Frontier Communications 2008 Annual Report Download - page 7

The Telecommunications Act of 1996, or the 1996 Act, dramatically changed the telecommunications
industry. The main purpose of the 1996 Act was to open local telecommunications marketplaces to competition.
The 1996 Act preempts state and local laws to the extent that they prevent competition with respect to
communications services. Under the 1996 Act, however, states retain authority to impose requirements on
carriers necessary to preserve universal service, protect public safety and welfare, ensure quality of service and
protect consumers. States are also responsible for mediating and arbitrating interconnection agreements between
competitive local exchange carriers (CLECs) and ILECs if voluntary negotiations fail. In order to create an
environment in which local competition is a practical possibility, the 1996 Act imposes a number of
requirements for access to network facilities and interconnection on all local communications providers.
Incumbent local carriers must interconnect with other carriers, unbundle some of their services at wholesale
rates, permit resale of some of their services, enable collocation of equipment, provide local telephone number
portability and dialing parity, provide access to poles, ducts, conduits and rights-of-way, and complete calls
originated by competing carriers under termination arrangements.
At the federal level and in a number of the states in which we operate, we are subject to price cap or
incentive regulation plans under which prices for regulated services are capped in return for the elimination or
relaxation of earnings oversight. The goal of these plans is to provide incentives to improve efficiencies and
increased pricing flexibility for competitive services while ensuring that customers receive reasonable rates for
basic services. Some of these plans have limited terms and, as they expire, we may need to renegotiate with
various states. These negotiations could impact rates, service quality and/or infrastructure requirements which
could impact our earnings and capital expenditures. In other states in which we operate, we are subject to rate
of return regulation that limits levels of earnings and returns on investments. We continue to advocate our
position for less regulation with various regulatory agencies. In some of our states, we have been successful in
reducing or eliminating price regulation on end-user services under state commission jurisdiction.
For interstate services regulated by the FCC, we have elected a form of incentive regulation known as
“price caps” for most of our operations. In May 2000, the FCC adopted a methodology for regulating the
interstate access rates of price cap companies through May 2005. The program, known as the Coalition for
Affordable Local and Long Distance Services, or CALLS plan, reduced prices for interstate-switched access
services and phased out many of the implicit subsidies in interstate access rates. The CALLS program expired
in 2005 but continues in effect until the FCC takes further action. The FCC may address future changes in
access charges during 2009 and such changes may adversely affect our revenues and profitability.
Another goal of the 1996 Act was to remove implicit subsidies from the rates charged by local
telecommunications companies. The CALLS plan addressed this requirement for interstate services. Some state
legislatures and regulatory agencies are looking to reduce the implicit subsidies in intrastate rates. The most
common subsidies are in access rates that historically have been priced above their costs to allow basic local
rates to be priced below cost. Legislation has been considered in several states to require regulators to eliminate
these subsidies and implement state universal service programs where necessary to maintain reasonable basic
local rates. However, not all the reductions in access charges would be fully offset. We anticipate additional
state legislative and regulatory pressure to lower intrastate access rates.
Some state legislatures and regulators are also examining the provision of telecommunications services to
previously unserved areas. Since many unserved areas are located in rural markets, we could be required to
expend the necessary capital to expand our service territory into some of these areas.
Recent and Potential Regulatory Developments
Wireline and wireless carriers are required to provide local number portability (LNP). LNP is the ability of
customers to switch from a wireline or wireless carrier to another wireline or wireless carrier without changing
telephone numbers. We are 100% LNP capable in our largest markets and over 99% of our exchanges are LNP
capable. We will upgrade the remaining exchanges in response to bona fide requests as required by FCC
regulations.
The FCC and state regulators are currently considering a number of proposals for changing the manner in
which eligibility for federal subsidies is determined as well as the amounts of such subsidies. In May 2008, the
FCC issued an order to cap Competitive Eligible Telecommunications Companies (CETC) receipts from the
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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES