Earthlink 2014 Annual Report Download - page 22

Table of Contents
Decisions by legislative or regulatory authorities, including the Federal Communications Commission, relieving incumbent carriers of
certain regulatory requirements, and possible further deregulation in the future, may restrict our ability to provide services and may increase
the costs we incur to provide these services.
We rely in significant part on purchasing wholesale services, including special access services, interconnection to exchange traffic with
incumbent and other carriers, and leasing network facilities from AT&T, CenturyLink, Verizon and other incumbent carriers. Over the past
several years, the Federal Communications Commission (“FCC”)
has reduced or eliminated a number of regulations governing the incumbent
carriers' offerings, which has had the effect of reducing these carriers' competition-
related obligations. These FCC actions include removal of
local switching and other network elements from the list of elements that the incumbent carriers must provide on an unbundled basis at TELRIC
cost-
based rates, the grant of broad pricing flexibility to incumbents for their special access services in many areas, and the nationwide
deregulation of certain services including optical carrier transmission and packet-
switched services. If the FCC continues to reduce or eliminate
regulations governing incumbent carriers, and if the incumbent carriers do not continue to permit us to purchase these services from them under
commercial arrangements at reasonable rates, our business could be adversely affected and our cost of providing local service could increase.
This can have a significant adverse impact on our operating results and cash flows.
The incumbent carriers regularly attempt to further reduce their competition-related obligations to non-
incumbent carriers like us. In November
2012, AT&T filed a petition with the FCC requesting that the FCC open a proceeding “to facilitate… the transition”
from technology platforms
such as copper loops to IP-based platforms, which proceeding could have the effect of further reducing the local competition-
related obligations
of the incumbent carriers. The FCC has also established a task force to coordinate its efforts on IP interconnection. Likewise, certain states have
taken steps to address IP interconnection. In addition, certain incumbent LECs have expressed an intention to begin discontinuing DS1 and DS3
special access services or at least certain term plans that provide us with discounts on these services. Under the FCC’
s current rules, this could
eliminate our ability to serve certain customers or increase the cost of doing so.
If the FCC, Congress, state legislatures or state regulatory agencies were to adopt measures further reducing the local competition-
related
obligations of the incumbents or allowing those carriers to increase further the rates we must pay, we could experience additional increases in
operating costs that would negatively affect our operating results and cash flows. In addition, the FCC currently is considering whether and how
to reform its special access rules. We rely to a considerable extent on interstate special access services purchased from the incumbent carriers in
order to connect to our customers. If the FCC adopts rules that do not protect our ability to purchase these services at reasonable prices on non-
discriminatory terms as compared to our competitors, our business could be adversely affected.
If we are unable to interconnect with AT&T, Verizon and other incumbent carriers on acceptable terms, our ability to offer competitively
priced local telephone services will be adversely affected.
To provide local telephone services, we must interconnect with and resell the services of the incumbent carriers to supplement our own network
facilities, pursuant to interconnection agreements between us and the incumbent carriers. We operate under interconnection agreements with
AT&T, CenturyLink, Fairpoint Communications, Frontier Communications, Verizon and Windstream. An interconnection agreement typically
has a term of three years, although the parties may mutually agree to extend or amend such agreements. Federal law requires these carriers to
negotiate the terms of interconnection agreements with us in good faith, but if such negotiations are unsuccessful we may be forced into an
expensive arbitration proceeding before state PUCs, with an uncertain outcome. If we are not able to renegotiate or enter into interconnection
agreements on acceptable terms, or if we are subject to unfavorable arbitration decisions, our cost of doing business could increase and our
ability to compete could be impeded. Moreover, our interconnection agreements and traffic exchange agreements with companies other than
ILECs (such as wireless and VoIP providers and other competitive carriers) are not subject to the statutory arbitration mechanism, making it
potentially more difficult to reach any agreement on terms that we view as acceptable. If we are unable to enter into, maintain, or update
favorable interconnection agreements in our markets, our ability to provide local services on a competitive and profitable basis may be adversely
affected. Any successful effort by the incumbent carriers to deny or substantially limit our access to their network elements or wholesale services
(in commercial agreements or by regulatory petition or otherwise) also would harm our ability to provide local telephone services.
Our operating performance will suffer if we are not offered competitive rates for the access services we need to provide our long distance
services.
We depend on other communications companies to originate and terminate a significant portion of the long distance traffic initiated by our
customers. The FCC regulates the access rates charged by local carriers to interexchange carriers for the origination and termination of long
distance traffic. These access rates make up a significant portion of the cost of providing long distance service. In late 2011, the FCC adopted
policy changes that over time are reducing carriers' terminating access rates. These rules significantly
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