The Universal Service Fund & USAC’s Role in Administration

1. The Universal Service Fund & USAC’s Role in Administration Craig Davis Director, High Cost Program Rural Cellular Association Marketing, Finance and Business Conference September 21, 2006 St. Louis, MO

2. USF & USAC • The Universal Service Fund (USF) is one fund with four programs • USAC is a not-for-profit corporation selected as the permanent administrator of the federal USF • In 2005, USAC disbursed approximately $6.52 billion in universal service support • USAC administers support programs for: • High cost companies serving remote and rural areas • Low-income consumers • Schools & libraries • Rural health care providers • Through USAC, the USF provides communities across the country with affordable telecommunications services

3. How does theUSF Work? • All telecommunications companies contribute to the USF based on their interstate and international revenues • USAC collects and disburses these funds to participants in the four support programs • Participants in the Schools and Libraries and Rural Health Care programs apply directly to USAC for support • Rural and non-rural telecommunications companies eligible for High Cost program support submit cost, expense, and other data to USAC to qualify for support • Low-income consumers apply for discounts for local telephone service or installation through their local telephone companies, which are reimbursed by the USF for providing the discounts

4. High Cost Program The High Cost Program ensures that consumers in rural areas have access to and pay rates for telecommunications services that are reasonably comparable to those services provided and rates paid in urban areas

5. High Cost Program • Provides assistance to rural, non-rural, and competitive carriers that are designated as eligible telecommunications carriers (ETCs) by a State (or the FCC) • Without it, consumers in high cost areas would pay significantly more for service due to factors such as dense terrain or sparse population, which raise the cost of building telecommunications networks • High Cost support benefits consumers in all 50 States and territories by providing support to 1,700 service providers • Over $21 billion has been disbursed to companies designated as ETCs since 1998

6. High CostComponents • High Cost Loop Support • Support for the "last mile" of connection for rural companies in service areas where the cost to provide this service exceeds 115% of the national average cost per line • Safety Net Additive Support • Support above the HCL cap for carriers that make significant investment in rural infrastructure in years when HCL support is capped • Safety Valve Support • Additional support, above the HCL cap, that is available to rural carriers that acquire high cost exchanges and make substantial post-transaction investments to enhance network infrastructure

7. High CostComponents • Local Switching Support • Provides interstate assistance and is designed to help carriers recoup some of the high fixed switching costs of providing service to fewer customers. LSS helps keep rural customers’ rates comparable to rates in more densely populated urban areas • High Cost Model Support • Keeps the cost for telephone service comparable in all areas (urban and rural) of a state. HCM support is distributed at the wire center level and is targeted to carriers serving wire centers with forward-looking costs that exceed the national benchmark • Interstate Access Support • Helps to offset interstate access charges for price cap companies

8. High CostComponents • Interstate Common Line Support • Helps to offset interstate access charges and is designed to permit rate-of-return carriers to recover their common line revenue requirement, while ensuring that subscriber line charges (SLCs) remain affordable to customers • Long Term Support was merged into ICLS, effective July 1, 2004

9. High Cost SupportSummary of Key Differences

10. High Cost ProgramGeneral Eligibility Criteria • In order to receive support, incumbent and competitive carriers must meet certain general eligibility criteria • Must be designated as an ETC by either a state commission or the FCC, if the state lacks jurisdiction • Must certify that all High Cost support will be used only for the provision, maintenance, and upgrading of services and facilities eligible for support • State certifies for HCL, LSS, and HCM, unless the state lacks jurisdiction (in which case the carrier self-certifies) – October 1st of each year • Carrier self-certifies for IAS and ICLS – June 30th of each year

11. High Cost2005 Disbursements by Component(Unaudited – in thousands) Total: $3.82 billion

12. Low Income Program The Low Income Program, commonly known as Lifeline and Link Up, provides discounts that make basic, local telephone service affordable to help over 7 million low-income consumers stay connected

13. Low IncomeComponents • Low-income consumers apply for discounts for service or installation through their local telephone provider, which are reimbursed from the USF for providing the discounts • Lifeline • Reduces eligible consumers' monthly charges for basic telephone service • Link Up • Reduces the cost of initiating new telephone service • Toll Limitation Service • Allows eligible consumers to subscribe to toll blocking or toll control at no cost

14. 2005 Low IncomeDisbursements by Component(Unaudited – in thousands) Total: $808.57 million

15. Rural Health CareProgram • The Rural Health Care Program provides reduced rates to rural health care providers for telecommunications and Internet services necessary for the provision of health care • Support is available for telecommunications services and monthly Internet access charges used for the provision of health care • Support for telecom services is the difference between rural and urban rates. Internet access services are discounted at 25%

16. Rural Health CareCommitments • Funding Year 2006 Commitments: $47 million (projected) Projected Commitments A Funding Year runs from July 1 to June 30

17. School and LibrariesProgram • The Schools & Libraries Program provides discounts to help schools (K-12) and libraries in every U.S. state and territory receive affordable telecommunications and Internet access • Priority One Support • Telecommunications Services • Internet Access • Priority Two Support • Internal Connections • Basic Maintenance of Internal Connections

18. Schools & LibrariesCommitments and Disbursements(unaudited – as of July 12, 2006) • Funding Year 2005 Commitments: Over $1.7 billion (to date) • All Funding Year Commitments: Over $17 billion (to date) A Funding Year runs from July 1 to June 30

19. USF ContributionsRevenue Data • All providers of telecommunications are required to contribute to the USF based on their projected collected interstate and international end-user telecommunications revenues, net of projected contributions • Carriers make 5 revenue filings per year with USAC • USAC makes quarterly revenue filings with the FCC

20. USF Contributions • Demand Data • USAC files universal service demand data with the FCC on a quarterly basis • This includes projected demand for all four USF programs plus USAC’s administrative costs • Contribution Factor • Based on the quarterly carrier revenue and projected demand data filed by USAC, the FCC calculates the quarterly contribution factor • USAC bills carriers based on the contribution factor and then disburses support to eligible entities

21. USF ContributionsContribution Factor Trend

22. Contributors • Find guidance on USAC’s Website concerning: Filer ID, Revenue Reporting, Invoices, and Appeals. • http://www.usac.org/fund-administration/contributors/

23. Revenue ReportingSchedule of Filings When a form due date falls on a weekend or holiday, the form is due the following business day. The Due Date is the date the form is due to USAC (it is not a postmark date).

24. Form 499Telecommunications Reporting Worksheet • Contributions are based on projected collected end-user interstate and international revenues • USAC enters your quarterly projected collected revenue into an FCC-determined contribution calculation using FCC-established contribution and circularity factors to arrive at your monthly obligation

25. Contribution Calculation • Projected collected interstate + Projected collected international = Revenue base • Revenue base x FCC Contribution factor = Unadjusted Contribution • Unadjusted Contribution x FCC Circularity factor = Circularity Deduction • Unadjusted Contribution - Circularity Deduction = Total Quarterly Contribution • Total Quarterly Contribution ÷ 3 = Monthly obligation

26. Contribution andCirculatory Factors • Established quarterly by the FCC for assessing USF obligations • Estimated Factors: Factors included in the Form 499 instructions that help companies anticipate whether they are likely to be de minimis before the actual factors are available • Quarterly Contribution Factors: Factors established quarterly by the FCC to indicate the percent of end-user revenue that should be contributed to the fund • Quarterly Circularity Factors: Factors established quarterly by the FCC to eliminate the circularity of being assessed Universal Service fees on pass-through charges

27. De Minimis Exemption • If contribution to USF in any given year is less than $10,000 then not required to submit a contribution for that year • Companies must demonstrate that they are de minimis on both the current 499-A and the current 499-Q to be exempt from billings in that quarter

28. Safe HarborInterstate Revenues • You must choose either to report actual revenues or to use the safe harbor for all of your affiliated legal entities. The same method must be used by all of your affiliates • 64.9% of interconnected VoIP telecom revenues • 37.1% of cellular and broadband PCS telecom revenues • 12% of paging revenues • 1% of analog SMR dispatch revenues

29. FCC Report and Order and Notice ofProposed Rulemaking - June 27, 2006 • Wireless Providers • The FCC increased the safe harbor to 37.1% of revenue that is subject to the USF contribution factor • Any wireless telephony provider that uses a traffic study to determine its actual interstate revenues must provide that data in its quarterly FCC Form 499-Q filings with USAC

30. Projected CollectedRevenue • Do not subtract international settlement payments from revenue reported • Any charge that is included on a bill in order to recover contributions must be included • Note that federal universal service pass-through charges are considered 100% interstate and should be reported • Federal Subscriber Line Charges are considered 100% interstate and should be included

31. Bundled Services • Includes fixed local exchange service with interstate toll service for a single price • Revenues for the whole bundle, except for tariffed subscriber line and PICC charges, should be reported (on Line 404 of the Form 499A) • The portion of revenues associated with interstate and international toll services must be identified • Filers should make a good faith estimate of the amounts of interstate and international revenues from bundled local/toll service if they cannot otherwise determine these amounts from corporate records • Upon request, the methodology must be made available to the FCC and USAC

32. IPIA Audits • Improper Payments Information Act (IPIA) Audits • FCC OIG determined that USF disbursements (i.e., HC, LI, RHC, S&L) should be included in the FCC’s plan to comply with IPIA • Audits will review payment processes, identify error rate of improper payments, and make plans to reduce improper payments • In June 2006, USAC issued RFPs to perform audits on the High Cost, Rural Health Care, and Low Income programs and on USF contributions

33. IPIA Audit Objectives • Provide an opinion as to whether USF beneficiaries are in compliance with the FCC’s rules and regulations governing the USF program (and USAC’s implementing procedures) • Detect and deter waste, fraud, and abuse by USF contributors and beneficiaries of the four programs • Identify areas for improvement in the compliance of beneficiaries with applicable law and in the administration of the four programs • Identify improper payments made from the USF related to the selected beneficiaries for the fiscal year under audit

34. IPIA Audits • Contributor Revenue – 90 • Review of revenue as reported on the 2006 FCC Form 499-A (1/1/05 - 12/31/05) • High Cost – 65 • Payments made from the program (10/1/04 – 9/30/05) • Low Income – 60 • Payments made from the program (10/1/04 – 9/30/05) • Rural Health Care – 89 • Payments made from the program (10/1/04 – 9/30/05) • Schools and Libraries – 157 • Payments made from the program (10/1/04 – 9/30/05)

35. Thank You • Visit us on the web at www.usac.org • Call us at 202-776-0200 Craig Davis Director - High Cost Program USAC 2000 L St., NW, Suite 200 Washington, DC 20036 For additional information or program data, please contact James Mardis, External Relations, at 202-772-5258 or via email at jmardis@usac.org.