Federal Universal Service Overview

1. NARUC Summer Meeting July 2007 Federal Universal Service Overview Ray BaumCommissioner Oregon Public Utility Commission

2. Universal Service Principles 47 U.S.C. 254(b) • Quality services at just, reasonable and affordable rates • Access to advanced services in all regions • Access to services in rural, insular and high cost regions, and to low-income consumers, that are reasonably comparable to those in urban areas, at reasonably comparable rates • Equitable and nondiscriminatory contributions • Specific, predictable and sufficient support mechanisms • Access to advanced telecom services for schools, health care providers and libraries • Additional principles determined by Joint Board and FCC: competitive neutrality

3. Four Federal Universal Service Fund (FUSF) Programs – 2006 Payments(in millions) • High-Cost$4,096 M Support to local service providers in high-cost rural & insular areas to keep rates affordable • Low-Income820 M Discounts on monthly service and installation charges for low-income consumers • Schools & Libraries1,669 M Discounts to eligible schools & libraries for telecom services and internet access • Rural Health Care41 M Discounts to rural health care providers for telecom services and monthly internet charges Total 2006 Payments$6,626 M

4. FUSF Surcharge • Program costs recovered through surcharge on interstate and international end user telecommunications revenues • Surcharge reset every quarter based on forecast of payments and contribution base revenues • 3Q 2007 surcharge rate = 11.3% of revenues

5. FUSF - Net Dollar Flows by State • Net FUSF dollar flows vary widely by state (Chart 1) and by year (NY -$190M, TX -$60M in S&L funds from 2005 to 2006) • Net dollar flow = payments to providers minus contributions from surcharge • Positive flow number indicates state is net receiver Mississippi: + $256 Million Oklahoma: + $123 Million Alaska: + $187 M Puerto Rico: + $109 M Kansas: + $146 M • Negative flow number indicates state is net payer Florida: - $330 Million Maryland: - $133 Million New York: - $210 M Massachusetts: - $119 M New Jersey: - $200 M Illinois: - $118 M Pennsylvania: - $138 M California: - $118 M

6. High-Cost Fund • High-cost fund comprises nearly 2/3 of total FUSF dollars and has increased dramatically in recent years • Only eligible telecommunications carriers (ETCs) receive support • All ILECs are ETCs • States may designate non-ILEC carriers as competitive ETCs (CETCs) • CETCs receive support based on ILEC per-line support

7. High-Cost Fund(continued) • High-cost fund grew from $2.6 billion in 2001 to $4.1 billion in 2006 • Increases since 2003 due largely to CETC payments(See Chart 2) • High-cost payments to CETCs grew from $0 in 2000 to nearly $1 billion in 2006 (See Chart 3) • Total high-cost support (ILEC+CETC) varies significantly by state (See Chart 4) • High-cost support to CETCs is skewed heavily toward a few states, e.g., Mississippi and Puerto Rico (See Chart 5)

8. Chart 1 8

9. (Chart 1 continued) 9

10. Chart 2 10

11. Chart 3 11

12. Chart 4 12

13. Chart 5 13