Impact of Non-Rural Rules on Rural ILECs

1. Impact of Non-Rural Rules on Rural ILECs Rural Task Force – Jan. 13, 2000 Bob Schoonmaker-VP

2. Purpose of Analysis • Assume that inputs to model and methodology adopted for non-rural companies was applied to both rural and non-rural ILECs • Analyze impacts on both rural and non-rural ILECs • Identify concerns with non-rural methodology if applied to rural companies as well

3. Data sources for Analysis • Non-rural ILECs • Data supplied by USTA based on data for non-rurals received from FCC staff • Rural ILECs • Data supplied by AT&T based on AT&T runs of SYN model for rural study areas • Data from both sources was transmitted as SYN output file for each company/study area • Total data - 9 CD’s, over 4 gigabytes

4. Known Data “anomalies” • Neither rural or non-rural data included LNP costs as data inputs - FCC did adopt LNP cost • Non-rural data contained Gallatin River, IL study area which is a rural company • Rural data not included for: • Alaska study areas (24) • Guam • Virgin Islands • Micronesia • Numerous “mismatches” between model study areas and USAC study areas (over 50)

5. Unknown Data Issues • NECA letter to FCC of December 23, 1999 • NECA calculated non-rural high cost support of $391 million vs. FCC calculated $437 million • Appears to be program error using incorrect “default” value of special access lines • Verification of individual rural study area information • FCC issued public notice January, 2000 correcting model and non-rural results.

6. Known Impact of Data Anomalies • Impact on non-rural only calculations of • No LNP cost in non-rural data • Gallatin River, IL in non-rural data • National USF cost per month • FCC - $23.84 • GVNW - $23.52 • Annual Support non-rural only (model only) • FCC - $252.1 million • GVNW - $262.5 million

7. Analysis Results - National Loop Cost • National Loop Cost - Non-Rural Only • Non-Rural $23.52 • National Loop Cost - Combined Rural and Non-Rural • Combined $26.09 • Non-Rural Companies - $23.52 • Rural Companies - $59.36

8. Analysis Results - # of States • # of States receiving support - Non-Rural Only • Currently - 20 • Non-Rural Only - 7 • # of States receiving support - Combined Rural and Non-Rural • Currently - 52 • Non-Rural Companies - 15 • Rural Companies - 15

9. Analysis of Results - USF Support(excluding Hold Harmless) • Non-Rural Companies Only • Current Support - $207.4 million • FCC Method Support - $262.5 million • Combined Non-Rural and Rural Companies • All Companies • Current Support - $1,760.7 million • FCC Method Support - $692.0 million • Change $(1,068.7) million

10. Analysis of Results - USF Support(excluding Hold Harmless) • Combined Non-Rural and Rural Companies • Non-Rural Companies • Current Support - $207.4 million • FCC Method Support - $241.1 million • Change - $33.7 million • Rural Companies • Current Support - $1,553.3 million • FCC Method Support - $450.9 million • Change -$(1,068.7) million

11. Analysis of Results - USF Support(excluding Hold Harmless) • Impact on Non-Rural Companies-FCC Method • Support with Non-Rural Only - $262.5 million • Support with Combined companies - $241.1 million • Change - $(21.4) million

12. Alternative Values - Lower Support Level

13. Alternative - Study Area Support Higher Support Level

14. Summary • Application of FCC methods and model inputs to rural companies has major negative impacts • Single biggest impact is likely the decision to base support on statewide average cost rather than study area average cost • Personal opinion - Use of FCC methods and model inputs for rural companies does not provide sufficient, predictable support for those companies