Proposal for Reforming the Intercarrier Compensation and Universal Service

Systems

CTIA – The Wireless Association™

May 18, 2005

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Telecommunications Provider Sources of Revenues

• Under current regulations, telecommunications providers have three potential revenue sources.

– Revenues from end-user customers;– Revenues from other telecommunications carriers;– Revenues from universal service.

• Under arcane and archaic FCC regulations, how much a provider receives from each of these revenue sources depends on:

– Whether the provider uses wireless or wireline technologies; – For incumbent LECs, whether the LEC is rural or non-rural, rate-of-return or

price cap; and– Whether traffic is local or long-distance, intrastate or interstate.

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High (¢/min): 1.5 8.9 9.9 34.9 6.8 35.9 0.3 0.1 8.9 0.3Low (¢/min): 0.5 0.3 0.4 0.7 0.2 0.4 0.0 0.0 0.2 0.0

Large ILECInterstate (0.6)

Small ILEC Interstate (1.8)

Large ILECIntrastate (2.5)

Small ILEC Intrastate ( 5.1)

CLEC Interstate ( 1.8)

CLEC Intrastate (3.0)

CMRS to ILEC InterMTA Access Cost ( 0.6)

CMRS to ILEC IntraMTA RC* (0.2)

RC* Voice (0.2)

RC* ISP ( 0.1)

LONG DISTANCE CALLS LOCAL CALLS WIRELESS CALLS

* RC = Reciprocal Compensation

Arbitrary Regulatory Distinctions Result in Intercarrier Compensation Chaos

Source: Intercarrier Compensation Forum, August 16, 2004, FCC Filing.

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Intercarrier Compensation and Universal Service – Broken Systems

•Regulatory Distinctions Pick Winners and Losers in the Competitive Marketplace and Fail to Target Appropriate Amounts of Support/Compensation– Results in fewer competitive alternatives – especially for consumers located in rural areas.– Means that consumers in similar high-cost areas end up with very different service quality.

• “All You Can Eat” System Rewards Inefficiency– Increased pass-through charges make new and innovative products and services less affordable to end-user customers. – Excess subsidies do not benefit consumers.

•Unnecessary Administrative Complexity– Creates transaction and other unnecessary costs that are flowed through to end-user customers.

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Intercarrier Compensation and Universal Service – How to Make it Better

•Eliminating Regulatory Distinctions and Allowing the Competitive Market to Work Will Mean More Choices for Consumers

– Must eliminate distinctions across and within technology platforms and between different types of traffic (e.g., wireless/wireline, rural/non-rural, price-cap/rate-of-return, intrastate/interstate, local/long-distance).

– Parties should be encouraged to voluntarily negotiate the terms of interconnection and the exchange of traffic

•Rules That Encourage and Reward Efficiency Lead to Better Services at Lower Costs

– Intercarrier compensation and universal service support should be targeted and no more than necessary for an efficient carrier to provide high-quality, affordable rates to consumers.

•Administrative Simplicity Will Translate to Better Enforcement and Real Cost Savings for Consumers

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CTIA-The Wireless Association™ Reform Proposal Highlights

• Encourage parties to continue exchanging traffic pursuant to validly negotiated and approved interconnection agreements;

• Transition to a Mutually Efficient Traffic Exchange (“METE”) system that: – Establishes a basic obligation for an originating provider to deliver traffic to the terminating provider’s

“network edge;”– Eliminates regulatory distinctions between different types of providers and traffic (e.g.,

wireless/wireline, rural/non-rural, price-cap/rate-of-return, intrastate/interstate, local/long-distance);– Sets federal rates for transit/transport based on efficient (forward-looking) costs; and– Gives wireline carriers additional flexibility in how they recover costs from end-user customers.

• Reform universal service by transitioning to one unified mechanism that encourages and rewards efficiency;

• Ensure that universal service costs are spread over the widest base of contributors; and

• Provide for a transition of no more than three years to the new system.

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Current and Proposed Intercarrier Compensation and Universal Service Systems

Current Systems

• Uneconomic Distinctions Between Technologies, Service Providers, and Categories of Traffic

• Encourage and Reward Inefficiency

• Unnecessary Administrative Complexity

CTIA’s Proposed Systems

• Eliminate Arbitrary Regulatory Distinctions

• Encourage and Reward Efficiency

• Dramatically Simplify Administration