FairPoint Communications 2004 Annual Report Download - page 21

of increases in charges for other services. Moreover, if we raise prices for services to offset loss of Universal Service Fund payments, the
increased pricing of our services may disadvantage us competitively in the marketplace, resulting in additional potential revenue loss.
Payments from the Universal Service Fund fluctuate based upon our average cost per loop compared with the national average cost per loop.
For example, if the national average cost per loop increases and our operating costs (and average cost per loop) remain constant or decrease,
the payments we receive from the Universal Service Fund would decline. Conversely, if the national average cost per loop decreases and our
operating costs (and average cost per loop) remain constant or increase, the payments we receive from the Universal Service Fund would
increase. Over the past year, the national average cost per loop in relation to our average cost per loop has increased and we believe the
national average cost per loop will likely continue to increase in relation to our average cost per loop. As a result, the payments we receive
from the Universal Service Fund will likely decline.
Universal service rules have been adopted by both the Federal Communications Commission and some state regulatory commissions.
Universal Service Fund funds may be distributed only to carriers that are designated as eligible communications carriers by a state regulatory
commission. All of our rural local exchange carriers have been designated as eligible communications carriers pursuant to the
Telecommunications Act. However, under the Telecommunications Act, competitors could obtain the same support payments as we do if a
state regulatory commission determined that granting such support payments to competitors would be in the public interest.
Two notable regulatory changes enacted by the Federal Communications Commission in the last four years are the adoption, with
certain modifications, of the Rural Task Force proposed framework for rural high-cost universal service support and the implementation of the
beginning phases of the Multi Association Group plan. The Federal Communications Commission's Rural Task Force order modifies the
existing universal service support mechanism for rural local exchange carriers and adopts an interim embedded, or historical, cost
mechanism for a five-year period that provides predictable levels of support to rural carriers. The Federal Communication Commission has
stated its intention to develop a long-term plan based on forward looking costs when the five-year period expires in 2006. The Multi
Association Group plan created a new universal service support mechanism, Interstate Common Line Support, to replace carrier common
line access charges and the recovery of certain costs formerly recovered through traffic sensitive access charges. A recent Federal
Communications Commission order merged long term support into its interstate common line support mechanism without reducing (at
least initially) the aggregate universal service support from the two mechanisms (both of which had been previously transformed from access
charge revenue streams into universal service support mechanisms). As a result of these changes, when a competitor is designated an
eligible communications carrier, it also receives an increased level of Universal Service Fund support equal to the level received by the
incumbent on a per line basis.
The Federal State Joint Board is currently considering recommendations on the question of which carriers can obtain Universal Service
Fund support in a market. The Federal State Joint Board recommended that:
•a set of permissive federal guidelines be developed to ensure that the public interest is served before eligible communications
carriers are designated;
•support be limited to a single connection that provides access to the public telephone network; and
•the basis for providing support be considered and further clarified during the comprehensive review of the Universal Service
Fund to be completed in 2006.
On February 28, 2005, the Federal Communications Commission issued a press release announcing additional requirements for the
designation of competitive Eligible Telecommunications Carriers for
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