Joint Board Recommendation USF Reform

1. NARUC Winter Meeting February 2008 Joint BoardRecommendation USF Reform Ray BaumCommissioner Oregon Public Utility Commission State Chair USJB

2. What’s the Problem? • Growth in High Cost Fund threatens sustainability and burdens telecom consumers • Total fund grew from $2.6B in 2001 to over $4B in 2007 • Over $1B of growth due to increased payments to CETCs

3. What’s the Problem? (continued) • CETC support distribution is skewed heavily toward a few states and is unrelated to need • Top ten states (exclusive of Alaska & Puerto Rico) receive almost 45% of CETC support • Examples: • Mississippi: $140m Wisconsin: $51m • Kansas: $55m Washington: $44m = $290 million • Other rural states receive less than 10% of that amount • Examples: • Idaho: $0 Utah: $0.3m • Missouri: $0.1m Tennessee: $1.5m = $1.9 million

4. What’s the Problem? (continued) • Current mechanism encourages duplicative networks/subsidizes competition, while many rural areas remain without wireless service • CETC support is based on costs of incumbents • Broadband services are not explicitly supported despite need in many unserved areas

5. Background • May 2007 Recommended Decision – • Public Notice - Comments on reverse auctions, use of GIS technology, disaggregation of support and support for broadband, etc. • Emergency/interim cap--Limits growth in high cost support to competitive eligible telecommunications carriers (CETCs) to 2006 level • Committed to comprehensive high-cost USF reform by November 2007

6. Background (continued) • Sept. 2007 Public Notice 1. Support for voice, broadband and mobility 2. Comprehensive reform: cost control, accountability, state participation, and infrastructure build-out in unserved areas • January 29 NPRM – FCC seeks comment on Recommended Decision • November 2007 Recommended Decision – Board’s long-term reform proposal released

7. Universal availability of broadband and mobility services Universal availability of wireline voice services at affordable and comparable rates Avoid increasing financial burden on consumers Objectives

8. Increase effectiveness of funding; avoid duplicative support and eliminate subsidization of competition Eliminate equal support rule and explore alternative distribution mechanisms, e.g. competitive bidding Strengthen state-federal partnership Objectives (continued)

9. Cap total high-cost funding near current level ($4.5 B) Transition to three new funds Provider of Last Resort (POLR) Mobility Broadband Separate distribution mechanisms, funding allocations, and caps for each fund Key Elements of Proposal

10. Explicit support for broadband and mobility services Target funds to extend mobile and broadband infrastructure into unserved areas Eliminate equal support rule for CETCs Distribute support to only one provider per fund in given area Key Elements of Proposal (continued)

11. POLR Fund • High cost support for wireline providers of last resort (initially ILECs) • Sum of all existing ILEC support mechanisms • Board unable to reach consensus on specific changes to legacy mechanisms • Recommend FCC develop new unified POLR mechanism to apply to all ILECs

12. POLR Fund (continued) • Drawbacks of current ILEC support mechanisms • “Rural” and “non-rural” company distinctions • Some costs are not recognized, e.g. transport • Cost averaging across wide areas vs. wire centers • Non-regulated revenues not reflected

13. Mobility Fund - Purpose • Primary purpose • Expand availability of wireless voice services to unserved areas, focus on populated unserved rural areas and public safety concerns • Secondary purpose • FCC to seek additional comment on whether to expand availability to underserved areas where service is not reliable

14. Mobility Fund – Support Type • Primary support type • One-time, project-specific grants for construction of new wireless facilities • Funding should decrease as build-out occurs

15. Mobility Fund - Distribution • FCC determines allocations to each state (unserved population, highway miles, etc.) • State cannot exceed allocation • States develop and publish maps of unserved areas • States award support based on federal standards and accountability safeguards; options (RFPs, reverse auctions, etc.) • USAC processes and audits funds

16. Mobility Fund - Recipients • Eligible Recipients • Eligibility rules specific to fund to be established • Only one carrier supported for wireless services per geographic area/project

17. Broadband Fund - Purpose • Primary purpose • Expand availability of broadband internet services to unserved areas • Secondary purpose • Enhance broadband services in areas with substandard service

18. Broadband Fund – Support Type • Primary support type • One-time, project-specific grants for construction of new broadband facilities • Secondary support type • Ongoing support for expenses in areas where subsidy is required for continuing operations • Funding should decrease as build-out occurs

19. Broadband Fund - Distribution • FCC determines allocations to each state (based on number of residents without broadband, etc.) • State cannot exceed allocation • States develop and publish maps of unserved areas/stimulate demand • States award support based on federal standards and accountability safeguards; options (RFPs, reverse auctions, etc.) • Focus on high-cost areas of non-rural carriers • USAC processes and audits funds

20. Broadband Fund - Recipients • Eligible Recipients • Eligibility rules specific to fund to be established • Only one carrier supported for broadband services per geographic area(includes ILECs, cable, satellite, wireless broad, etc.)

21. Funding Levels - Caps • Total cap of $4.5 billion (approx. 2007 level) • Excludes any new support ordered in response to Tenth Circuit Remand in Qwest II • Mobility Fund cap = $1 B (Jt. Board’s May 2007 decision recommendation) • POLR Fund cap = $3.2 B (2007 ILEC level) • Broadband Fund (initial) = $0.3 B • Collection of funds targeted to constant $4.5 B annual total; not based on variable forecasts of support as currently

22. Current Levels Proposed Levels $0.3 $1.3 $1.0 $3.2 $3.2 High Cost Fund Changes

23. More on Funding • Broadband Funding • Available support can accumulate from year-to-year if unspent • Will grow as other funds decrease • RUS monies also available for broadband expansion in RLEC areas • Avoid duplication of funding • State Matching Funds • For broadband and mobility funds • Base funding level; supplemental funding available if state provides matching funds

24. More Issues Issues for Further Comment • Allocation of funds among states • Identification of unserved areas • Definition of broadband • Impacts on Lifeline/LinkUp • Implementation, transition and review • Compliance with federal law

25. FCC Actions • No FCC order on interim cap to date • Approximately 50% wireless support capped at June 2007 levels via merger/sale conditions (Alltel, AT&T/Dobson); Verizon/RCC (pending) • FCC released RD for comment on January 29, along with two other NPRMs • Elimination of identical support rule; support to CETCs based on own costs • Reverse auctions to determine support

26. FCC Actions (continued) • Comments due 30 days after publication in Federal Register • Reply comments due 60 days after publication

27. Will any action be taken before elections? 27