Tribal Telecom 2013 Telecom 101 : The History of Independent Telecommunications

1. Tribal Telecom 2013Telecom 101:The History of Independent Telecommunications Presented by: Doug Kitch, CPA

2. Timeline • Telephony Discovered and Patented (1870) • Introduction of Independent Telephony (1892) • Interconnection (early 1900’s) • The Great Depression (1930’s) • Smith vs. Illinois (1930) • The Communications Act of 1934 • Settlement Negotiations (1935-1950) • Rural Electrification Act (1949) • Changes in Separations (1950-1971) • Wireless Debut (1960’s & 1970’s) • AT&T Divestiture (1984) • Access • Universal Service Funding • Wireless Debut #2 (1980’s & Early 1990’s) • Telecommunications Act of 1996 • Wireless Debut #3 (Late 1990’s Through Current) • Current Issues

3. Telephony Discovered (1870) • When Bell started his early experiments he wasn't thinking about a telephone • Cutting-edge technology of his day: the multiple telegraph and trying to improve upon its design. • He accidentally discovered that voice could traverse over the line • In 1870, both Bell and a gentleman by the name of Elisha Gray were independently working on devices that could transmit speech electrically (the telephone) • Both men rushed their respective designs to the patent office within hours of each other • Gray and Bell entered into a famous legal battle over the invention of the telephone, which Bell won

4. Telephony – The Early Days (1870 – 1892) • Bell had to run the gauntlet of scoffing and adversity • The very idea of talking or yelling at a piece of sheet-iron was so new and extraordinary that the normal mind repulsed it • Businesses and government scorned Bell’s invention seeing no practical use for this invention • In 1875, Bell established a legal entity, Bell Telephone Company, to protect its patent • In 1877, construction of the first regular telephone line from Boston to Somerville, Massachusetts was completed • Service between New York and Chicago started in 1892, and between New York and Boston in 1894 • At this time, this long distance business was formally incorporated as American Telephone & Telegraph, or AT&T

5. Independent Telephony (1892) • Expiration of the Bell patents in 1892 allowed the introduction of independent telephone companies • Individuals, communities and co-operatives provided telephone service in rural areas and small towns • A number of competing telephone systems had blossomed in the early part of the century, and in some cases people served by one system could not be connected with people hooked to another in the same area • By 1900, Bell served 800k phones compared to 600k served by Independents • Bell once again took the lead by completing the first coast-to-coast telephone line in 1915

6. Interconnection (1900s) • To stave off competition from Independents, AT&T would not let them interconnect • Although there existed quasi-competition, the most serious threat to AT&T was not competition from other companies; it was the threat of being taken over by the federal government to be run as an arm of the Post Office. • Facing the threat of anti-trust actions, AT&T wrote a letter to the US Attorney General allowing independent telco's to connect to AT&T toll lines (“the Kingsbury Commitment”) • Origin of settlements: board-to-board settlements • Bell companies compensated independents for jointly handled business • Toll costs included only interexchange switching and facility; no local

7. The Great Depression (1930s) • The Great Depression had severe effects on the telephone industry • Total telephones in service ↓ 10% • Long distance calls ↓ 40% • Many rural independent telcos went bankrupt • AT&T became dominant force again with 15 million phones in service by 1940

8. Smith vs. Illinois (1930) • Supreme Court decision established the concept of “jurisdictional separations” • Jurisdictional separations is assigning or allocating telephone plant and expenses as state or interstate based on the usage of the associated plant • Origins of settlements paying a portion of local plant costs • Established the principle that local companies should receive compensation for originating and terminating long distance calls

9. Communications Act of 1934 • Established the goal of universal service as making available “rapid, efficient, nationwide and worldwide wire and radio communications services with adequate facilities at reasonable charges..” to all people of the United States • One result of the 1934 Act was to subsidize lower residential rates by raising the cost of long distance service and business services • Created the Federal Communications Commission (“FCC”) to regulate interstate telephone and other communications services (radio, television, etc.)

10. Settlement Negotiations(1935 – 1950) • Smith vs. Illinois established the concept of Jurisdictional Separations by function, but accomplishing it was another matter • National Association of Regulatory Utility Commissioners (NARUC) becomes concerned that too much cost is shifted to state jurisdiction causing a disparity in state and interstate access rates • NARUC and FCC negotiate the process of separations over time • Settlements to independents were distributed by the Bell system • 1948 – Dr. Claude Shannon developed and published a “Mathematical Theory of Communication” • Promoted concept of communicating in binary codes • Became the basis for the digital communications revolution – from cell phones to Internet

11. Rural Electrification Act (1949) • In 1949, Congress amends REA’s charter to provide loans to telephone companies • In 1949, only 60% of rural homes and 30% of farms had telephone service; by 1985 telephone penetration had reached 94% • Today, REA is known as the Rural Utility Service (RUS) which is an agency within the US Department of Agriculture

12. Changes in Separations(1950 – 1971) • NARUC held several conventions in the 1950’s, 60’s, and 70’s that resulted in changes to the Separations Manual • The various changes were named after the place where the convention took place • The Charleston Plan in 1951, the Denver Plan in 1965, and the Ozark Plan in 1971 all made changes that shifted “revenue requirement” from the state to the interstate jurisdictions • Shifts from the state jurisdiction result in lowerlocal telephone rates • Shifts to the interstate jurisdiction result in higher interstate toll rates

13. Wireless Debut(1960’s & 1970’s) • In 1964, AT&T developed a second-generation cell phone system called Improved Mobile Telephone Service (IMTS) • In 1968, the FCC opened the so-called "cellular docket," Docket 18262, to address the reallocation of these new airwave frequencies • AT&T wanted a monopoly on the market • Motorola, however, gave the first demonstration of a wireless portable telephone • Yet it took until 1981, after more than a decade of legal wrangling, for the FCC to finalize the rules and allocations for cellular spectrum • 1977 - AT&T developed the advanced mobile phone system (AMPS), the first regular U.S. cellular phone system using microwave transmissions

14. AT&T Divestiture (1984) • In 1984, the US District Court ordered the divestiture of the AT&T System separating its long distance business from its local operations (the Bell companies) • Largest corporate reorganization ever undertaken: dividing the Bell System into eight major entities • Some believe the Bell System was brought down by the U.S. Justice Department • The real cause of AT&T’s demise may have been its long status as a "regulated natural monopoly” • "One Policy, One System"

15. “Access” is Born (1980’s >>>) • Before 1984, AT&T was responsible for revenue distribution to the local Bell companies who then paid the independent companies • However, 1984 began the origination of generalized “access charges”, or “intercarrier compensation”. This became the standard compensation method between all telecom carriers • In 1983, the FCC created the National Exchange Carrier Association (NECA) to be the administrator of interstate access charges and universal service funding (USF)

16. Universal Service Funds (1980s >>>) • USF is a “subsidy” program overseen by the FCC that, up until recently, compensated [generally] high cost and rural providers through a variety of funding mechanisms: • High Cost Loop (HCL USF) • Interstate Common Line Support (ICLS) • Local Switching Support (LSS; no longer available) • Lifeline • Schools & Libraries • More on these later under “Current Issues”

17. Wireless Debut #2(1980’s & Early 1990’s) • By the 70’s, cell phones and related technology were under way • These early cell phones were the size and weight of small bricks, required large batteries and often had to be carried in briefcases • Demand soon far outweighed the supply of frequency bands and cell phone numbers as well as their analog systems could not contain the flood of potential wireless customers • In 1990, the digital standard time division multiple access (TDMA) system was established • Tripled Capacity & Improved sound quality • In 1994, an alternative digital standard, code division multiple access (CDMA) was introduced by Qualcomm. In December of that year, the FCC began to auction off the "PCS" (Personal Communications Service) airwaves, for digital cell phone use

18. Telecom Act of 1996 • Congress reformed telecom laws by opening local telephone service to competition • Created an uneasy balance between the goals of implementing competition while maintaining universal service • Who is responsible for serving every customer? • Do competitors get to “cherry pick” high volume customers? • Universal service funds became “portable” • Eligible Telecommunications Carrier (ETC) status necessary • Also resulted in substantial decreases in access charges • Historically, long distance charges of 10, 12, or 15 cents per minute were necessary to pay for access charges of 8, 10, or 14 cents per minute. All of these are now generally below 5 cents per minute • Places additional pressure on local rates

19. Wireless Debut #3(Late 1990’s >>>) • In 1990, the IEEE began work on a wireless Ethernet standard, which would come to be known as Wi-Fi • In 1994 Ericsson began research on what would become a narrowband wireless personal area network (WPAN) spread spectrum system called Bluetooth • In 1999, wireless phones converged with handheld personal computers, combining wireless phone service, Web access and personal digital assistant (PDA) capabilities in a single pocket-sized device • Further improvements led in 1999 to the adoption of IEEE 802.11b, allowing speeds of up to 11 mbps • 4th generation wireless, or 4G, became available in 2009, however did not become widespread until recently. The main difference between 4G and previous standards is a large increase in data transfer speeds

20. Current Issues • Intercarrier Compensation & USF Transformation Order: • Challenges • Access Charges/Intercarrier Compensation • Universal service • Tribal Carriers

21. Current Issues (cont’d) • Challenge of modern day regulators is complicated by emerging technologies: wireless, Internet, video, voice-over-IP • Proper regulatory framework must create/maintain a level playing field for various competing industries (cable vs. DSL; wireless vs. wireline) without sacrificing universal service policy • The benefits of competition must be balanced against the costs of universal service • Competition itself is not the goal • Policies that develop uneconomic incentives should be eliminated and/or avoided • An environment with some stability must be created to encourage the future deployments of advanced services

22. Intercarrier Compensation • FCC took immediate action to stop regulatory arbitrage • Different types of carriers (wireline; wireless; internet; large; small; satellite; competitive carriers; video/cable) created complication in assessing compensable intercarrier charges • FCC adopted a plan to “bill & keep” access • Terminating access going away • Access charges will eventually decrease towards zero, with USF “picking up the tab” • FCC generally implemented additional end user charges on non-Lifeline customers

23. Universal Service • FCC Ordered that there will be explicit support available for broadband-capable networks • Total fund is capped at $4.5B annually ($1.8B for large carriers; $2B for small wireline carriers; $500M for wireless carriers, of which $100M is set aside for Tribal carriers; $100M for remote areas) • Minimum standards apply for receiving support • 4 Mbps downstream/1 Mbps upstream • Various per-line caps enforced with new Order • $3,000/line total USF cap • Corporate expense cap • “Quantile Regression” caps/benchmark

24. Universal Service • Numerous additional accounting & administrative compliance requirements • 5 year progress report • Detailed information on outages • Unfulfilled service requests • Customer complaints • Price offerings • Network performance tests (latency, speed tests, etc) • Financial reporting • Record retention

25. Tribal Carriers • The National Broadband Plan, released in 2010, states that Tribal Carriers need more, and not less, funding • Current mechanisms do not seem to support this • As a result of the Order, the FCC set aside $100M annually for Tribal carriers from the Mobility Fund • Standing Rock received a 2 year delay for the beginning of a 5 year transition of competitive ETC support • Tribal carriers receive priority review from the FCC • ETCs serving Tribal lands must have meaningful Tribal engagement with their government/Council • All intercarrier compensation and USF reforms apply to Tribes

26. FCC Decision Local Rate Payers Congress Price Cap ILECs State PUC’s Decision Issue ROR ILECs CLECs Info/Data Cxrs Public Interest Cable Wireless Cxrs IXC’s

27. Tribal Telecom 2013Telecom 101:Intro to Technology & Regulation Doug Kitch, CPA Chris Barron Alexicon

28. Outline • The Communications Industry – Technology Platforms • Wireline/Cable • Wireless • Satellite • Internet Protocol • Types of Providers • ILECs, CLECs, Wireless, ISPs • Regulation • Why is regulation necessary? • Types of regulation • Evolving with technology • Today’s world • What’s Next?

29. Technologies • Wireline • Traditional ILEC technology • Physical plant connects customers to outside world • High fixed cost characteristics • Cable • Systems owned by video/television providers (i.e., cable TV) • Coaxial and fiber/coax hybrid • Entered two-way communications market after 1996 Telecom Act

30. Technologies • Wireless • Commercial Mobile Radio Service (CMRS) • Cellular • PCS (personal communication service) • Advanced (3G/4G) • Satellite • Broadband for remote areas • Internet Protocol (IP) • VoIP • Other services • Mainly provided over broadband

31. Retail Local Telephone Service Connections S: FCC Local Telephone Competition Report (Jan. 2013)

32. Broadband Connections(Over 200 kbps) S: FCC Internet Access Services Report (6/30/2011)

33. Providers • Incumbent Local Exchange Carriers (ILEC) • Original telephone service providers • Includes former “Bell Operating Companies” (BOCs), rural local exchange carriers, and mid-size local exchange carriers • Competitive Local Exchange Carriers (CLEC) • Started with 1996 Telecom Act • Generally wireline or landline-based providers • Facilities-based, unbundled network elements, resale • 1996 Act allowed CLECs to interconnect with ILECs

34. Providers • Eligible Telecommunications Carriers (ETCs) • Started with 1996 Act • Prior to 1996 Act, only incumbent carriers (ILECs) were allowed to receive USF support • FCC adopted ETC requirements in order to allow competitive carriers (CETCs) to receive USF support • CETCs – wireline (CLECs), wireless, and Lifeline-only (generally wireless) • Internet Service Providers/Internet Protocol • ISPs – provide access to Internet services, typically over other carriers’ facilities • IP – based services (usually require broadband) such as VoIP

35. Regulation-Brief History • Why is it necessary? • Originally – to limit utility service provision to one company (natural monopoly) • Regulation took on the role of competition • Limits prices, ensures service quality and constrains anti-competitive behavior • Regulatory Compact • Utility Service Provider – receives exclusive service territory, free of competition • Must operate as carrier of last resort (COLR) – provide service to all in the established service territory • Economic Regulation is included in the deal

36. Regulation-Brief History • The telecommunications natural monopoly included end-to-end service (local to long distance) • AT&T break up in 1984 – competition in long distance market • Access charges begin • Telecommunications Act of 1996 • Competition adopted as national policy • New policies for interconnection, competition, and universal service • Did not eliminate COLR • USF determined to be “portable” • Access charges “inefficient” and improperly subsidized other services

37. The Regulators • Federal Communications Commission (FCC) • State Regulatory Commissions • Tribal Authorities • Local entities • Who regulates what? * Limited authority over specific issues

38. Regulation Today • Rate-of-Return Regulation (RoR) • Rates to be charged determined by company’s total regulated cost of service • Cost of service = Net Rate Base x RoR + allowable expenses and taxes • Net Rate Base = Telecommunications plant in service (used for regulated purposes) less accumulated depreciation • RoR = allowable return on rate base (e.g., 11.25%) established by state or federal regulators • Allowable expenses and taxes – those amounts necessary for provision of regulated services

39. Regulation Today • RoR regulation – key concepts • Used and Useful • Known and measurable • Cost allocation • Affiliate transactions • Why are these concepts important? • FCC’s recent actions – push to end traditional regulation? • Price Cap Regulation • Developed for large carriers with competition • Rates are not set based on cost of service • Instead, services are grouped into “baskets” • The total price (rates x demand) of the basket cannot exceed a defined cap • Companies are free to revise rates up or down, as long as cap is not exceeded • Incents cost control

40. Regulation Today • Alternative Forms of Regulation (AFOR) • Combination of different regulatory systems • Some examples • De-Tariffing • “Light” regulation • Service quality / customer complaints • A note on deregulation • Never 100% “deregulated” • Wireless carriers – still subject to certain FCC rules • Same for CETCs and CLECs • Internet Access is close

41. What’s Next • Continuing struggle to keep up with technology • Latest FCC reforms reflect the emphasis on broadband • Recent petitions related to IP regulation • Increasing levels of competition • IP, Wireless • Large company push to eliminate COLR obligations • Problem for high cost rural areas – still need for service, but little or no independent financial business case • Add to this apparent lack of appetite for sufficient USF programs at the federal and state levels • Future – service quality and complaints

42. Questions?