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ICC-USF ReformFederal Regulatory Update

Bob Schoonmaker, Sr. VP

Jonas Karlson, Sr. Consultant

November, 2013

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Overview

• Future Financial Impacts

• ETC Requirements-2014

• Special Access Data Request

• IP Technology Transition

• Call Completion

• First Net

• Other

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Future Financial Impacts

• ICC-USF Transformation Order– ICC Terminating Rate transition– ARC Rates– CAF-ICC Impacts– HCL – Rural Growth Factor– HCL – Various limits

• Originating Minute and Line Losses

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ICC Terminating Rate Transition• 2012-2013 – Intrastate rates (EO Switch &

Tdm. Switch Transport) to interstate levels• 2014-2016 – EO Switching – Both inter-

and intra-state to $0.005• 2016-2019 – EO Switching - $0.005 to

$0.0007• 2020 – EO Switching to “bill and keep”• Continued loss of terminating minutes

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Terminating EO Rate Transition

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$0.000000

$0.005000

$0.010000

$0.015000

$0.020000

$0.025000

$0.030000

$0.035000

$0.040000

$0.045000

$0.050000

2012 2013 2014 2015 2016 2017 2018 2019 2020

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ARC Rates• Residence & Single Line Business

– Increase $0.50 per year to a maximum of $3.00

– Maximum Res Rate of $30.00 – (Basic + SLC + ARC + EAS additive + State SLC + state USF + State TRS + State 911)

• Multi-Line Business– $1.00 per year but max of ARC and SLC of

$12.20

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CAF-ICC Transition

• 2011 Base Revenue Requirement

• Multiplied by 95% each succeeding year

• Less– ARC– Interstate billed switched access– Intrastate billed terminating switched access

• Equals eligible recovery

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Hypothetical Example

• Local line loss – 4%/year

• Interstate minute loss – 7%/year

• Intrastate minute loss – 5%/year

• Term Minutes approx. 67% of total

• 2011 Base period rev req - $800,000

• Band 8 Local Switching rate in 2012-2013

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CAF-ICC Recovery

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$-

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

Eligible Recovery

Intra Term Billed

Inter Billed

ARC

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High Cost Loop (HCL) Cap

• Rural Growth Factor limit on total fund – Rural access line change + GDP-CPI

• Total HCL Fund-2010 through 2014

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Year HCL Fund % Change2010 962.0$ -4.6%2011 905.9$ -5.8%2012 795.1$ -12.2%2013 774.8$ -2.6%2014 756.5$ -2.4%

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Other HCL Limits

• $250/line/month –

• Corporate Operations Expense Limit– Formula adjusted by GDP-CPI– Based on # of Loops-may be impact as loops

go down– 2013 Submission – 199 nationwide, 1 Iowa

• Safety Net – 38 Iowa companies

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QRA

• Currently based on sum of OpEx and CapEx results

• Phase in for 2014 same as 2013, max 15% decrease in USF

• Same factors in 2014, but against 2013 HCL data submission

• FCC “working on” single formula

• One IA company impacted in 2013

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QRA - Future

• RAG and others pointing out flaws in the process

• NECA hypothetical test - QRA only identified 26% of the highest cost companies

• FCC Staff very committed to QRA

• Proposals to use QRA as a “trigger” for review rather than a hard cap

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Future Financial Impacts

• Revenue Impacts– Regulatory – generally negative– Minutes and access lines – mostly negative– Broadband – positive– New Services – can be positive

• Need to assess financial impacts on cash flow to project future investment ability

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2014 ETC Report Requirements

• FCC 481 – Filed October 2013– Filing Delayed to FCC due to Shut Down– Initial Responses/Feedback– Other Issues with This Year’s Filing

• Additional Requirements Next Filing– Filing Due July 1, 2014

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2014 ETC Report Requirements

• Additional Requirements for 2014– Broadband Data as well as Voice

• Emergency Functionality• Unfulfilled Service Requests• Number of Complaints

– Company Price Offerings• Broadband and Voice• Keep Track of Rate Floor Changes• Within 2 Standard Deviations of National Average

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Five Year Plan

• Required with 481 due July 1, 2014

• Should Include Broadband Deployment

• Community Anchor Institutions

• Progress Report of Past Work– Broken out by voice/broadband

• Financial/Strategic Plan

• Stay Conservative in Projections

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2014 ETC Report Requirements

• 4Mbps Down/1Mbps Up Service Standard – Based on “Reasonable Request”– Define Criteria for Limits

• Mileage• Cost for Extending Facilities• Cost to Upgrade Network

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Special Access Data Request• FCC investigation of PC Special Access

• September 18, 2013 Order

• Response date - after OMB approval

• Must file a response if:– A Provider of special access in a PC area– A Purchaser of special access in a PC area– A Best Efforts Business Internet Access

Service Provider – Filed Form 477 in 2012

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Special Access Data Request• Filers of Form 477, but not in other

categories certify to that effect only.

• Responses for provision and/or purchase of special access in price cap areas.

• If you are either a provider or a purchaser of dedicated special access in a price cap area-start reviewing DR now – it is very detailed

• 100 pages of form and instructions20

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Circuit Switched to IP Transition• FCC – Speak of it as key priority

• IUB – Recently held workshops primarily on regulatory and legislative issues

• Technically – investments being made– Softswitches & routers– Ethernet based transmission equipment– Broadband transmission to end users– IP voice over LTE close for wireless– VOIP being provided by some

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Circuit Switched to IP Transition

• Competitively Offered IP services– Vonage, Skype and others – public internet– Magic Jack– Cloud business system offerings – Level 3,

8x8, ANPI– Cable systems – IP based managed service

network

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IP Transition - FCC

• AT&T Filed a Petition to conduct two trials– long on rhetoric, short on specifics– Let us conduct with very few regulatory

requirements

• NTCA and others– Trials OK, but look at individual regulatory

requirements to see whether applicable

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IP Transition - FCC

• Comments filed

• FCC Technology Transitions Policy Task Force formed and working

• No formal action on AT&T petition yet

• Number assignment trials to VOIP providers underway

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IP Transition – Technical Issues

• Technical requirements – who sets them? – Current Notes on the

Network over 1600 pages– Interconnection – Sec 251 and 252 apply?– Translation of NPA-NXXs to IP addresses– Quality of service– Voice over public internet or managed

“separate” IP network

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IP Transition - Numbering

• Who will be eligible for number assignments?

• Possibly require ten-digit dialing nationwide

• Eliminate geographic meaning of numbers

• Change thousand block assignments to hundreds blocks or individual number

• Data base for number to IP addresses26

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IP Transition – Public Safety

• Impact on 911 and NG 911 systems

• Identifying end user locations

• Cost of upgrading

• Potential impact of non-geographic numbers

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IP Transition – Customer Impact• End user instrument compatibility

• Special feature “transitions”– Verizon Fire Island – wireless replacement

• Alarm services• Credit card verification• Medical alert services• FAX impacts

• Powering issues

• Education - Training28

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IP Transition - Government

• DoD on behalf of federal agencies filed comments in GN Docket No. 13-5– DoD/FEA customers continue to rely heavily

on wireline TDM-based networks and services and will do so for the foreseeable future. The FCC should carefully consider potential adverse consequences on public safety and national security interests as a result of requiring DoD/FEA to prematurely transition to different technologies or services.

04/21/23

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IP Transition - Government • DoD cites example of Federal Aviation

Administration (FAA) reliance on TDM technology and services 92% of the time for critical air traffic operations.

• Preliminary indications are that certain functionalities that DoD/FEA customers currently receive over wireline and TDM-based networks may not be available through wireless or IP-based networks

04/21/23

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IP Transition – Rural CAF-BB• Proposal to provide support for data only

broadband lines • Revenue Req. for data only lines shifts 75% of

loop cost from state to interstate• Loop cost for data only lines shifted from Special

Access to Common Line• CAF-BB provides support for total loop cost less

$26 maximum BB SLC• Would reduce data-only interstate charges

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IP Transition - Summary

• Will move forward – pushed by technology and cost issues

• Many difficult issues to deal with both nationally and locally

• Expect a considerable amount of change and possibly disruption

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Call Completion• Continues to be a vexing problem in rural

areas

• NPRM issued – Feb 7, 2013

• Enforcement Bureau action against Level 3 – March 12, 2013– $950,000 “voluntary contribution”– $1,000,000 per quarter if certain parameters

are not met

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Call Completion

• FCC Order on circulation – On Oct 28 Meeting Agenda– Expect it will primarily require message data

recording by IXCs– Will be some implementation time– Not end solution, but may give data for further

Enforcement Bureau action

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FirstNet – What is it?• Nationwide LTE wireless broadband network

for Emergency Responders

• Early stages of implementation

• $7 billion of funding to come from spectrum auctions

• Intend to share and use facilities of existing providers

• “Hardened” Network Capability

• 700 mhz Block D spectrum – 10 mhz

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FirstNet - Implications

• FirstNet works with state coordinators

• State coordinates with in-state and local agencies

• FirstNet will need to coordinate use of facilities and possibly spectrum with current providers

• Potential for fiber use, towers, etc. of rural providers

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Transformation Order - NPRM

• Rate of Return– Staff report – proposes high of 8.72%– Comments generally that is too low– Need to have a rulemaking– Don’t anticipate quick action

• Originating Access Rate transition– No action apparent at this time

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Transformation Order - NPRM

• Transport Access Rates transition– No apparent action at this time

• QRA for ICLS– Was supposed to implement in July, 2012– No action likely until QRA for HCL gets

resolved

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Transformation Order - NPRM

• Limit USF where there is unsubsidized wireline competition (voice and BB)– Implementing for PC companies as part of

CAF I and CAF II– Major issue for cable TV groups– Not implemented yet for ROR study areas

with 100% overlap– How to implement in other ROR study areas

with lower overlap?

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Transformation Order - NPRM

• CAF - Remote Area – $100 million budget– Provide funding for customers in “highest

cost” areas not supported by CAF II both PC and ROR

– Propose consumer subsidy– No significant action yet – may move forward

after CAF II is implemented

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Transformation Order - Appeal

• 10th Circuit Court of Appeals– Denver

• Written briefs have been completed

• Oral argument scheduled for Nov 19

• Possibility of delay because of government shutdown

• No seats available

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Transformation Order - Appeal• Some key issues

– FCC authority over state access– Recovery of costs in different jurisdiction– USF provisions sufficient and predictable– Is bill and keep (zero rate) appropriate

compensation– Act differentiates between reciprocal comp

and access– Broadband requirement unlawful

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Transformation Appeal - Decision

• First half of 2014

• 1 – Uphold – Order Provision Stands

• 2 – Remand – Order Provision remains in place, but sent back to FCC for modifications in rationale or the provision.

• 3 – Vacate – Order Provision no longer applicable. FCC could replace it with something else.

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CACM• Connect America Cost Model

• Currently close to finalization for PC companies and CAF II

• Cost results at census block level

• FCC Public Notice - comments regarding voluntary use for ROR companies

• May have other longer-term uses for ROR companies

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Questions

• We are available to answer any of your questions here at the convention or contact us:

• Bob – bschoonmaker@gvnw.com – 719-594-5809

• Jonas – jkarlsson@gvnw.com – 217-862-1511

04/21/23