Universal Service and USF Reform:Establishing a Rational and Efficient System

Presentation to NASUCA Mid-Year Meeting

San Antonio, TX

June 28, 2011

Presentation to NASUCA Mid-Year Meeting

San Antonio, TX

June 28, 2011

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CenturyLink: Network Map and Service Territory

CenturyLink CLEC Service Area

Qwest POPS

CenturyLink IP / MPLS Core

CenturyLink Fiber Network

Qwest

CenturyLink

Qwest Fiber Network

Upon Merger Close, Served Approximately: 17 Million Access Lines >5 Million Broadband Customers >600,000 Video Subscribers w/ growing facilities

base In 37 States

Upon Merger Close, Served Approximately: 17 Million Access Lines >5 Million Broadband Customers >600,000 Video Subscribers w/ growing facilities

base In 37 States

CenturyLink in Texas

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286,000 access lines106 exchanges6 operating companies22.9 HH per square mile average densityLargest exchanges served:

KilleenPorterHumbleSan Marcos

Small, rural exchanges (HH density/square mile)

74 exchanges below 2047 exchanges below 1023 exchanges below 5

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Population Density Matters

ILECs bear expensive COLR obligations to service all customers; a burden unique only this class of provider, and very important in areas of low population density

CenturyLink serves vast tracts of rural America; in addition to urban centers like Denver, Las Vegas, Seattle, Phoenix, and Minneapolis

Line Density (loops/sq. mile): Service Area (sq. miles):

AT&T 101 AT&T 602,391 Verizon 155 Verizon 229,569 CenturyLink 29 CenturyLink 699,521

Much of CenturyLink’s service area has fewer than 10 households per square mile

Competitors routinely avoid serving low density areas If COLR, ICC & USF reform is not handled properly, there is a real

risk of leaving rural areas behind

Historically COLR Costs Have Been Buried

Petroleum, INMonthly Cost:

$100

Franklin, INMonthly Cost:

$28

Indy Metr

o

Preble, INMonthly Cost:

$73

Salamonia, INMonthly Cost:

$104

When the entire territory (study area) in a state is averaged, it is assumed that revenues earned in low-cost Franklin can be used to offset the cost incurred in serving high-cost Petroleum.

Migrating USF distributions from a study area basis can better align funding with costs – and (generally) away from competition.

Legacy EQ receives $0 High Cost funding (except IAS access replacement) under the study area system; a wire-center system would fund the higher cost exchanges.

*Costs for voice network. Principle holds true for broadband.

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Wire Center Boundary

Service Locations

Central Office

Sweet Springs, Missouri Investment OverviewDistance and Density Drive Costs

Wire Center

Total Lines Served

1,077

122 sq. mi.

Investment per Line

$6,610

City Center

Lines Served

138 per sq. mi.

Investment per Line

$2,650

Outside City Center

Lines Served

2.4 per sq. mi.

Investment per Line

$17,960

Population Density Example: ILECs Serve Higher Cost Areas

Network deployed deeper into rural markets

Deployment not a choice: subject to state and federal obligations

Continuing service obligations lead to ongoing capital expense requirements

Cost of service far exceeds viable business case parameters

Brookneal, Virginia2,600 Access Lines

Rural Broadband Will Need Support

Broadband has become a necessary component for business, education, health, and in the lives of consumers

Market forces are working for most consumers:large-scale broadband network development, broadband devices,

software development, and application development.

However, consumers in the most rural portions are not servedUniversal service funding will be required if national public policy

to serve “all” remains in placeMust avoid unfunded mandates and minimize investment risk

during transition

Principle:Competition in the cities must not deprive the rural areas of

needed universal service support

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Universal Service: 5 Fundamental Questions

#1 Determine what “it” is- Define broadband service, speeds, other parameters

#2 Determine the areas that need universal service support- Target to high cost areas; given rate comparability policies

#3 Determine the cost of achieving universal service- Calculate the total cost of qualifying high-cost areas less expected

customer contributions

#4 Determine rules for vendors to implement universal service policy

- Provide requirements for those who receive funds and deliver on the promise of universal service

#5 Determine how to fund the Universal Service Fund- Apply surcharge applicable to all providers to establish a broad,

competitively neutral contribution mechanism

The government

buys jet fighters,

computers, light bulbs,

etc. It should “buy”

universal service

similarly.