FairPoint Communications 2004 Annual Report Download - page 70

implemented on a revenue neutral basis (with commensurate increases in other charges and Universal Service Fund support), there is no
assurance that future changes in access charge rates will be implemented on a revenue neutral basis. It is unknown at this time what
additional changes, if any, the Federal Communications Commission may eventually adopt. Furthermore, to the extent our rural local
exchange carriers become subject to competition, such access charges could be paid to competing communications providers rather than to
us. Additionally, the intrastate access charges we receive may be reduced as a result of wireless competition. Regulatory developments of
this type could adversely affect our business, revenue and/or profitability.
 We receive Universal Service Fund revenues to support the high cost
of our operations in rural markets. For the year ended December 31, 2004, approximately 9% of our revenues resulted from the high cost
loop support we received from the Universal Service Fund and was based upon our average cost per loop compared to 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
management believes the national average cost per loop may continue to increase in relation to our average cost per loop and, as a result, the
payments we receive from the Universal Service Fund could decline. This support fluctuates based upon the historical costs of our operating
companies. In addition to the Universal Service Fund high cost loop support, we also receive Universal Service Fund support payments,
which include local switching support, long term support, and interstate common line support that used to be included in our interstate
access charge revenues (the Federal Communications Commission has recently merged long term support into interstate common line
support). If our rural local exchange carriers were unable to receive support from the Universal Service Fund, or if such support was reduced,
many of our rural local exchange carriers would be unable to operate as profitably as they have historically, in the absence of our
implementation 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.
The Telecommunications Act provides that eligible communications carriers, including competitors to rural local exchange carriers, may
obtain the same per line support as the rural local exchange carriers receive if a state commission determines that granting such support to
competitors would be in the public interest. In fact, wireless communications providers in certain of our markets have obtained matching
support payments from the Universal Service Fund, but that has not led to a loss of revenues for our rural local exchange carriers under
existing regulations. Any shift in universal service regulation, however, could have an adverse effect on our business, revenue and/or
profitability.
During the last four years, pursuant to recommendations made by the Multi-Association Group and the Rural Task Force, the Federal
Communications Commission has made certain modifications to the universal service support system that changed the sources of support
and the method for determining the level of support. These changes have been revenue neutral to our operations. It is unclear whether the
changes in methodology will continue to accurately reflect the costs incurred by our rural local exchange carriers, and whether it will provide
for the same amount of Universal Service Fund support that our rural local exchange carriers have received in the past. In addition, several
parties have raised objections to the size of the Universal Service Fund and the types of services eligible for support. A number of issues
regarding the source and amount of contributions to, and eligibility for payments from, the Universal Service Fund are pending and will likely
be addressed by the Federal Communications Commission or Congress in the near future. The outcome of any
67