rural” company or a “2% company” under the 1996 Act

18. Rates • Track 1: RBOCs & Large Price Cap • Uniform Structure and Uniform Rates • Low per minute termination rates ($0.0005 to $0.0007) • Track 2: Mid-Size • Mid-size Price Cap • Target rate is +/- $0.01 (transport and termination) • Optional Incentive Regulation • Track 3: Rural Rate-of Return (RoR) • Unified Interstate and State Access @ Interstate (≈ $0.018) • Rates vary by company with optional pooling and rate banding

19. Unifying Intercarrier Compensation Rates

20. Small ILEC Intrastate ( 5.1) CLEC Interstate ( 1.8) Large ILEC Intrastate (2.5) CLEC Intrastate (3.0) Small ILEC Interstate (1.8) Recip Comp (Voice 0.2) CMRS to ILEC (InterMTA 0.6) Large ILEC Interstate (0.6) Recip Comp (ISP 0.1) CMRS to ILEC (IntraMTA 0.2) Current Intercarrier Compensation Rates AVERAGE RATES (Cents per MOU) LONG DISTANCE CALLS LOCAL CALLS WIRELESS CALLS High (¢/min): 1.5 8.9 9.9 34.9 6.8 35.9 0.3 0.1 8.9 0.3 Low (¢/min): 0.5 0.3 0.4 0.7 0.2 0.4 0.0 0.0 0.2 0.0

21. LD Intrastate LD Interstate Wireless ** Local * LD Intrastate LD Intrastate LD Interstate Wireless Local LD Interstate Wireless Local ICC Rates After Reform AVERAGE RATES (Cents per MOU) Track 1 ILECs (0.0023) Track 2 ILECs (0.0080) Track 3 ILECs (0.0171) * Compensation for EAS traffic remains under existing arrangements ** Compensation for IntraMTA traffic @ local rates & compensation for InterMTA traffic @ interstate access rates

22. SLC Increases • Track 1 • Residential SLC Caps increase $3.50 over 4 years • Average residential SLC may increase by no more than $0.75 in steps 1 and 2, and $1.00 in steps 3 and 4 • No residential SLC may increase by more than $0.95 in steps 1 and 2, and $1.20 in steps 3 and 4 • Track 2 • Residential SLC Caps increase $2.25 over 3 years • MLB SLC Cap increase to $10.00 • Track 3 • Residential SLC Caps increase $2.25 over 3 years • No MLB increase

23. Restructure Mechanism • To the extent revenues associated with rate reductions are not recovered through restructured intercarrier charges or increases to the SLC, the Plan permits additional recovery through a new Restructure Mechanism (RM). • The RM will be available to non-ILEC competitive carriers. (The precise formulas for determination of RM amounts for competitive carriers has yet to be finalized.) • “Early Adopter Fund” of at least $200M or percentage of state recovery mechanism as determined by the Commission is created for states that have previously or established state recovery mechanisms to reduce intrastate access rates. State Commissions insure RM is utilized for appropriate purposes

24. Estimated Restructure Mechanism Size Restructure Mechanism.…………… $ 1,500M Universal Service Mechanisms High Cost Fund Modifications…… $ 300M Lifeline Support……………………… $ 225M Early Adopter Fund .....……….……….. $ 200M Total……………………………………… $ 2,225M

25. Current Year Interstate Switched Access Revenue Requirement Base Year Intrastate Switched Access Revenue Base Year Reciprocal Compensation (Net) Track 3: RM Calculation Current Year Intrastate & Interstate Switched Access and Recip. Comp. Revenues, net of Payments to Other Carriers for Recip. Comp. and Transiting/Transport Current Year Traffic Sensitive SLC Revenue Current Year LSS Revenue LESS

26. Summary

27. Interconnection Framework • The interconnection obligations and intercarrier compensation framework of the Missoula Plan operate on an Edge architecture • An Edge is a location on a carrier’s network where it receives traffic to perform the termination function. • General interconnection obligation: A carrier must permit other carriers with the financial obligation for interconnection to physically interconnect, directly or through a transit carrier, at its Edge • The Plan specifies duties interconnecting carriers must satisfy to obtain interconnection • The Plan establishes rules for procurement and provision of Tandem Transit Service • Carrier with the financial obligation for transport chooses the transit carrier. • Indirectly interconnected carriers and the Tandem Transit Provider must exchange call detail records at no additional charge.

28. Intercarrier Compensation Framework • Each carrier has a financial obligation to transport its originating non-access traffic to the terminating carrier’s Edge • Transport is the transmission facilities a carrier requires to physically connect its network with the terminating carrier’s edge. • Transport exceptions exist for out of balance traffic. • Interconnection between Track 1 carriers and CRTCs is governed by a specific transport framework. • Each carrier has a financial obligation for the termination of its traffic by the terminating carrier • Termination is the acceptance of traffic by a terminating carrier at its Edge and the delivery of the traffic to the called party. • Termination charges cover any transport and end office switching a terminating carrier uses to deliver traffic from its Edge to the called party.

29. General Intercarrier Compensation Framework Transport and Termination of Non-Access Traffic • When a carrier uses the terminating carrier’s network to fulfill its obligation to transport non-access traffic, transport and termination charges will apply. • Termination is the acceptance of traffic at its designated Edge for delivery to the called party. EDGE TerminatingEnd User OriginatingEnd User LEC A E.O. LEC B E.O. Transport Termination Access Traffic Remains as it is Today

30. TRANSIT TANDEM General Interconnection Framework A carrier may fulfill its duty to transport non-access traffic via direct or indirect interconnection. Indirect Interconnection OriginatingEnd User TerminatingEnd User LEC A E.O. LEC B E.O. EDGE Direct Interconnection LEC A’s financial duty to transport traffic Carrier that pays chooses interconnection method

31. Meet Point OriginatingEnd User EDGE TerminatingEnd User CRTC E.O. Non- CRTC E.O. Rural Transport Rule Shifts some or all of the transport cost between the meet point and the non-CRTC’s edge to the terminating carrier. CRTC Interconnection Framework Rural Transport Obligation The Plan provides Track 2 and 3 ILECs an exception from the general duty to transport non-access traffic originating on its network to the terminating carrier’s Edge. This is referred to as the “Rural Transport Rule.”

32. Meet Point OriginatingEnd User TerminatingEnd User EDGE CRTC E.O. Non- CRTC E.O. CRTC Interconnection Framework Rural Transport Rule for CRTCs Tandem Interconnection The non-CRTC bears all of the transport cost Direct Interconnection Track 3 ILECs will pay the non-CRTC 50% of the dedicated transport, not to exceed 10 miles. The non-CRTC will bear the balance of the cost.

33. Intercarrier Compensation Framework • As a general rule, calling and called telephone numbers will be used to determine when traffic should be subject to switched access charges or reciprocal compensation charges • Resolves wireless intraMTA intercarrier compensation disputes. • Helps to resolve virtual FX and VoIP-to-PSTN intercarrier compensation disputes. • The Plan provides a mechanism governing how all carriers may obtain both interim and formal interconnection agreements – and companion reciprocal compensation arrangements – for the exchange of non-access traffic • An interim interconnection arrangement with the originating carrier by sending a notification letter to the originating carrier • Both carriers to begin billing one another their applicable interim reciprocal compensation charges (i.e., interstate access rates) beginning 15 days after the date of the notification letter • Any carrier may request a formal agreement by invoking the negotiation and arbitration procedures set forth in Section 252 of the Act

34. Comprehensive Solution for Phantom Traffic • Establishes call signaling rules that apply to all communications service providers and traffic identification obligations to help expeditiously resolve disputes • With certain exceptions, every originating communications service provider must transmit telephone number of the calling party to intermediate and terminating carriers. • With certain exceptions, every intermediate communications service provider must transmit without alteration the telephone number information it receives from another provider. • When a provider’s switch is equipped with SS7, it shall utilize SS7 when interconnecting directly with another provider’s switch that is equipped with SS7. • Proposes an industry-driven uniform framework for the generation and exchange of call detail records • Implements rules to govern procurement and provision of Tandem Transit Service • Recommends an interim order, pending adoption of comprehensive intercarrier compensation reform, that will: • Implement the call signaling rules. • Establish an interim process and, in certain circumstances, charges for the creation and exchange of call detail information.

35. Other Features of the Missoula Plan • Creates a federal Early Adopter Fund for States that have rebalanced intrastate access through explicit state funds • Minimum of $200M provided for the Early Adopter Fund. • Missoula Plan supporters commit resources to work with State Commissioners to help size this Fund and determine how it should work when States have rebalanced intrastate access through state funds or local rate increases. • Provides additional universal service support • Provides approximately $300M for several rural and non-rural high cost loop fund modifications. • Provides approximately $225M in additional Lifeline support to insulate low income consumers from SLC increases. • ROR CRTCs will have an annual option to move to an incentive regulation program on a study area-by-study area basis • Study areas for which incentive regulation is chosen will be treated as Track 2. • Existing ROR rules for switched services will be replaced by rules that regulate prices. • Interstate special access prices will be reinitialized to 11.25% ROR and subject to a price cap plan.

36. How does the plan deal with VNXX? • Does not constrain the association of rate centers and telephone numbers • Does limit exposure by: • Constraining the traffic classified as local by employing the telephone numbers principle • Reassigning the financial obligation for transport to the terminating non-CRTC

37. What does proposal mean for traffic terminating from ISP to PSTN? • Telephone numbers rule defines classification • Calling and called numbers for the purpose of applying the telephone numbers rule cannot be intermediate numbers • Phantom traffic issues must be resolved to solve problems

38. What did we Get and What did we have to Give Up? The Consensus • The consensus process requires give and take and no party walked away with everything they wanted • So what did we get? • Cost based intercarrier compensation charges rather than bill and keep • Originating access charges • Smaller SLC increases than the large companies • Financial transport responsibility limited to exchange boundaries • Clarity regarding interconnection responsibility • Solution to the phantom traffic problems • Make whole for lost revenues in the Restructure Mechanism • Other items • And what did we have to give up and why? • Local rate benchmarking – difficulty in getting local rate increases • 10 miles – to make it more attractive for wireless to sign on • Other issues… • Although rural companies had to compromise on some issues we were able to obtain our key objectives

39. Next Steps • The FCC has now put the Missoula Plan out for public comment • Comments September 25 • Replies November 9 • The framework will come under attack on multiple fronts • Wireless Carriers – still want bill and keep • Consumer Groups – SLC increases • Verizon and Qwest have not signed on • Others - ??? • The Rural Alliance will need to fight to retain the important items we won during the NARUC process

40. Join the Rural Alliance!! • We are at the beginning of a long fight for our financial future • We have demonstrated what we can do when we plan and act as a united rural industry • To be successful we will need to engage the best legal and regulatory talent in our industry • Over 350 RLECs participated in our advocacy efforts • We need to get everyone on board now! • Suggested Contribution: • 0 – 499 Access Lines $500 • 500 – 999 Access Lines $1,000 • 1,000 – 9,999 Access Lines $2,000 • Over 10,000 Access Lines $3,000

41. In Summary • The RLEC industry has made great progress over the past 18 months through the Rural Alliance and the NARUC process • The proposed framework offers significant benefits: • Cost-based originating and terminating rates • A non-portable RM to assure revenue stability • Interconnection rules and compensation obligations that limit RLEC transport obligations • Stability and certainty going forward • The RLEC industry is united as never before to fight for the fair intercarrier compensation reform that our customers need and deserve

42. For more information on the Rural Alliance please visit our web site at www.rural-alliance.org

43. Growth in the USF

44. Sources of Growth Note: LTS included in ILEC High Cost 3Q04 – 4Q06

45. CETC Support

46. USF Collection Mechanism