S f USF & ICCSummary of USF & ICC Reform Order & FNPRM

Part V – Intercarrier Compensation Reform & FNPRM Proposals

MOSS ADAMS LLP | 1

ICC REFORM• Underlying PrinciplesUnderlying Principles

o Phase out of per minute ICC chargeso Migrate to bill and keepg po Promote the transition to IP networkso Provide a more predictable path for the industry and investors

o Eliminate hidden subsidies in current system

MOSS ADAMS LLP | 2

ICC REFORM• FCC Conclusions on Bill & KeepFCC Conclusions on Bill & Keep

o Market based & less burdensome than alternativeso Consistent with cost causation principlesp po Consumer benefits through reduced rates and/or improved service quality

o Eliminates arbitrage & market distortionso Appropriate even if traffic is imbalancedo Legal authority under Section 251(b)(5)o Legal authority under Section 251(b)(5)

Only applies to “termination” Interstate and Intrastate switched access

MOSS ADAMS LLP | 3

ICC REFORM• State Role in Bill & KeepState Role in Bill & Keep

o Oversee tariffing of intrastate rate reductionso Interconnection negotiation and arbitrationgo Determination of network edge for purposes of bill and keep

MOSS ADAMS LLP | 4

ICC REFORM – ORDER (ROR)• Transition terminating switched access to billTransition terminating switched access to bill and keepo Cap all interstate switched access ratesp

Effective 12/29/11 Originating and terminating

– End Office Access Service– Tandem Switched Transport Access Service– Dedicated Transport Access– Other interstate switched access rate elements

C i C Li li bl» Carrier Common Line, as applicable» Information Surcharge

MOSS ADAMS LLP | 5

ICC REFORM – ORDER (ROR)• Transition terminating switched access to billTransition terminating switched access to bill and keepo Cap intrastate switched access ratesp

Effective 12/29/11 Terminating only

– End Office Access Service– Tandem Switched Transport Access Service

Includes reciprocal compensation No adjustment required/allowed if intrastate is already lower than interstate

MOSS ADAMS LLP | 6

ICC REFORM – ORDER (ROR)• Transition terminating switched access andTransition terminating switched access and reciprocal compensation to bill and keepo Step 1 (July 1, 2012) – 50% transition to interstatep (J y )

May maintain intrastate switched access rate structure; or Apply interstate rate structure for intrastate rates

– Immediately migrate to interstate rates– Apply a transitional rate equal to 50% of the difference

o Step 2 (July 1, 2013) – 100% transition to interstate

MOSS ADAMS LLP | 7

ICC REFORM – ORDER (ROR)• Transition terminating switched access andTransition terminating switched access and reciprocal compensation to bill and keepo Step 3 (July 1, 2014) – 1/3 of difference between p (J y ) /interstate and $0.005

o Step 4 (July 1, 2015) – 2/3 of difference between interstate and $0 005interstate and $0.005

o Step 5 (July 1, 2016) –$0.005

MOSS ADAMS LLP | 8

ICC REFORM – ORDER (ROR)• Transition terminating switched access andTransition terminating switched access and reciprocal compensation to bill and keepo Step 6 (July 1, 2017) – 1/3 of difference between p (J y ) /$0.005 and $0.0007

o Step 7 (July 1, 2018) – 2/3 of difference between $0 005 and $0 0007$0.005 and $0.0007

o Step 8 (July 1, 2019) – terminating switched end office access rates @ $0.0007

o Step 9 (July 1, 2020) – bill and keep Tariff filings to remove charges for Terminating End Office Access Charges

MOSS ADAMS LLP | 9

Charges

ICC REFORM – ORDER (ROR)• Other IssuesOther Issues

o Reforms do not automatically replace existing contracts or interconnection agreements Left to “change of law”, renegotiation and termination clauses in agreements

o Originating Access left to FNPRM, beyond capg g y po Transport (originating and terminating) left to FNPRM, beyond cap

fo Other rate elements left to FNPRM, beyond cap

MOSS ADAMS LLP | 10

ICC REFORM – ORDER (ROR)o Eligible Recoveryo g b e ecove y

Rate of Return Baseline2011 Interstate Switched Access Revenue Requirement*

+ 2011 Intrastate Switched Access Revenues+  2011 Intrastate Switched Access Revenues+  2011 Net Reciprocal Compensation Revenues‐ 5% annual reduction

o Recovered from 3 sources Intercarrier Compensation RevenuesA R Ch (ARC) Access Recovery Charge (ARC)

Connect America Fund (CAF)

* R i t b itt d t NECA f 2011 t iff fili

MOSS ADAMS LLP | 11

* Revenue requirement submitted to NECA for 2011 tariff filing

ICC REFORM – ORDER (ROR)o Access Recovery Charge (ARC)o ccess ecove y C a ge ( C)

Residential & SLB = $0.50/year for up to 6 years for a max of $3.00

MLB = $1 00/year for up to 6 years for a max of $6 00 MLB = $1.00/year for up to 6 years for a max of $6.00– SLC + ARC may not exceed $12.20

Local Rate + SLC + EAS + Surcharges + ARC ≤ $30.00R id ti l b h k f SLB & MLB– Residential, no benchmark for SLB & MLB

ARC is not mandatory, but will be imputed for CAF– Carriers that forego recovery in 1 year may not recover in f tfuture years

ARC may not be assessed on Lifeline customers ARC may be determined at the holding company level

MOSS ADAMS LLP | 12

ICC REFORM – ORDER (ROR)o Connect America Fund (CAF) supporto Co ect e ca u d (C ) suppo t

Eligible Recovery‐ Intercarrier Compensation RevenuesA R Ch R‐ Access Recovery Charge Revenue

= CAF Support

Phases down over time as Eligible Recovery is reduced by 5% each year

Obligation to deploy broadband upon reasonable request as a condition of ICC CAF

CLECs not eligible for ICC CAF

MOSS ADAMS LLP | 13

ICC REFORM - ORDER• Monitoring ComplianceMonitoring Compliance

o Annual filing of the following data ICC Rates Revenues Expenses Demand for the preceding fiscal year

• Waiver RequirementsSi il t USF R f i i to Similar to USF Reform waiver requirements Total Cost and Earnings Review, including non‐regulated Carriers face a “heavy burden”

MOSS ADAMS LLP | 14

ICC REFORM - ORDER• VoIP Traffic – originates/terminates in IPVoIP Traffic  originates/terminates in IP formato All VoIP to PSTN traffic under section 251(b)(5)o Toll VoIP to PSTN = Access

Originating and Terminating Rates may be tariffed (state or interstate), or; Interconnection agreement (preferable to tariffs)

– Subject to arbitration by the State PUC Traffic subject to VoIP access may be set as the % of VoIP customers in the statecustomers in the state

o All other VoIP to PSTN = Reciprocal Compensationo Blocking of VoIP traffic is precluded

MOSS ADAMS LLP | 15

ICC REFORM - ORDER• CMRS‐LEC CompensationCMRS LEC Compensation

o Non‐access = Bill and Keep Interim transport rule for Rate of Return carriers

– CMRS chosen interconnection point within LEC territory– LEC responsibility stops at the meet point if CMRS chosen interconnection point is outside LEC territory

Existing interconnection agreements remain in effect

o IntraMTA rule applies to all traffic originated/ terminated within the same MTAterminated within the same MTA Not CLEC transiting traffic Reciprocal compensation applies

MOSS ADAMS LLP | 16

IMPACTS ANALYSIS - ORDER

65 C C S d A• 65 Cost Company Study Areas• ≈ 310,000 Access Lines (2012)

$• ≈ $200M in 2012 USFo ≈ $25M in LSS$75M i 2012 IS SW R R i• ≈ $75M in 2012 IS SW Revenue Requirement

• ≈ $  35M in 2012 ST SW Revenue

MOSS ADAMS LLP | 17

IMPACTS ANALYSIS - ORDERICC Reform Impacts Implementation Total ImpactAnnual ImpactICC Reform Impacts Implementation Total Impact(65 Companies) Date 2012 2013 2014 2019 2012 ‐ 2019Intrastate Terminating ICC Reductions 7/1/2012 (2,699,636)     (5,909,823)     (10,032,373)  (11,115,987)  (74,174,663)    Interstate Terminating ICC Reductions 7/1/2014 ‐                   ‐                   (1,032,675)     (6,205,886)     (26,483,645)    Access Recovery Charge (ARC) 7/1/2012 1,105,135      3,255,082      5,285,975      9,082,028      51,759,559      

d / /

Annual Impact

• CAF support declines in later years due to growth in ARC and

Connect America Fund 7/1/2012 14,492,777  31,192,639  32,274,589  24,489,310  217,829,632 Interstate TS Settlement Reductions 7/1/2012 (12,148,915)  (26,107,633)  (26,724,392)  (27,531,745)  (203,149,763)  Total 749,362          2,430,264      (228,876)        (11,282,280)  (34,218,880)    

CAF support declines in later years due to growth in ARC and reduction in Eligible Recovery.

• Interstate TS Settlement Reductions are the combination of the elimination of LSS and the 5% productivity factorelimination of LSS and the 5% productivity factor.

• Some impacts appear positive due to cost reductions > 5% productivity factor.

MOSS ADAMS LLP | 18

IMPACTS ANALYSIS - ORDERICC Reform Impacts ‐ Average Implementation Total ImpactAnnual Impactp g p p(65 Companies) Date 2012 2013 2014 2019 2012 ‐ 2019Intrastate Terminating ICC Reductions 7/1/2012 (41,533)           (90,920)           (154,344)        (171,015)        (1,141,149)      Interstate Terminating ICC Reductions 7/1/2014 ‐                   ‐                   (15,887)           (95,475)           (407,441)          Access Recovery Charge (ARC) 7/1/2012 17,002            50,078            81,323            139,724          796,301            Connect America Fund 7/1/2012 222 966 479 887 496 532 376 759 3 351 225

p

• Impacts do not appear “crippling” and phase in over time

Connect America Fund 7/1/2012 222,966        479,887         496,532        376,759        3,351,225      Interstate TS Settlement Reductions 7/1/2012 (186,906)        (401,656)        (411,144)        (423,565)        (3,125,381)      Total ICC Impacts 11,529            37,389            (3,521)             (173,574)        (526,444)          

• Impacts do not appear  crippling  and phase in over time.• Opportunity to develop cost efficiencies and generate additional 

revenue streams.G l ithi th i d t t b th t ICC f• General response within the industry seems to be that ICC reform is acceptable.

MOSS ADAMS LLP | 19

ICC REFORM - FNPRM• Impacts of the Order appear acceptable but theImpacts of the Order appear acceptable, but the FNPRM asks some troubling questionso How should originating rates be transitioned to B&K?o What, if any, recovery is appropriate for originating access?

o Should there be a defined sunset date for the ARC?o Should there be a defined sunset date for the ARC?o How should eligible recovery be calculated after year 5?o Are SLCs set at the appropriate level or should they be eliminated?

o Should ICLS be eliminated?

MOSS ADAMS LLP | 20

IMPACTS ANALYSIS - FNPRM• 65 Cost Company Study Areasp y y• ≈ 310,000 Access Lines (2012)• ≈ $200M in 2012 USF

o ≈ $85M in ICLSo ≈ $25M in LSS$75M i 2012 IS SW R R i• ≈ $75M in 2012 IS SW Revenue Requirement

• ≈ $  35M in 2012 ST SW Revenue$ 26M i 2012 SLC R• ≈ $  26M in 2012 SLC Revenue

• ≈ $1.1M in 2012 ARC Revenueo Grows to ≈ $9M during transition

MOSS ADAMS LLP | 21

o Grows to ≈ $9M during transition

IMPACTS ANALYSIS - FNPRMICC Reform Impacts Implementation Total Impact(65 Companies) Date 2012 2013 2014 2019 2012 2019

Annual Impact(65 Companies) Date 2012 2013 2014 2019 2012 ‐ 2019Intrastate Terminating ICC Reductions 7/1/2012 (2,699,636)     (5,909,823)     (10,032,373)  (11,115,987)  (74,174,663)    Intrastate Originating ICC Reductions 1/1/2013? ‐                   (5,909,823)     (10,032,373)  (11,115,987)  (71,475,028)    Interstate Terminating ICC Reductions 7/1/2014 ‐                   ‐                   (1,032,675)     (6,205,886)     (26,483,645)    Interstate Originating ICC Reductions 7/1/2014? (1,032,675)     (6,205,886)     (26,483,645)    Access Recovery Charge (ARC) 7/1/2012 1,105,135    3,255,082    5,285,975    9,082,028    51,759,559    ARC Sunset (6 Years) 1/1/2019? ‐                   ‐                   ‐                   (1,513,671)     (1,513,671)      Connect America Fund 7/1/2012 14,492,777    31,192,639    32,274,589    24,489,310    217,829,632   Interstate TS Settlement Reductions 7/1/2012 (12,148,915)  (26,107,633)  (26,724,392)  (27,531,745)  (203,149,763)  Eligible Recovery (10% Reduction) 1/1/2019? ‐ ‐ ‐ (2,500,000) (2,500,000)Eligible Recovery (10% Reduction) 1/1/2019?                                                     (2,500,000)   (2,500,000)    SLC Elimination (6 Years) 1/1/2019? ‐                   ‐                   ‐                   (4,333,333)     (4,333,333)      ICLS Elimination (6 Years) 1/1/2019? ‐                   ‐                   ‐                   (14,166,667)  (14,166,667)    Total 749,362          (3,479,559)     (11,293,924)  (51,117,823)  (154,691,224)  

MOSS ADAMS LLP | 22

IMPACTS ANALYSIS - FNPRMICC Reform Impacts ‐ Average Implementation Total Impact(65 Companies) Date 2012 2013 2014 2019 2012 ‐ 2019

Annual Impact(65 Companies) Date 2012 2013 2014 2019 2012 ‐ 2019Intrastate Terminating ICC Reductions 7/1/2012 (41,533)           (90,920)           (154,344)        (171,015)        (1,141,149)      Intrastate Originating ICC Reductions 1/1/2013? ‐                   (90,920)           (154,344)        (171,015)        (1,099,616)      Interstate Terminating ICC Reductions 7/1/2014 ‐                   ‐                   (15,887)           (95,475)           (407,441)          Interstate Originating ICC Reductions 7/1/2014? ‐                   ‐                   (15,887)           (95,475)           (407,441)          

/ /Access Recovery Charge (ARC) 7/1/2012 17,002          50,078           81,323          139,724        796,301          ARC Sunset (6 Years) 1/1/2019? ‐                   ‐                   ‐                   (23,287)           (23,287)            Connect America Fund 7/1/2012 222,966          479,887          496,532          376,759          3,351,225        Interstate TS Settlement Reductions 7/1/2012 (186,906)        (401,656)        (411,144)        (423,565)        (3,125,381)      Eligible Recovery (10% Reduction) 1/1/2019? ‐                 ‐                  ‐                 (38,462)         (38,462)          g y ( ) ( ) ( )SLC Elimination (6 Years) 1/1/2019? ‐                   ‐                   ‐                   (66,667)           (66,667)            ICLS Elimination (6 Years) 1/1/2019? ‐                   ‐                   ‐                   (217,949)        (217,949)          Total ICC Impacts 11,529            (53,532)           (173,753)        (786,428)        (2,379,865)      

MOSS ADAMS LLP | 23

ICC REFORM - FNPRM

• Recommendationso Understand the revenues that you receive from each of these ICC sources

o Analyze the potential impacts on your company if there is significant change as a result of the FNPRMthere is significant change as a result of the FNPRM

o Consider filing comments with the FCC – they need to understand the implications of their proposals

MOSS ADAMS LLP | 24