FCC USF REFORM LEGACY AND A-CAM SUPPORT October 11, 2017 Presenters: Gary Smith JSI and Chad Duval Moss Adams
AGENDA Background A-CAM Support Legacy Support
Background FCC Reforms Impacting Legacy and A-CAM Carriers
MARCH 30, 2016 Federal Communications Commission released its Report and Order and Order on Reconsideration, and Further Notice of Proposed Rulemaking (FCC 16-33) Modernizes and reforms the federal high-cost universal service program supporting the nation s rate-of-return (ROR) carriers
MODERNIZE Focuses on broadband, including standalone broadband Seeks to direct federal support to areas lacking broadband deployment Increases requirements and accountability for federal support
FCC REFORM GOALS Create a voluntary path to using a cost-based model for support (A-CAM) Reform existing Legacy Support to ensure that carriers that remain on that form of support have the incentives and support to continue investing in robust broadband networks Establish a timely and reasonable transition period Require specific budgets on capital and operating expenditures that can be recovered through the programs.
PURPOSE Reforms are intended to encourage broadband deployment and support standalone broadband FCC observes that some rural areas have state-ofthe-art broadband, while other rural areas have no broadband at all
REFORM PRINCIPLES Remain within the existing ROR budget Distribute support fairly and equitably among ROR carriers Be forward looking Ensure no double recovery of costs
A-CAM & LEGACY MODELS 34 Oklahoma rural telephone companies 10 elected A-CAM (29%) 24 remained Legacy (71%) 4 Oklahoma companies didn t have a choice to select A-CAM; Legacy was their only option March 30, 2016 order did not allow ROR carriers with 90% or more 10/1 Mbps broadband deployment reported on their June 2015 Form 477 to elect A-CAM
OKLAHOMA RATE-OF-RETURN CARRIERS BY SUPPORT TYPE BLUE LEGACY/CAF-BLS SUPPORT RECIPIENTS ORANGE A-CAM SUPPORT RECIPIENTS
A-CAM & LEGACY MODELS In 2016, Companies Assessed their Projected Legacy vs A-CAM Support Over a 10-Year Period to Determine Which Path to Take Each Option had its Pros and Cons Chad will provide overview of A-CAM Gary will provide overview of Legacy Oklahoma companies chose the option that best put their company in a position to achieve the FCC Reform goals and achieve their company s long term goals Required them to evaluate and compare each option in regards to the estimated support received to the additional costs needed to meet their obligations Engineering teams were engaged to determine the build out requirements to meet speed obligations. Financial teams were engaged to determine if new investment requirements could be paid for with funds on hand or via a loan. In essence, could you afford it As will be explained in this presentation, unfortunately, there were some impacts that those staying on Legacy could not have envisioned at the time such as those from the Budget Control Mechanism
Alternative Connect America Cost Model ( A-CAM ): A Model-based Approach to Universal Service Funding Chad Duval, Partner, Moss Adams LLP
Alternative Connect America Cost Model ( A-CAM ) 47 C.F.R. 54.311(a) - paraphrased A rate-of-return carrier receiving HCLS and ICLS (now CAF BLS) may voluntarily elect A-CAM support in lieu of HCLS and CAF BLS. Election is state-wide Support available for a specific number of locations per Census Block 10-year term of support Support is fixed for the 10-year term Deployment obligations and reporting requirements
Alternative Connect America Cost Model ( A-CAM ) Forward-Looking Economic Cost Model Developed by CostQuest under contract to USAC Connect America Cost Model ( CACM ) Price Cap Alternative Connect America Cost Model ( A-CAM ) - RoR Efficient Network Configuration Most efficient technologies currently available Lowest cost network configuration One time build vs. building in pieces over time Forward looking cost of capital Economic life depreciation rates Reasonable allocation of common costs
Alternative Connect America Cost Model ( A-CAM ) Network Design & Costs based on: Greenfield build of the network Existing locations of central offices Geocoded customer locations Unknown locations placed along roads Fiber to the Premises broadband network Commercial grade VoIP No Switching Current costs of equipment Price Cap Carrier data Overhead/Expenses Industry averages, including NECA data
Alternative Connect America Cost Model ( A-CAM ) Calculation of Support RoR carriers > 90% 10/1 Mbps not eligible No support in competitive Census Blocks ( CB ) Unsubsidized competitor offering supported services Cable & Fixed Wireless Providers Competitive Challenge process was conducted Average cost to serve each location in the CB Broadband Benchmark Rate = $52.50 Cost below which support is not provided Per Location Support Cap $200/Location Costs between $52.50 - $252.50 supported
Alternative Connect America Cost Model ( A-CAM ) Election Timing & Results Initial Elections due 11/1/2016 273 Statewide Holding Companies (228 > 2015 support < 45) Oversubscribed $160M (Budget = $150M) Revised Offer of Support (12/20/16) Additional $50M/year of support (total of $2B over 10 years) Accepted initial elections < 2015 support Company specific support cap & buildout obligations Final Elections due 1/19/17 262 Statewide Holding Companies (204 > 2015 support < 58) $555,802,081 in 2017 support
Alternative Connect America Cost Model ( A-CAM ) Transitional Support (< 2015 Support) 10% Annual Reduction 2-year transition to A-CAM support > 10% Annual Reduction 25% 5-year transition to A-CAM support > 25% Annual Reduction 10-year transition to A-CAM support $505,297,611 in support at full transition $50.5M in 2017 transitional support
Alternative Connect America Cost Model ( A-CAM ) Buildout Obligations (SHC Location Density) 10 locations/sq. mile* 25/3 Mbps: 75% of fully funded locations 4/1 Mbps: 50% of capped locations 5 locations/sq. mile < 10* 25/3 Mbps: 50% of fully funded locations 4/1 Mbps: 25% of capped locations < 5 locations/sq. mile 25/3 Mbps: 25% of fully funded locations 4/1 Mbps: 25% of capped locations * 10/1 Mbps to remaining fully funded & Reasonable Request Standard for remaining capped locations
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Alternative Connect America Cost Model ( A-CAM ) Reporting Requirements Interim Milestones apply to 10/1 Mbps only Years 1-3 = Progress Reporting Year 4 = 40% Years 5-10 = 10%/year 25/3 Mbps, 4/1 Mbps & Reasonable Request by end of year 10 Non-Compliance Measures Compliance Gap Non-Compliance Measure 5%/< 15% Quarterly Reporting ( QR ) 15%/< 25% 25%/< 50% 50% + QR + 15% Withholding of Support QR + 25% Withholding of Support QR + 50% Withholding of Support (6 Mo.)/100% Withholding (6+ Mo.) + recover support = compliance gap + 10% of support to date
Alternative Connect America Cost Model ( A-CAM ) Summary of Oklahoma A-CAM Carriers Federal Communications Commission CAF - A-CAM 2.3.2 - Authorization Report Version 2.0 (Includes Version 1.0) Authorized A-CAM Support & Obligations - First and Second Offer Authorizations January 24, 2017 Total Number of Rate-of-Return Locations in Census Blocks Receiving Model- Based Funding Number of Locations in Eligible Census Blocks with Obligation to Offer Number of Locations in Eligible Census Blocks with Obligation to Offer Number of Locations in Eligible Census Blocks with Obligation to Offer 4/1 Mbps Number of Locations Remaining on Reasonable Request Standard Holding Company Authorization Date Annual A-CAM Support 25/3 Mbps 10/1 Mbps Carnegie Telephone Company January 24, 2017 694,285 686 202 203 70 211 Cross Telephone Company LLC December 20, 2016 3,478,143 5,446 3,928 1,310 104 104 DWL Holding Company December 20, 2016 3,784,420 3,573 1,329 1,330 228 686 MBO Corporation December 20, 2016 3,635,531 3,949 2,590 864 247 248 Oklahoma Western Telephone Company January 24, 2017 3,847,511 3,774 642 1,929 300 903 Pioneer Telephone Cooperative (OK) January 24, 2017 18,217,112 18,953 2,677 8,032 2,061 6,183 Salina Spavinaw Telephone Co., Inc. January 24, 2017 1,418,685 3,772 2,409 803 280 280 Southwest Oklahoma Telephone Company January 24, 2017 782,695 718 83 251 96 288 Telephone and Data Systems, Inc. January 24, 2017 3,615,168 6,479 4,251 1,417 405 406 Valliant Telephone Company, Inc. January 24, 2017 1,197,221 1,812 1,190 397 112 113 Total 40,670,771 49,162 19,301 16,536 3,903 9,422
Impact of USF reform on LEGACY Support Reforms for Existing Federal Support Programs
USF REFORM AND THE LONG RANGE IMPACT ON ILEC REVENUE Overview of Legacy Support Items to Consider: Rate of Return Reduction Negative Impact of Budget Constraints Other Reforms Impacting Legacy Carriers Competitive Overlap Operating Expense Caps Capital Investment Allowances Buildout Obligations
OVERVIEW OF LEGACY SUPPORT Carriers on Legacy Support continue to receive federal USF based on embedded cost Federal USF Mechanisms Connect America Fund Broadband Loop Support (CAF-BLS) High Cost Loop Support (HCLS) Connect America Fund Intercarrier Compensation (CAF-ICC) Support Both Legacy and A-CAM electors receive CAF-ICC
CAF-BLS Reimburses legacy carriers for projected investments and expenses to be incurred Has Two Components: One component is what was formerly known as Interstate Common Line Support (ICLS) Based upon each company s historical or embedded, interstate loop costs and allows legacy carriers to recover their interstate common line revenue requirement and still allow the flat-rated, per-line monthly subscriber line charge or SLC to remain affordable to customers. Second component provides support for standalone broadband, also known as Consumer Broadband-Only Loop (CBOL)
CAF-BLS CBOL SUPPORT March 30, 2016 Order created new support mechanism for standalone broadband (consumer broadband-only loops or CBOL) CAF-BLS equals Now add (old ICLS) Interstate common line revenue requirement less interstate common line revenues Consumer broadband-only loop (CBOL) revenue requirement less consumer broadband-only loop revenues Assign costs properly to ensure no double recovery FCC to impute a $42 per loop per month consumer broadband-only loop revenue, or the actual per line per month consumer broadband loop revenue requirement (whichever is less) plus additive to account for the Budget Control Mechanism (more about that mechanism to come)
HCLS & CAF-ICC HCLS Reimburses legacy carriers for investments and expenses already incurred. Support is based on their capital expenditures to date (investment rate base) and operating expenses. These investments and expenses are compared to a national average cost per loop (NACPL) and support is provided back to these companies to compensate them for the additional cost needed to provide service to rural and remote areas of the country CAF-ICC Recovery mechanism established in 2012 to account for the loss of access revenues as most of the terminating and transport access charges were phased down to bill-and-keep and for costs associated with switching which had been recovered through a different mechanism. This mechanism is not impacted by the March 30, 2016 Order
RATE OF RETURN REDUCTION July 2016 July 2017 Change occurs in 6 annual steps July 2018 Change affects all rate-of-return interstate services (except for capped switched access rates or CAF-ICC) July 2019 July 2020 July 2021
BUDGET CONTROL MECHANISM Currently, budget for all rate-of-return carriers for federal high cost universal service support is $2.2B FCC has stated that it will conduct a budgetary review in 2017 but so far, this has not occurred. In the March 2016 order, the FCC created automatic controls to keep budget at $2.2B This has had a negative effect on legacy carriers Caps HCLS and CAF-BLS preventing them from fully recovering their costs as intended by these mechanisms The budget control mechanism is calculated every year based on forecasted demand so carriers are not able to predict how much support will be cut The base rate for the CBOL of $42 has an additive to account for the budget control mechanism. In most cases, this additive is significant causing CBOL rates to be unaffordable to consumers (many exceed $100.)
BUDGET CONTROL MECHANISM Reduces CAF-BLS & HCLS to Legacy carriers due to projected payments exceeding annual $2.2B budget for rate-of-return carriers To determine the amount of reduction, FCC takes total budget of $2.2B and subtracts the demand for the upcoming fiscal year for the following mechanisms: A-CAM Model Support Support for carriers in Alaska that have elected frozen model support CAF-ICC Remaining amount becomes the budget for legacy carriers which is divided by the total demand forecast for CAF-BLS and HCLS to develop a budget adjustment factor For instance, for 2017/2018 timeframe, the FCC projects that legacy carriers will be $111M above the $2.2B budget (a 12.4% reduction)
BUDGET CONTROL MECHANISM ILLUSTRATED Calculate Total Demand for FY by Adding: HCLS CAF-BLS CAF-ICC support (varies due in part to 5% reduction each year) ACAM model support (fixed amount for 10 years) Alaska Model (fixed amount for 10 years) = total demand for all rate-of-return high-cost support ($2.35B for example) Calculate Budget Adjustment Factor for FY $2.2B Budget minus projected ACAM, Alaska model and CAF-ICC support to obtain budget for legacy carriers (1.4B for example) Combine the demand forecast for CAF-BLS and HCLS ($1.6B for example) Divide the budget for legacy carriers by the demand forecast to obtain the budget adjustment factor (1.4B/1.6B =.87500)
ELIMINATE SUPPORT IN AREAS SERVED BY QUALIFYING COMPETITOR After a competitive challenge process, the FCC requires legacy carriers to disaggregate support in census blocks determined to be overlapped by one or more competitors which effectively eliminates CAF-BLS support in those areas. Challenge process begins by FCC Wireline Competition Bureau (WCB) publishing a preliminary list of competitors serving specific census blocks based on Form 477 data. Competitor would have to make a filing with the FCC affirming that they offer voice and broadband services (10/1 Mbps) to at least 85% of the residential locations in census blocks Affected Legacy carrier will have opportunity to rebut the competitor assertions WCB will then publish a final list of census blocks served by competitors after they make final determination as to whether competitors assertions are valid WCB to revisit competitive overlap every 7 years
OPERATING EXPENSE LIMITATIONS Corporate Expense Cap Operating Expense Limit Out of 34 Oklahoma Rate of Return ILECs, 4 are currently impacted by Exp Limitation.
OPERATING EXPENSE LIMITATION Applies to the following Expense Accounts: Network Support & General Support Central Office Equipment Information Origination/Termination Cable & Wire Facilities Other Property Plant & Equipment Network Operations Expense Marketing Customer Service Corporate Operations (limited) If Operating Expenses exceed the Operating Expense Limitation, each account will be reduced proportionally to meet the allowable limit Applicable to CAF-BLS and HCLF Not Special Access Access
OPERATING EXPENSE LIMITATION WORKSHEET NECA Worksheet to Calculate OpEX Limit Factor for CAF-BLS & HCLS Purposes for Cost Companies Based on FCC Rate-of-Return USF Reform Order Released March 30, 2016 Enter Study Area Code 120125 Study Area Name ABC TeleCommunication 1. Input data BLS HCLS 1a Locations (Housing Units) 4,134.23 4,134.23 1b Density 264.58 264.58 2. Capped OpEx 2 Maximum Allowable Annual OpEx $ 4,200,478 $ 4,200,478 3. Actual OpEx 3 OpEx Annual Costs $ 4,536,516 $ 4,536,516 4. Impact 4a OpEx Limit Factor 0.92592593 0.92592593 4b Dollar Impact on OpEx $ (336,038) $ (336,038) Housing units used in regression are the most recently available U.S. Census data for each census block in the study area
CAPITAL INVESTMENT ALLOWANCES (CIA) FCC s goal is that support should be used as efficiently as possible to preserve existing service and to advance deployment on broadband services in all areas of the United States
CAPITAL INVESTMENT ALLOWANCES Two separate and distinct components: Annual Allowed Loop Plant Investment (AALPI) Maximum Average Per Location Construction Limit Applies to all carriers remaining on legacy support Applicable to CAF-BLS Voice revenue requirement CBOL revenue requirement Applicable to HCLS Reflected in average schedule formulas Does not apply to Special Access or A-CAM electors
CAPITAL INVESTMENT ALLOWANCES The AALPI is the Loop Plant Investment Allowed During a Calendar Year. Excludes any Loop Investment above the carrier s AALPI limit from CAF- BLS and HCLS In essence, carriers with older, more depreciated plant will have the ability to make greater capital investments eligible for federal high-cost support than carriers with newer, less depreciated plant Maximum Average Per Location Construction Limit. Evaluated on a per project basis Excludes any loop plant investment associated with new construction projects where the average cost of such project per location exceeds the maximum average per location construction project limitation. Also applies to CAF-BLS and HCLS
NEW CONSTRUCTION PROJECT LIMITS ~ PROJECT PER LOCATION LIMITS ~ If the facility passes the location (pedestal) and can serve the location within 10 business days, it would be considered a location served Total Project = $80k Would any of these locations exceed the New Construction Project Limit if the limit was $10k per location? Carriers must document how they are counting locations and be prepared to defend their methodology if audited $9 k $9k $14 k 8 Location $9k s $9k $9k $9k $12 k
BUILDOUT REQUIREMENTS Legacy carriers that reported less than 80% 10/1 Mbps broadband as of Dec. 31, 2015 on their Form 477 have specific, defined buildout obligations These carriers must deploy 10/1 Mbps broadband to a defined number of locations within their service area by the end of a fiveyear period which began Jan. 1, 2017
CALCULATION OF BUILDOUT DUTIES Each carrier is required to target a defined percentage of its five-year forecasted CAF- BLS support to the deployment of broadband service where it is currently lacking 10/1 Mbps. This support is divided by an industry average cost per location to calculate a number of locations to build out to within 5-years The Universal Service Administrative Company (USAC) has made these calculations and provided companies with the number of locations to which they must deploy 10/1 Mbps broadband to at the end of the 5 years
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