“Surviving the FCC Cuts, Caps and Limits” Presenter: John Balk- TCA President

1. “Surviving the FCC Cuts, Caps and Limits”Presenter: John Balk- TCA President Wisconsin Statewide Telephone Cooperative Association Spring Conference and Annual Meeting April 30-May 1, 2012

2. Quantile Regression Analysis

3. Quantile Regression Analysis • FCC wants to stop “race-to-the-top” • FCC views current system as incenting higher costs, while punishing companies that cut costs • FCC wants to encourage operational efficiencies • FCC’s aim is to set limits on the recovery of capital & operating costs to ensure that companies do not receive more support than necessary to serve their communities

4. Quantile Regression Analysis • Per the Order: • Effective July 1st, 2012 the FCC will put into place rules limiting capital & operating costs • The FCC is proposing the usage of Quantile Regression Analysis to estimate appropriate levels of capital & operating costs • Limits support for areas that have costs higher than vast majority of their similarly-situated peers • Limits will impact HCLS & ICLS • Method for determining limits in FNPRM • Delegate authority on determining methodology to Wireline Competition Bureau

5. Regression Analysis • Regression Analysis is a mathematical tool used to understand how the typical value of the dependent variable changes when any one of the independent variables is varied, while the other independent variables are held fixed • Average value of the dependent variable when the independent variables are held fixed • The goal in regression analysis is to create a mathematical model that can be used to predict the values of a dependent variable based upon the values of an independent variable

6. Cable and Wire Investment

7. Quantile Regression Analysis • Quantile = Percentile • Quantile Regression Analysis (QRA) aims to fit a line to a percentile instead of the average • The FCC is utilizing QRA to identify companies with costs exceeding the 90th percentile of similarly situated companies and limit costs exceeding that benchmark • 90 of 100 companies that have similar factors will be at or below the predicted value

8. Cable and Wire Investment

9. Quantile Regression Analysis - FNPRM • Model utilized census data and loops to predict costs • 11 Steps of HCLS Algorithm Capped • Each of the 11 items is measured independently to benchmark • Can exceed on 1 or all or anything in between • Capital Investment caps were established based on Gross Investment • A company that exceeds the 90th Percentile in any of the 11 cost categories will have their support limited based on the benchmark

10. Quantile Regression Analysis - FNPRM • Regression Caps established based on 2010 financial data would apply to 2012 HCLS and ICLS payments • 2 year lag for cash flow effect • Caps would be applied July 1st, 2012

11. Regression Analysis Impact - FNPRM • 280 companies had reductions in HCLS of $110 million • 340 companies did not exceed any of the 11 caps and benefited by $55 million • Based on the FCC’s figures 41% of companies were negatively impacted by the Regression Analysis • Companies exceeding any one of the caps would not be eligible for “recycled support” • The above impact figures don’t include the impact on ICLS, which was put out for comment in the FNPRM

12. Quantile Regression Analysis Order • On April 25th, 2012 the FCC released their final Quantile Regression Analysis Order • Order reduced the number of capped categories from 11 to 2 • Capital and Operating Costs are now capped at 90% of similarly situated companies based on a companies Capital Cost Per Loop and Operating Expense Cost Per Loop • Capping occurs at the “Step 25” level on the High Cost Loop Algorithm • Expenses now included Corporate Operations Expense, Operating Taxes and Rents • These items were not included in the original model released in the FNPRM • If a company has their Corporate Cap limited the limited number will be included as not to penalize a company twice • Order applies to HCLS but does not address ICLS? • Capital Investment caps set based on Net Investment

13. Quantile Regression Analysis Order • Regression Caps established based on 2010 financial data will apply to 2012 HCL and ICLS payments • Caps will be implemented as of July 1st 2012 • In 2012 support reductions will be to 25% of total impact • If impact is greater than 10% of HCLS impact will be limited to 10% • In 2013 support reduction will be to 50% total impact • Regressions will not be updated, however new Cost Data will be incorporated so caps will change • Starting in 2014 a full impact will be realized • After 2013 Regressions and Cost Data will change every year, so caps will change each year

14. Independent Variables

15. Quantile Regression Analysis Order • 100 companies had reductions in HCLS of $65 million • 500 companies did not exceed either of the caps and benefited by $55 million • The above figures are based on a full year impact • Based on the FCC’s figures 17% of companies were negatively impacted by the Regression Analysis • Companies exceeding one or both of the caps are not eligible for “recycled support” • All additional USF funds received by carriers must be utilized in accordance with 254(e) requirements • These funds need to be included in the build-out plans submitted to the FCC in 2013 in accordance with 54.313 requirements

16. Regression Analysis Impact

17. Regression Analysis Issues • “Race-to-the-Middle” concept • Companies below limits will increase investment and expenses • Companies above limits will decrease investment and expenses • Problem is, do not know limits in advance

18. Cable and Wire Investment

19. Regression Analysis Issues • Inaccuracies have been found in the underlying Independent Variables • Corrections will be a two part process • Near Term: Streamlined Waiver • If you company is impacted, check independent variable data for accuracy • FCC supplied a template for these waivers, LECs should supply shape files and readme files and must be hand or messenger delivered • Must be certified by a company officer • Long Term: FCC Public Notice for comment on data specifications for a Data Request that the FCC will issue to obtain study area boundaries directly from the RoR LECs • Expect to have updated boundaries in place to calculate 2014 support

20. Waiver Process

21. Other Factors • Consider whether reforms would cause a provider to default on existing loans and/or become insolvent • Mobile Providers – consider impact on customers (including roaming) if petitioner is sole provider of CDMA or GSM coverage • FCC states it will be a “Rigorous, thorough and searching review comparable to a total company earnings review.” • Must file all components and provide additional information as requested by staff

22. Chances of Success • The FCC states that any petition for waiver must • Clearly demonstrate that good cause exists for exempting an ETC from some or all of the reforms • Good cause – special circumstances • Demonstrate that a waiver is necessary and in the public interest to ensure that consumers in the area continue to receive voice service • Wireless competition may be considered voice providers • Only grant in cases where no alternative voice providers exist • “The intent of this waiver process is not to shield companies from secular market trends, such as line loss or wireless substitution.”

23. Timing of Petitions • Delegated to Wireline Competition and Wireless Telecommunications Bureaus • Petitions available for Public Comment (45 days) • Prioritize petitions from providers serving Tribal lands and insular areas • Finalize review 45 days after record closing • No such “shot clock” for non-tribal areas • FCC Petition backlog • 5,328 petitions pending for more than 2 years as of July 2011

24. Petition for Waiver Components • Density characteristics of the study area or other relevant geographic area including any characteristic that contributes to the area’s high costs • Information regarding existence or lack of alternative providers of voice and whether those alternative providers offer broadband service • Accounting for unused or spare equipment or facilities • Specific details on corporate operations expenses • Information regarding all end user rate plans • Procedures for allocating shared or common costs • Audited financial statements and notes to the financial statements (or unaudited financial statements) for the most recent three fiscal years • A list of services other than voice provided over the supported plant • Information regarding outstanding loans, • Identification of the specific facilities that will be taken out of service absent grant of the requested waiver. • For Tribal lands and insular areas, any additional information about: 1) Operating conditions, 2) Economic conditions, 3) Other reasons warranting relief

25. Advocacy Efforts

26. AdvocacyIntent to File a Waiver Letter

27. AdvocacyThe “Ask” • Determine what your message is to • FCC • RUS • Congress • National Associations are asking the FCC to halt further reforms until Order impacts are fully known and clarifications are addressed

28. AdvocacyThe One-Page Handout

29. AdvocacyNTCA Swing State Initiative • Goal - “[e]nsure that candidates and elected officials understand from the “ground level” the importance of the Universal Service Fund which helps to sustain local telecommunication companies and their connections to the nation.” • 2012 is an election year and Wisconsin is a Swing State! • Candidates will work harder to gain support from Constituents in WI