FairPoint Communications 2004 Annual Report Download - page 17

charge revenues that we receive is based on rates set by federal and state regulatory bodies, and such rates are subject to change at any time.
The Federal Communications Commission regulates the levels of interstate access charges by imposing price caps on larger
incumbent local telephone companies. These price caps can be adjusted based on various formulae, such as inflation and productivity, and
otherwise through regulatory proceedings. Smaller incumbents may elect to base access charges on price caps, but are not required to do so
unless they elected to use price caps in the past or their affiliated incumbent local telephone companies base their access charges on price
caps. Each of our 26 incumbent local telephone subsidiaries elected not to apply the Federal Communications Commission's price caps.
Instead, our subsidiaries employ rate-of-return regulation for their interstate access charges.
The Federal Communications Commission has made, and is continuing to consider, various reforms to the existing rate structure for
charges assessed on long distance carriers for connection to local networks. States often mirror federal rules in establishing intrastate access
charges. In 2001, the Federal Communications Commission adopted an order implementing the beginning phases of the Multi Association
Group plan to reform the access charge system for rural carriers. The Multi Association Group plan is revenue neutral to our operating
companies. Among other things, the Multi Association Group plan reduces access charges and shifts a portion of cost recovery, which
historically has been based on minutes-of-use, to flat-rate, monthly per line charges on end-user customers rather than long distance
carriers. As a result, the aggregate amount of access charges paid by long distance carriers to access providers, such as our rural local
exchange carriers, has decreased and may continue to decrease. In adopting the Multi Association Group plan, the Federal Communications
Commission also determined that rate-of-return carriers will continue to be permitted to set rates based on the authorized rate of return of
11.25%. Additionally, the Federal Communications Commission initiated a rulemaking proceeding to investigate the Multi Association
Group's proposed incentive regulation plan and other means of allowing rate-of-return carriers to increase their efficiency and
competitiveness. The Multi Association Group plan expires in 2006 and will need to be renewed or replaced at such time. In addition, to the
extent our rural local exchange carriers become subject to competition in their own local exchange areas, such access charges could be paid
to competing local exchange carriers rather than to us. Additionally, the access charges we receive may be reduced as a result of competition
by other service providers such as wireless and voice over internet services. Such a circumstance could have a material adverse effect on our
financial condition and results of operations. In addition, the Federal Communications Commission has sought comment on broad policy
changes that could harmonize the rate structure and levels of all forms of intercarrier compensation, and could, as a result, substantially
modify the current forms of carrier-to-carrier payments for interconnected traffic. Furthermore, in the notice of proposed rulemaking on voice
over internet protocol services the Federal Communications Commission adopted in February 2004, the Federal Communications
Commission has sought comment on whether access charges should apply to voice over internet protocol or other internet protocol based
services. It is unknown at this time what additional changes, if any, the Federal Communications Commission may eventually adopt and
the effect of any such changes on our business.
 Our rural local exchange carrier services segment revenue is subject to
regulation including regulation by the Federal Communications Commission and incentive regulation by various state regulatory
commissions. State lawmakers will likely continue to review the statutes governing the level and type of regulation for communications
services. It is expected that over the next few years, legislative and regulatory actions will provide opportunities to restructure rates, introduce
more flexible incentive regulation programs and possibly reduce the overall level of regulation. We expect the election of incentive regulation
plans and the expected reduction in the overall level of regulation to allow us to introduce new services and pricing changes more
expeditiously than in the past. At the same time, however, the implementation of such new programs may also lead to reductions in
intrastate access charges.
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