Summary of USF & ICC Reform Order & FNPRM

Part III Intercarrier Compensation Reform

Chad Duval, Principal

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The material appearing in this presentation is for informational purposes only and is not legal or accounting advice. Communication of this information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, accounting, or other professional advice is required, the services of a professional should be sought.

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ICC REFORM
o o o o

Underlying Principles

Phase out of per minute ICC charges Migrate to bill and keep Promote the transition to IP networks Provide a more predictable path for the industry and investors o Eliminate hidden subsidies in current system

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FCC Conclusions on Bill & Keep

o Market based & less burdensome than alternatives o Consistent with cost causation principles o Consumer benefits through reduced rates and/or improved service quality o Eliminates arbitrage & market distortions o Appropriate even if traffic is imbalanced o Legal authority under Section 251(b)(5)
Only applies to termination Interstate and Intrastate switched access
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State Role in Bill & Keep

o Oversee tariffing of intrastate rate reductions o Interconnection negotiation and arbitration o Determination of network edge for purposes of bill and keep

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Rate of Return Carriers

o Transition terminating switched access to bill and keep

Cap all interstate switched access rates
Effective 12/29/11 Originating and terminating
End Office Access Service Tandem Switched Transport Access Service Dedicated Transport Access Other interstate switched access rate elements
Carrier Common Line, as applicable Information Surcharge

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Rate of Return Carriers

Effective 12/29/11 Terminating only

o Transition terminating switched access to bill and keep

Cap all intrastate switched access rates
Includes reciprocal compensation No adjustment required/allowed if intrastate is already lower than interstate
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End Office Access Service Tandem Switched Transport Access Service

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Rate of Return Carriers

o Transition terminating switched access and reciprocal compensation to bill and keep

Step 1 (July 1, 2012) 50% transition to interstate

Step 2 (July 1, 2013) 100% transition to interstate

May maintain intrastate switched access rate structure; or Apply interstate rate structure for intrastate rates
Immediately migrate to interstate rates Apply a transitional rate equal to 50% of the difference

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Rate of Return Carriers

o Transition terminating switched access and reciprocal compensation to bill and keep

Step 3 (July 1, 2014) 1/3 of difference between interstate and $0.005 Step 4 (July 1, 2015) 2/3 of difference between interstate and $0.005 Step 5 (July 1, 2016) $0.005

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Rate of Return Carriers

o Transition terminating switched access and reciprocal compensation to bill and keep

Step 6 (July 1, 2017) 1/3 of difference between $0.005 and $0.0007 Step 7 (July 1, 2018) 2/3 of difference between $0.005 and $0.0007 Step 8 (July 1, 2019) terminating switched end office access rates @ $0.0007 Step 9 (July 1, 2020) bill and keep

Tariff filings to remove charges for Terminating End Office Access Charges

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o Other Issues

Rate of Return Carriers

Originating Access left to FNPRM, beyond cap Transport (originating and terminating) left to FNPRM, beyond cap Other rate elements left to FNPRM, beyond cap

Reforms do not automatically replace existing contracts or interconnection agreements

Left to change of law, renegotiation and termination clauses in agreements

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Rate of Return Carriers

o Eligible Recovery
Rate of Return Baseline

o Recovered from 3 sources

2011 Interstate Switched Access Revenue Requirement* + 2011 Intrastate Switched Access Revenues + 2011 Net Reciprocal Compensation Revenues - 5% annual reduction Intercarrier Compensation Revenues Access Recovery Charge (ARC) Connect America Fund (CAF)

* Revenue requirement submitted to NECA for 2011 tariff filing

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Rate of Return Carriers

o Access Recovery Charge (ARC)

Residential & SLB = $0.50/year for up to 6 years for a max of $3.00 MLB = $1.00/year for up to 6 years for a max of $6.00 Local Rate + SLC + EAS + Surcharges + ARC $30.00 ARC is not mandatory, but will be imputed for CAF
Residential, no benchmark for SLB & MLB SLC + ARC may not exceed $12.20 Carriers that forego recovery in 1 year may not recover in future years
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ARC may not be assessed on Lifeline customers ARC may be determined at the holding company level

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Rate of Return Carriers

o Connect America Fund (CAF) support

Eligible Recovery - Intercarrier Compensation Revenues - Access Recovery Charge Revenue = CAF Support Phases down over time as Eligible Recovery is reduced by 5% each year Obligation to deploy broadband upon reasonable request as a condition of ICC CAF CLECs not eligible for ICC CAF

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Price Cap Carriers

o Transition terminating switched access and some transport to bill and keep
Cap all interstate and intrastate switched access rates
Effective 12/29/11 Originating and terminating

End Office Access Service Tandem Switched Transport Access Service Dedicated Transport Access Any rate elements in the traffic sensitive and trunking baskets

Remove rate elements from price cap regulation effective 1/1/12

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Price Cap Carriers

o Transition terminating switched access and some transport to bill and keep
Step 1 (July 1, 2012) 50% transition to interstate
Terminating switched end office and transport Originating and terminating dedicated transport Reciprocal compensation Terminating switched end office and transport Reciprocal compensation

Step 2 (July 1, 2013) 100% transition to interstate

Step 3 (July 1, 2014) 1/3 of difference between interstate and $0.0007

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Price Cap Carriers

o Transition terminating switched access and some transport to bill and keep
Step 7 (July 1, 2018) bill and keep for all terminating traffic
$0.0007 when terminating carrier owns tandem

o CMRS providers transition same as price cap carriers for reciprocal compensation

Step 4 (July 1, 2015) 2/3 of difference between interstate and $0.0007 Step 5 (July 1, 2016) $0.0007 Step 6 (July 1, 2017) bill and keep

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Price Cap Carriers

o Eligible Recovery

Price Cap Baseline

Recovered from 3 sources

Intercarrier Compensation Revenues Access Recovery Charge (ARC) Connect America Fund (CAF)

2011 Interstate Switched Access Revenue subject to reform + 2011 Intrastate Switched Access Revenue subject to reform + 2011 Net Reciprocal Compensation Revenues - 10% annual reduction
6-year exception for newly converted carriers

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Price Cap Carriers

o Access Recovery Charge (ARC)

Residential & Single Line Business = $0.50/year for up to 5 years for a maximum ARC of $2.50 Multi Line Business = $1.00/year for up to 5 years for a maximum ARC of $5.00 Local Rate + SLC + EAS + Surcharges + ARC $30.00 ARC is not mandatory, but will be imputed for CAF purposes ARC may not be assessed on Lifeline customers
Residential, no benchmark for SLB & MLB SLC + ARC may not exceed $12.20

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Price Cap Carriers

o Connect America Fund (CAF) support

Support is transitional, phasing out over 3-years beginning in 2017 Support must be used to deploy broadband capable networks as a condition of CAF CLECs not eligible for ICC CAF Eligible Recovery - Intercarrier Compensation Revenues - Access Recovery Charge Revenue = CAF Support

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Monitoring Compliance Waiver Requirements

o Annual filing of the following data o Filings aggregated at the holding company level o Similar to USF Reform waiver requirements
Total Cost and Earnings Review, including non-regulated Carriers face a heavy burden ICC Rates Revenues Expenses Demand for the preceding fiscal year

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ICC REFORM

VoIP Traffic originates/terminates in IP format

Originating and Terminating Rates may be tariffed (state or interstate), or; Interconnection agreement (preferable to tariffs)
Subject to arbitration by the State PUC

o All VoIP to PSTN traffic under section 251(b)(5) o Toll VoIP to PSTN = Interstate Access o All other VoIP to PSTN = Reciprocal Compensation o Blocking of VoIP traffic is precluded
Traffic subject to VoIP access may be set as the % of VoIP customers in the state

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ICC Reform

o CMRS-LEC Compensation

Existing interconnection agreements remain in effect IntraMTA rule applies to all traffic originated/ terminated within the same MTA Not CLEC transiting traffic Reciprocal compensation applies

Non-access = Bill and Keep Interim transport rule for Rate of Return carriers

CMRS chosen interconnection point within LEC territory LEC responsibility stops at the meet point if CMRS chosen interconnection point is outside LEC territory

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Arbitrage Issues

o Access Stimulation

Revenue sharing arrangements with high call volume customers for LECs with high switched access rates. Inflates access minutes terminated to the LEC, with no requirement to reduce access rates. Service is free to end users, while IXCs recover the costs from all of their customers as a result of high access rates.

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Arbitrage Issues

o Access Stimulation Defined

LEC has entered into a revenue sharing agreement, and; Payment by the LEC based on billing of access to an IXC 3 to 1 interstate originating to terminating ratio in a given month, or; More than 100% increase in interstate originating and/or terminating switched access Compared to the same month in the prior year

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Arbitrage Issues

o Access Stimulation Remedies

RoR LEC must file a revised tariff based on prospective costs and demand May not participate in NECA tariff Revenue sharing agreement may be terminated before revised tariff must be filed (45 days) CLEC must benchmark access rates to the rates of the price cap LEC with the lowest rates in the state Revenue sharing agreement may be terminated before revised tariff must be filed (45 days) Access sharing payments are not properly included as rate of return costs

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Arbitrage Issues

o Phantom Traffic Defined

Terminating traffic that lacks identifying information necessary to bill the call Service providers in the call path intentionally remove or alter to avoid paying for termination Calls that transit another carrier are ripe for arbitrage due to the # of carriers that access the call record

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Arbitrage Issues

o Phantom Traffic

Calling Party Number (CPN) and Charge Number (CN), if different, required in all call signaling Applies to all traffic bound for the PSTN, including VoIP Intermediate carriers must pass along unaltered call signaling An entity that neither originates or terminates traffic that traverses the PSTN

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