PLAN OPERATIVO ANUAL-POA-

In November of 2011, the FCC released a comprehensive order (CAF Order) that greatly affected universal service as well as broadband funding and intercarrier compensation.61 The order ended a long period of relative stability in FUSF by restructuring major portions of the existing FUSF system. The order changes support levels for Wyoming’s ILECs, changes the federally

imposed duties of those carriers, changes the intercarrier compensation those carriers can expect, and changes the duties and opportunities of the Wyoming Commission. These federal changes

profoundly alter the context in which Wyoming policymakers will redesign the WUSF.

a. Federal Goals, Federal Budget

The CAF Order established basic principles and goals that will guide the FCC’s universal service initiative. Broadband was the key addition. Specifically, the new federal goals are to:

(1) Preserve and advance universal availability of voice service.

(2) Ensure universal availability of modern networks capable of providing voice and broadband service to homes, businesses, and community anchor institutions.

(3) Ensure universal availability of modern networks capable of providing advanced mobile voice and broadband service.

(4) Ensure that rates for broadband services and rates for voice services are reasonably comparable in all regions of the nation.

(5) Minimize the universal service contribution burden on consumers and businesses.62

61

In the Matter Connect America Fund, WC Docket No. 10-90; A National Broadband Plan for Our

Future, GN Docket No. 09-51; Establishing Just and Reasonable Rates for Local Exchange Carriers, WC Docket No. 07-135; High-Cost Universal Service Support, WC Docket No. 05-337; Developing an Unified Intercarrier Compensation Regime, CC Docket No. 01-92; Federal-State Joint Board on Universal Service, CC Docket No. 96-45; Lifeline and Link-Up, WC Docket No. 03- 109 and Universal Service Reform – Mobility Fund, WT Docket No. 10-208, Report and Order and

Further Notice of Proposed Rulemaking, FCC 11-161, released November 18, 2011, (“CAF Order”).

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b. CAF, the Budget, and Public Interest Obligations

The CAF Order created a new support mechanism which it calls the “Connect America Fund (CAF). The CAF would distribute the budgeted funds using a variety of mechanisms. While the order suggests that CAF is a single entity, it is actually a constellation of support mechanisms that apply to different kinds of providers. There is one division between “remote areas” and other areas. Another division is between wireless and wireline carriers. Finally, wireline carriers are divided between price cap63 and rate-of-return carriers.64

While the CAF Order prescribed costly new goals that include broadband, at the same time it limited the funds that will be available to meet those goals. It set an annual $4.5 billion FUSF budget. Within this overall budget, separate sub-budgets were also established:

 $1.8 billion will be distributed among price cap ILECs.

 $2.0 billion will be distributed to rate-of-return ILECs.

 $0.5 billion will be distributed to wireless carriers.

 $0.1 billion will be distributed to remote areas.65

The authors and many other observers doubt whether this budget is sufficient to achieve the FCC’s stated goals for broadband, particularly in light of increased financial stress on ILECs due to increased competition from cable and wireless providers and due to other regulatory changes in the

CAF Order that reduce ILEC intercarrier revenues.

Carriers receiving FUSF are called “Eligible Telecommunications Carriers” (ETCs). Federal law defines the obligations of ETCs, and those obligations have changed somewhat over the years. Largely consistent with existing policy, the FCC will now require all ETCs to provide standalone voice service throughout their service areas.66 States have also imposed similar carrier of last resort obligations in many areas, and the FCC declined to preempt these state-imposed obligations.

63

This federal classification refers to incumbent local exchange carriers whose interstate rates the FCC sets using a “price cap” mechanism in which prices are limited, without regard to earnings, and adjusted from time to time using predetermined formulas.

64

This federal classification refers to incumbent local exchange carriers whose interstate rates the FCC sets using traditional “rate-of-return” principles in which carriers report their investments and expenses, and rates are sufficient to allow the carrier to earn a reasonable return on its net

investment.

65

CAF Order ¶ ¶ 18, 25-26, 28, 158.

66

Instead, the FCC recommended that states review their respective regulations and policies in this area.67

The real news in the CAF Order is that ETCs of all kinds will now be required to meet federal standards for broadband. ETC-offered broadband must meet basic performance

requirements, and the ETC must report regularly on associated performance measures.68 Like the support amounts, performance requirements are tailored for each kind of carrier.

(1) Price Cap Wireline Carriers

CenturyLink affiliates in Wyoming (including the original CenturyTel-Wyoming territory, the Qwest territory and the United territory) are subject to the FCC’s USF rules for price cap carriers. Unfortunately, it is no simple matter to understand the types of support available to those carriers and their obligations and options.

Beginning this past January, the FCC began what it calls “Phase I” for price cap carriers, with “frozen” support at preexisting levels. In addition, a new $300 million of “incremental support” is available. CenturyLink Wyoming is likely to be eligible for some of this funding because the funding is cost-based and intended for the very highest cost areas, and Wyoming has many areas served by Century Link with very low population densities and very high costs per location.

Despite this support, there is some uncertainty about whether the investment will take place in Wyoming. Even if additional funds are allocated to CenturyLink as a holding company on the basis of cost, CenturyLink appears likely to be able to transfer the funding to other states. Moreover, the FCC has provided CenturyLink with the incentive to transfer the funding to lower cost states because the FCC build-out obligation favors investment in lower-cost states.69

During Phase I, price cap carriers may elect to receive all, some, or none of the incremental support to which they are otherwise entitled.70 If CenturyLink accepts incremental support it will be required to deploy broadband to at least one new location for every $775 of support, although it has wide discretion to self-identify the areas to be upgraded.71 If CenturyLink accepts any funding, the associated broadband deployment must be completed three years thereafter.

Other requirements will apply during Phase I to CenturyLink’s legacy high-cost support. Varying proportions of this support must be used to “build and operate broadband-capable networks

67 CAF Order ¶ 82. 68 CAF Order ¶ 86. 69 CAF Order ¶ 145. 70 CAF Order ¶ 146. 71 CAF Order ¶ 138.

in areas substantially unserved by an unsubsidized competitor.”72

From 2013 through 2015, price cap carriers will have to spend increasing shares of their support in this way, ending at 100% in 2015. Carriers will be required to certify compliance with these requirements.73

“Phase II” of the price cap regime for CenturyLink could begin in 2013 or later.74

Support will be allocated based on the results of a new forward-looking cost model that the FCC has not yet developed. Costs will be calculated at the “wire center” level. Support availability will be

determined by what amounts to a triage75 system:

 No support will be provided to any wire center with very high costs (above a “very high cost benchmark”). Support for some of these so-called “remote areas” will be provided by a different mechanism, but not everywhere. The very high cost

benchmark has not yet been set.76

 No support will be provided to any wire center with low cost (below a “low cost benchmark”). The FCC presumes a carrier can obtain adequate revenue in these areas from end user sources alone.77 Similarly, no support will be provided to areas where an “unsubsidized competitor” offers affordable broadband that meets the FCC’s broadband performance requirements.78

 For areas between the lower and upper benchmark limits, support per month for the wire center will equal the difference between the wire center cost and the low cost benchmark times the number of locations in the wire center.

72 CAF Order ¶150. 73 CAF Order ¶150. 74

CAF Phase II requires affirmative Commission action to be implemented, and the date could be delayed. CAF Order ¶ 148. In particular, the FCC must complete work on its new broadband forward-looking model and determine how it will conduct its proposed competitive bidding process in areas where incumbent carriers choose not to accept CAF Phase II funding, CAF Order ¶ 156.

75

Triage is the process of determining the priority of patients' treatments based on the severity of their condition. Triage was originally implemented in the French military as a way to identify injured patients for whom immediate care might make a positive difference in outcome, as distinct from those who were likely to die regardless of the care they received and those who were likely to live, regardless of the care they received.

76

The Order allows the Wireline Competition Bureau to set this value in the future in a way that limits national spending under the program to $1.8 billion per year. ¶169.

77

CAF Order ¶ 167.

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The FCC has delegated to its Wireline Competition Bureau the responsibility to construct the model and to determine the low cost benchmark and the very high cost benchmark.79 Eventually, the FCC has indicated that it may shift the whole system once again to a new “market based”

distribution mechanism, such as competitive bidding.80 The FCC has not clarified how this competitive bidding system might operate.

During Phase II for price cap carriers, supported carriers will have to meet increasingly stringent broadband deployment and speed requirements. Those new deployment requirements will apply to all high-cost locations between an upper and lower threshold within their service territory in a state.81

 For the first three years, price cap ETCs must offer broadband at actual speeds of at least 4 Mbps downstream and 1 Mbps upstream, with latency suiTable Eor real-time applications, such as VoIP, and with usage capacity reasonably comparable to that available in comparable offerings in urban areas.

 By the end of the third year, price cap ETCs must offer at least 4 Mbps/1 Mbps broadband service to at least 85 percent of their high-cost locations – including locations on Tribal lands.

 By the end of the fifth year, price cap ETCs must offer at least 4 Mbps/1 Mbps broadband service to all supported locations, and at least 6 Mbps/1.5 Mbps to a number of supported locations to be specified.82

Price cap carriers will be able to accept or decline support on a state-by-state basis.83 If a carrier accepts support in a state, the carrier will be obligated to provide broadband for five years. The FCC believes this rule creates a limited, one-time opportunity for the rapid deployment of broadband services over a large geographic area.84 In states where a price cap ILEC does not accept the funding and responsibility, the FCC anticipates offering FUSF to other providers through a

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CAF Order ¶¶ 22-24. The ABC Plan used an $80 lower benchmark and a $256 upper benchmark to generate a total CAF Phase II price cap support of $2.2 billion. This means only wire centers with cost between $80 and $256 would receive support. However, the FCC price cap budget is $1.8 billion, implying that $80-$256 support range must shrink (providing support to fewer areas) in order to meet the budget constraint. See Letter to Chairman Genachowski from Robert W. Quinn, Jr., AT&T et. al., July 29, 2011, WC Docket No. 10-92.

80

CAF Order ¶ 163.

81

See CAF Order ¶ 173.

82 CAF Order ¶¶ 160-62. 83 CAF Order ¶ 171. 84 CAF Order ¶¶ 177-78.

presently undefined competitive bidding system.85 After five years, the FCC anticipates renovating the support mechanism still one more time for all price cap carriers, replacing the above-described Phase II model-based system with yet another new system based on competitive bidding. 86

CenturyLink’s decision to accept or reject Phase II support will be a watershed moment for universal service in Wyoming’s future. It is impossible for the authors to know at the time of this writing what that decision will be. Even within the company’s own offices, it would likely be speculative to anticipate that decision at the present time. The better choice for CenturyLink inevitably will depend on the details of the new cost model, which is currently under development. It will also depend on presently undefined national parameters such as the value of the “very high cost benchmark” and presently unknown mapping details such as the extent of areas the FCC deems “remote” and what areas the FCC deems to have an “unsubsidized competitor” offering broadband. Finally, the company will have to estimate its cost of the FCC’s build-out requirements. Most of that work is speculative until the FCC announces more details about Phase II CAF support.

(2) Rate-of-Return Carriers

Most rate-of-return carriers are also “rural carriers,” a quite similar set. These carriers have been receiving support under several support mechanisms, notably including the “high cost loop” (HCL), “local switching support” (LSS), and “interstate common line support” (ICLS) mechanisms.

The CAF Order made numerous but not particularly fundamental changes to these existing programs. The FCC:

 Eliminated the “Local Switching Support” mechanism, a traditional program that provides federal support for the cost of central office switches.

 Established a recovery mechanism to replace, in part, revenue reductions associated with its new intercarrier compensation (access and reciprocal compensation)

policies.87

 Proposed a framework to constrain excessive capital and operating expenses. One part of that framework would require carriers with very low local rates to either increase those rates or lose part of their universal service funding. The FCC will examine in the future the question of longer-term support for rate-of-return carriers.88

 Requested comment on whether the current interstate rate of return should be reduced.89 85 CAF Order ¶ 179. 86 CAF Order ¶ 163. 87 CAF Order ¶ 847. 88 CAF Order ¶¶ 26-27. 89 CAF Order ¶ 1045.

 Requested comment on the “Rural Association Plan.” That plan would make a

fundamental shift in the allocation of investment and cost to the interstate jurisdiction.

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ROR carriers must provide broadband service at speeds of at least 4 Mbps downstream and 1 Mbps upstream with latency suiTable Eor real-time applications, such as VoIP, and with usage capacity reasonably comparable to that available in residential terrestrial fixed broadband offerings in urban areas, upon reasonable request. ROR carriers are not required, to comply with intermediate build-out milestones or increased speed requirements for future years. Therefore, ROR carriers will not necessarily be required to build out to and serve the most expensive locations within their service areas.91

As part of the reform of the HCL support mechanism, the FCC proposed constraints on excessive capital expenditures and operating expenses. In the further notice, it suggested a particular method to determine excessive expenditures and expenses and requested comment on that method.92 The method entails constructing a regression equation for each constrained capital expenditure and operating expense. The regression equation would determine a maximum reasonable expenditure and expense depending on the characteristics of the service territory where the characteristics have been defined as housing units, the number of Census blocks, loops and percent of the Census block that is covered by water.93 If the FCC adopts its proposed method, it appears that two Wyoming carriers, Silver Star and Tri-County, will have their support constrained.94 In addition, the FCC is considering applying similar constraints to its ICLS mechanism.95

(3) Mobility Fund

Still another set of rules will apply to wireless carriers. These carriers will be allowed to bid at FCC auctions for the right to receive support in specified areas.

In its Order, the FCC established “ubiquitous availability of mobile services as a universal service goal.”96

In aid of accomplishing that goal, the FCC establishes two mobility funds: one fund 90 CAF Order ¶ 1032. 91 CAF Order ¶¶ 206-07. 92 CAF Order ¶ 1079. 93

CAF Order, Appendix H ¶¶ 20-27.

94

Substantial criticism of the FCC method was filed by commenting parties. See for example, the Comments of the Nebraska Rural Independent Companies, the joint Comments of NECA, NTCA, OPASCO, and the WTA, and the joint Comments of NASUCA, the Maine OPA, the New Jersey Division of Rate Counsel and TURN, January 18, 2012, WC Docket No. 10-90.

95

CAF Order ¶ 225.

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(the Mobility Fund Phase I) that will distribute one-time support in the short term to provide 3G or better service to currently un-served areas; and another longer-term fund (the Mobility Fund Phase II) to provide ongoing support for mobile services.

The goal of the Mobility Fund Phase I is to “extend the availability of mobile voice service on networks that provide 3G or better performance and to accelerate the deployment of 4G wireless networks in areas where it is cost effective to do so with one-time support.”97 The Mobility Fund I will total $300 million, and will be distributed through a reverse auction to be held in 2012. A separate $50 million fund will be distributed to build mobile networks in un-serve Tribal areas.

Under the Mobility Fund Phase I and the associated auction processes:

 Support will be one-time and will be disbursed through a reverse auction.

 Only one provider per area will be supported.

 Support will be provided to areas where no provider currently provides these services.

 No support will be provided to any area where any provider has made a regulatory commitment to provide 3G or better wireless service, or has received a funding commitment from a federal agency to provide such service.98

 Areas eligible for support will be identified at the census block level. A census block will be considered unserved if the geometric center of the block is not covered by a network service.

 The Order delegates to the FCC Bureaus the decision regarding defining minimum bidding areas.

 All un-served areas eligible for support may compete for funding, and the auction process will prioritize which areas can be served.99

 Awards will be made to applicants with the highest ratio of number of linear road miles served per dollar of support. 100

To be eligible to participate in the auction, providers must:101

 Be designated as a wireless ETC.

 Have access to the spectrum capable of 3G or better service in the areas to be served.

 Must certify their technical and financial ability to provide the service within the specified time frame.

Auction winners, as a condition of support, must provide:102 97 CAF Order ¶ 322. 98 CAF Order ¶ 341. 99 CAF Order ¶ 357. 100 CAF Order ¶ 350. 101 CAF Order ¶ 386.

 Voice service, including standalone voice service.

 Voice and broadband services that are reasonably comparable to services available in urban areas.

 Provide service over a 3G or better network; providers can specify if they will provide 3G or 4G service.

 Providers electing 3G service must offer 200kbps downstream and 50kbps upstream speeds in both fixed and mobile conditions and at typical vehicle speeds.

 Providers electing 4G must provide 768 kbps upstream and 200kbps downstream

 3G providers will have 2 years to cover at least 75% of road miles in the supported census blocks; 4G providers will have 3 years.

In addition, providers will be required to provide collocation on their towers to other wireless providers103 and to certify annually for 5 years that their rates are within a reasonable range of rates