Rural Telecom Revenues
FCC Reform
Spring 2012
Presented to
ABC Communications
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© Moss Adams LLP | April 2012 V2
THE BASICS
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ACCESS
• What other carriers pay to use our network
• Most companies pool access with NECA using
cost studies
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RATE OF RETURN REGULATION
• Expenses & Operating Taxes, plus
• Profit (Return on Rate Base), equals
• Revenue Requirement
Rates = Revenue Requirement / Demand
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COMPETITION
• When there is no monopoly, companies
compete to:
o Maximize revenues
o Minimize costs
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KEY ELEMENTS OF FCC REFORM
INTENDED PURPOSE OF REFORM
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I. LOCAL VOICE SERVICE RATES
Key elements
Purpose
Minimum customer monthly rate
(if HCLS recipient)
Rural companies must charge end users
a minimum rate for local service,
reasonably comparable to urban rates,
to justify cost recovery through USF.
3-year phase-in with benchmarks
($10, $14, national average)
ARC charge
if local service rates are <$30/month
© Moss Adams LLP | April 2012 V2
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II. CARRIER ACCESS RATES
Key elements
Purpose
All terminating switched access
transitions to $0.000 over 9 years
Switched access rates are problematic.
Originating interstate rates frozen at
12-29-11
The number of minutes is declining due
to wireless calls, VoIP traffic that is not
measured and problems billing carriers
that terminate traffic.
Differences between state and
interstate rates don’t make sense.
Switching costs are lower in an IP
environment - Reform to provide an
orderly transition away from carriers
paying for switching.
© Moss Adams LLP | April 2012 V2
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UNIVERSAL SERVICE FUNDING
III. FEDERAL SUPPORT FOR LOOP COSTS
ASSIGNED TO INTRASTATE AND LOCAL (HCLS)
Key elements
Purpose
Revised corporate operations expense
limitation calculation
(more support if < 3,500)
(less support if > 3,500)
Current mechanism allows carriers to
spend whatever they deem appropriate
and receive support. Reform sets limits
to provide incentive to companies to
limit spending.
Regression based limitations on capital
expenditures and operating expenses
© Moss Adams LLP | April 2012 V2
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UNIVERSAL SERVICE FUNDING
IV. SUPPORT FOR HIGH LOOP COST GROWTH (SNA)
Key elements
Purpose
Phased out depending on qualification
factor (plant versus lines)
Original intent was to support
significant cost growth in an
environment where access lines were
flat or growing.
With access line losses, many carriers
are growing cost per line only as a
result of line loss. No longer consistent
with original intent.
© Moss Adams LLP | April 2012 V2
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UNIVERSAL SERVICE FUNDING
V. SUPPORT FOR LOOP COSTS ASSIGNED TO
INTERSTATE (ICLS)
Key elements
Purpose
New limitation on corporate operations Current mechanism allows carriers to
expense
spend whatever they deem appropriate
and receive support.
Regression based limitations on capital
expenditures and operating expenses
Reform sets limits to provide incentive
to companies to limit spending.
© Moss Adams LLP | April 2012 V2
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UNIVERSAL SERVICE FUNDING
VI. SUPPORT FOR LOCAL SWITCHING COSTS (LSS)
Key elements
Purpose
Eliminated and cost recovery shifted to
CAF
Local switching costs are declining and
can be absorbed by the end user.
Cost recovery is locked in at a 5%
annual reduction to provide stability
during the transition period.
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UNIVERSAL SERVICE FUNDING
VII. OTHER SUPPORT LIMITATIONS
Key elements
Purpose
Identical support for cellular & wireline
competitors (CLEC)
Difficult to justify supporting more than
one carrier via identical
support. Providing support equal to
the incumbent means other carriers
not required to cost justify support.
5-year phase out of identical support
Mobility Fund created for wireless
providers for underserved areas
Total support limited to $250 per line
per month
© Moss Adams LLP | April 2012 V2
Overall $250/line/month cap on
support forces use of an alternate
provider (i.e. satellite) when traditional
wireline service is extremely costly –
applies to very few companies/end
users.
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HOW THE CONNECT AMERICA FUND (CAF)
WORKS
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PURPOSE OF THE CAF
Designed to compensate companies for
intercarrier switching costs with 2011 as a
baseline, revenues are then reduced 5% per year.
© Moss Adams LLP | April 2012 V2
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SWITCHED ACCESS REVENUE BASELINE
• Baseline Equals
1. 2011 IS Switched Access Revenue Requirement,
plus
2. 2011 ST Terminating Switched Access Revenue,
plus
3. 2011 Net Reciprocal Compensation
• The baseline includes intercarrier and support
revenues
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ANNUAL CAF CALCULATION
• Annual CAF revenue equals
o Prior year switched access revenue baseline less 5%
o Less actual revenues earned in the current year for:




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All interstate switched access
State terminating switched access
Net reciprocal compensation
ARC revenues
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ACCESS RECOVERY CHARGE (ARC)
ARC customer charges phase-in to $3/line/month
• Residential = $0.50 increments for 6 years
• Single Line Bus = $0.50 increments for 6 years
• Multi-Line Bus = $1.00 increments for 3 years
ARC revenues reduce CAF revenues
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REFORM YET TO COME?
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REFORM YET TO COME
I. ORIGINATING SWITCHED ACCESS
• The FCC is phasing out terminating, and will
likely also eliminate originating in favor of end
users and USF paying all switching costs (bill
and keep). When this will happen, the specifics
of transition and the means for providing USF
to offset lost revenues are currently being
reviewed.
© Moss Adams LLP | April 2012 V2
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REFORM YET TO COME
II. BROADBAND SUPPORT
• Existing USF mechanisms cover portions of
loop related broadband costs, but not all. The
FCC is yet to establish the means for rural
companies to recover costs for broadband
connections from the customer premises to the
connection with the backbone provider.
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REFORM YET TO COME
III. USF CONTRIBUTIONS
• USF is funded through charges to consumers
based on a percentage of purchased telephone
services. This system is out dated and the
contribution base is declining, which results in
an increasing contribution factor
(FUSC). Reform is expected to implement a
line/connection based contribution, which
would expand the base to include more carriers
and services.
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Impact of Reform
REVENUES BEFORE
Revenue
($)
END USER
Local Voice Service
Subscriber Line Charge (SLC)
Miscellaneous
Revenue
($)
Variance
($)
Local Voice Service
Subscriber Line Charge (SLC)
Miscellaneous
Access Recovery Charge (ARC)
ACCESS CUSTOMERS
Switched Access
Special Access
DSL
UNIVERSAL SERVICE FUNDING (USF)
High Cost Loop Support (HCLS)
Interstate Common Line Support (ICLS)
Local Switching Support (LSS)
Wireless (Identical Support)
CLEC (Identical Support)
Safety Net Additive (SNA)
NON-REGULATED
Internet Access
Cellular
Video (Cable TV, IPTV)
Premises equipment
Long distance service
CLEC customers
Other
TOTAL
REVENUES AFTER
Switched Access
Special Access
DSL
High Cost Loop Support (HCLS)
Interstate Common Line Support (ICLS)
ICC Connect America Fund (ICC CAF)
Mobility Fund
-
Internet Access
Cellular
Video (Cable TV, IPTV)
Premises equipment
Long distance service
CLEC customers
Other
TOTAL
-
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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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