Connect America Fund Summary of Draft Report and Order, FNPRM and Order on Reconsideration Released Nov. 21, 2018

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1 Connect America Fund Summary of Draft Report and Order, FNPRM and Order on Reconsideration Released Nov. 21, 2018 Introduction About 30% of rural Americans lack access to fixed, terrestrial high-speed Internet of at least 25/3 (compare: urban at 2%) CAF Phase II auction deploy 25/3 or higher speeds to approximately 713,176 locations o Support of $1.488B over 10 years (fraction of $5B if model-based support provided) Broadband access critical to econ opportunity, job creation, education and civic engagement (even more important in rural areas) Access to 25/3 service not a luxury for urban areas (necessity for all) High-cost program implements one of Congress core universal service policies (cites to reasonable comparability principle) Revised Offer for Existing ACAM Carriers Increase funding cap from $ to $200 per location Increased 25/3 deployment obligations o Low density carriers: 25/3 service for 50% of fully funded locations o Medium density carriers: 25/3 service for 65% of fully funded locations o High density carriers: 25/3 service for 85% of fully funded locations Reject request to count existing locations toward deployment obligation o Example: locations ineligible in original ACAM offer because in census blocks served with FTTP or cable facilities Term of revised offer: 1/1/19 to 12/31/28 Deployment milestones o original 10/1 milestones still in effect o new 25/3 milestones: 10 year beginning 1/1/19 40% by end of % by end of % by end of % by end of % by end of % by end of % by end of 2028 WCB will release a Public Notice listing revised ACAM support and deployment obligations o Existing ACAM recipients: 30 days to confirm acceptance of revised offer o Acceptance is irrevocable 1

2 o USAC begin distributing revised support the month following PN authorizing increased support to carriers accepting revised offer Existing ACAM carriers can decline offer of revised support and deployment obligations o Remain subject to terms of existing ACAM support ACAM II (new model offers) Open to all legacy RoR carriers, except existing ACAM and Alaska Plan carriers o Those previously excluded due to 90%+ 10/1 deployment are eligible o Carriers that would receive more in model support than cost-based support are eligible for ACAM II o Carriers eligible even if they have no fully funded locations Example: where required to deploy only 4/1 or on reasonable request Many features of original ACAM offer, but several critical adjustments Fully funded up to $200/location o No limitation in amount of support available thru offer o No reductions of funding cap to fit within a budget due to number of carrier elections o Rejects WISPA proposal for reduction of per-location funding cap to reflect that all deployments are not fiber o Rejects flexible glide path where funding caps would exceed $200/location to limit % support loss New Model Parameters o Includes census blocks where FTTH or cable has already been deployed o Excludes locations presumed to be served by an unsubsidized competitor that provides voice AND minimum 25/3 service o Using most recent updated Form 477 data ( permits [Commission] to avoid a time-consuming and administratively burdensome challenge process ) o Tribal BB Factor incorporated into model; sets HC benchmark $39.38 on Tribal lands (a 25% reduction from $52.50); raise funding cap to $213.12/location 10-year term of support (1/1/19 to 12/31/28) Glide path transition for carriers electing to receive less ACAM II support than legacy support o Same three-step transition as in original ACAM offer if reduction is 10% or less: transition is one-year if reduction is 11%-25% less: transition is over four-years if reduction is greater than 25%: transition is full 10-year term of plan o Base year for calculating transitional support: 2018 claims o Rejected proposals to cap glide path reduction at specific percentage of current support Deployment Obligations o Offer 25/3 to at least all fully funded locations by end of term of support o Must provide 4/1 to defined number of locations that are not fully funded by end of support term Carriers with density of 10 housing units/sq mile or more must offer 4/1 to 50% of all capped locations 2

3 Carriers with 10 or fewer housing units/sq mile must offer 4/1 to 25% of all capped locations Rest of capped locations are subject to reasonable request standard o Minimum usage allowance of 170 GB/month o Latency standard: 95% or more peak period of round trip latency at or below 100 milliseconds for all fully funded locations o Milestones: 25/3 to 40% of fully funded locations by 2022; 50% (2023) with 10% increments to 2028 o Also; 4/1 to required number of locations by end of 2028 o Geocoding reporting requirements o Single-step Election process o WCB will issue Public Notice with ACAM II support offers and deployment requirements o Carriers will have 45 day to confirm acceptance o Acceptance is irrevocable Cost-Based Carriers Legacy budget is delinked from ACAM budget(s) o CAF-ICC budget also separate CAF-ICC administered outside legacy budget and ACAM support mechanisms New budget for cost-based RoR carriers (HCLS and CAF-BLS) o Approximately $1.42 billion (based on 2018 uncapped/unconstrained claims) Uncapped/unconstrained appears to mean no budget control mechanism effects. HCLS cap and rural growth factor are not being eliminated or changed Tenth Circuit: sufficient does not mean full funding o Increased annually by inflationary adjustment (GDP-CPI) Rejected Employment Cost Index Not conceding that broadband deployment and maintenance costs increase over time commensurate with inflation FCC staff: rising labor costs offset by falling equipment costs and productivity gains GDP-CPI used in other support mechanisms Not use inflation adjustment for other high-cost USF support programs Interim Budget Control Mechanism impacts o Refund all BCM support reduction from July 1, 2018 until the LATER of Dec. 31, 2018 or the effective date of the R&O WCB and USAC will determine whether refunds in lump sum or over a one-year period (depending upon availability of funds. o No BCM reductions for period from Jan. 1, 2019 to June 30, 2019 Adjustment to Budget to reflect CBOL conversions (CBOL = 100% interstate) o FCC expectation: increases due to CBOL conversion not exceed 7% of adjusted legacy budget over time o Adjust budget changes for carriers accepting ACAM II offer 3

4 ACAM II acceptors whose model support exceeds their uncapped HCLS and CAF-BLS claims: USAC will take only those claims out of legacy budget ACAM II glide path acceptors: USAC will only take their model support out of the legacy budget FCC anticipates : sufficient number of companies take ACAM II glide path FCC anticipates : amount of increase to adjusted legacy budget cap (i.e., after adjusted for those electing ACAM II) will be at least 7% of such adjusted budget cap To ensure: FCC will increase legacy budget in July 2019 by 7% If number of companies accepting ACAM II glide path support causes legacy budget to increase by more than 7%, legacy carriers keep entire increase in budget going into effect in July 2020 o One-time increase Minimum Threshold Level of Support o Equal to 5-year CAF BLS forecast by NECA (for use to determine carrier-specific mandatory buildout obligations) Calculated using new budget plus inflation adjustments o Any amounts greater than threshold: may be subject to BCM: Per-line component of BCM eliminated Rejected NTTA request to prioritize Tribal areas Rejected Joint Association regarding 3-year moving average of unconstrained claims Budget review in 2024 (5 years) Budget calculations (93) o By May 1, 2019, USAC publish new legacy budget cap plus new budget adjustment factor (July 1, 2019 to June 30, 2020) 2018 actual unconstrained support claims Plus: one-year inflation using GDP=CPI Increase budget cap by 7% Budget adjustment factor modified to eliminate per-line reduction (effective from July 1, 2019 June 30, 2020) o By May 1, 2020 USAC publish next legacy budgrt cap and next budget adjustment factor Previous year s budget cap plus inflation factor ACAM I carriers receiving increased support: deduct their 2018 actual unconstrained claims plus two years of inflation adjustment ACAM II glide path carriers: calculate difference between total 2018 actual unconstrained claims plus two years of inflation adjustment AND model support if greater than 7% of 2020 budget, increase budget by excess over 7% Compare capped amount for each carrier with CAF-BLS 5-year forecast, and if capped amount lower, increase to forecast amount o Subsequent years: increase prior year budget cap by inflation adjustment Calculate budget adjustment factor for July June period 4

5 CAF-BLS: calculate pro rate reductions once a year HCLS: calculate pro rate reductions semi-annually Deployment Obligations o All carriers subject to deployment obligations o Based on a new CAF-BLS 5-year forecast (using projected claims for 2018) o Minimum broadband speed obligation is 25/3 (increased from 10/1) o Deployment term is effective date of R&O until Dec. 31, 2023 o 25/3 deployment since May 25, 2016 counts toward overall deployment obligation o prohibition on deploying terrestrial wireline tech in a census block if it means support in study area exceeds the per-line and per-month cap o mandatory buildout deployment obligations should be determined based on percentage of CAF-BLS less than 20% of 25/3 throughout entire service territory then must use 35% of forecasted CAF-BLS for 25/3 deployment if more than 20% but less than 40% of 25/3 then must use 25% of forecasted CAF-BLS 40% or more of 25/3 then must use 20% of forecasted CAF-BLS for deployment o all carriers required to report deployed locations to HUBB Elimination of the Capital Investment Allowance o Eliminated Simplified Capital Budget Mechanism o Eliminates per-line reduction portion in BCM s calculation (maintains pro-rata portion of calculation) Monthly Per-Line Limit on USF o Reducing support from $250 to $225 beginning July 1, 2019 and then to $200 starting July 1, 2021 o Waivers available Competitive Overlap o Eliminates current 100% overlap rules and process o Support to be awarded through competitive bidding in areas entirely or almost entirely (basis appears to be 95% threshold) overlapped by unsub competitor providing voice and 25/3 service (will use Form 477 data) FNPRM to determine which study are almost entirely overlapped o Projected savings from competitive bidding will go back into legacy budget Line Count Filings (FCC Form 507) o Used to determine monthly cap (now proposed for $200 down from current $250) and for administering BCM o March 31 st new date for submitting mandatory line counts (e.g., voice and broadband-only) for CAF BLS support but lines counts are determined as of December 31 st o No change in due date for HCLS line count submissions (HCLS line counts and cost data submissions are currently done on the same schedule) o Carriers that don t receive CAF BLS are to file line counts annually on Form 507 on July 1 st each year 5

6 Uniform System of Accounts to Incorporate New Lease Accounting Standards o Revised rules to be effective Jan. 1, 2020 o Amending Part 32 rules to conform to FASB lease accounting standards so carriers can maintain a singles set of lease accounts o Adopts FASB lease accounting standards definition: a lease as part of a contract, or part of a contract, that conveys the right to control the use of identified property, plant and equipment for a period of time in exchange for consideration Carrier to determine whether a contract is or contains a lease HCLS Cap (Rural Growth Factor) o No changes (existing policy remains in place) OpEx Limitations o No changes (existing policy remains in place) o Commission wants to monitor to determine if changes in future are necessary Collecting USF to Meet Demand (e.g., Contributions) o USAC directed to continue to collect USF based on projected demand Further Notice of Proposed Rulemaking (FNPRM) Auction Criteria o Process to work like in CAF II auction Multi-round descending clock auction with carriers bidding against one another in same performance tier with weight given to higher speed and higher broadband usage allowances o What percentage of study area should be used to determine almost entirely overlapped (99% or 95%) for support to be awarded through competitive bidding? o Proposing to break each study area up into a census geography, such as census block groups, with each unit as the minimum geographic bidding area o Proposing to set reserve price by proportionally allocating incumbent s legacy support across each eligible study area using the costs for each census block as determined by the cost model or should reserve price be established based on ACAM costs or a percentage of incumbent s prior year legacy claims? o Proposing to accept bids with various performance tiers but nothing lower than 25/3 broadband speeds; should it be something else? (winning bidders required to serve all locations within each census block group) o Proposing any entity is eligible to participate in competitive bidding process, not just incumbent and competitor that reports coverage within study area o Proposes that if incumbent declines to compete in competitive bidding process its support be reduced; what should happen to incumbent s support if no entity decides to bid in auction? Should incumbent continue to receive support pursuant to legacy rate-of-return support mechanism? o What transitional support should be provided to incumbent LEC that loses auction bid and how to ensure customers continue to receive voice and broadband service prior to new carrier taking over? o Should auction be conducted every other year like in 100% process and be based on most recent Form 477 data? 6

7 CBOL Conversion o Commission is adopting a minimum 7% budgetary increase in 2020 over and above 2019 budget increase and inflationary adjustment to account for CBOL conversion Seeks comments on whether to limit number of CBOL conversions? Should carriers immediately lose HCLS for voice lines converted to broadband? How to encourage carriers moving customers to broadband only lines without gaming the rules by moving voice customers to interconnected VoIP solely to maximize support? Should a carrier s CAF-ICC be adjusted to prevent arbitrage? Is there a specific way to determine whether legacy carriers is migrating customers to broadband only lines as part of the desired transition to all broadband networks or to benefit from increased high-cost support? Order on Reconsideration Commission denies three petition seeking Recon on 2018 Rate of Return Order and NPRM seeking additional ACAM support o Grand River Mutual Telephone o Clarity Telecom, LLC o Hamilton County Telephone Co-op 7