Frontier Communications 2010 Annual Report Download - page 12

services of common carriers, such as our company, to the extent those facilities are used to provide, originate or
terminate interstate or international telecommunications services. State regulatory commissions generally
exercise jurisdiction over common carriers’ facilities and services to the extent those facilities are used to
provide, originate or terminate intrastate telecommunications services. In particular, state regulatory agencies
have substantial oversight over the provision by incumbent telephone companies of interconnection and non-
discriminatory network access to competitive providers. In addition, local governments often regulate the public
rights-of-way necessary to install and operate networks, and may require service providers to obtain licenses or
franchises regulating their use of public rights-of-way. Municipalities and other local government agencies also
may regulate other limited aspects of our business, by requiring us to obtain construction permits and to abide
by building codes.
We believe that competition in our telephone service areas will continue to increase in the future as a
result of the Telecommunications Act of 1996 (the “1996 Act” or the “Telecommunications Act”) and actions
taken by the FCC and state regulatory authorities, and through increased deployment of various types of
technology, although the ultimate form and degree of competition cannot be predicted at this time. Competition
may lead to loss of revenues and profitability as a result of loss of customers; reduced usage of our network by
our customers who may use alternative providers for voice and data services; and reductions in prices for our
services which may be necessary to meet competition.
Under the 1996 Act, state regulatory commissions have jurisdiction to arbitrate and review interconnection
disputes and agreements between ILECs and competitive local exchange carriers, in accordance with rules set
by the FCC. State regulatory commissions also may impose fees on providers of telecommunications services
within their respective states to support state universal service programs. Many of the states we operate in
require prior approvals or notifications for certain acquisitions and transfers of assets, customers, or ownership
of regulated entities.
In connection with their approvals of the Transaction, the FCC and certain state regulatory commissions
specified certain capital expenditure and operating requirements for our business for specified periods of time
post-closing. These requirements focus primarily on certain capital investment commitments to expand
broadband availability to at least 85% of the households throughout the acquired Territories with minimum
speeds of 3 megabits per second (Mbps) by the end of 2013 and 4 Mbps by the end of 2015. To satisfy all or
part of certain capital investment commitments to three state regulatory commissions, we placed an aggregate
amount of $115.0 million in cash into escrow accounts and obtained a letter of credit for $190.0 million.
Another $72.4 million of cash in an escrow account, with an associated liability was acquired in connection
with the Transaction to be used for service quality initiatives in the state of West Virginia. As of December 31,
2010, we had a restricted cash balance in these escrow accounts in the aggregate amount of $187.5 million, in
addition to the $190.0 million letter of credit. The aggregate amounts of these escrow accounts and the letter of
credit will decrease over time as we incur the defined capital expenditures in the respective states.
In addition, in certain states, we are subject to operating restrictions such as rate caps (including
maintenance of existing rates on residential and business products and wholesale prices and terms of
interconnection agreements with competitive local exchange carriers and arrangements with carriers that, in
each case, existed as of the time of the Transaction), continuation of product bundle offerings that we offered
before the Transaction, and restrictions on how early termination fees are calculated, restrictions on caps on
usage of broadband capacity, and certain minimum service quality standards for a defined period of time (the
failure of which to meet may result in penalties, including, in one state, cash management limitations on certain
of our subsidiaries in that one state). In one other state, our subsidiaries are subject to restrictions on the
amount of dividends up to the parent company for a period of approximately four years. We are also required
to report certain financial information and adhere for a period of time to certain conditions regulating
competition and consumer protection. Although most of these requirements are generally consistent with our
business plans, they may restrict our flexibility in operating our business during the specified periods, including
our ability to raise rates in a declining revenue environment and to manage cash transfers from our subsidiaries
in two states if we do not meet certain operating service criteria.
Some legislation and regulations are, or could in the future be, the subject of judicial proceedings,
legislative hearings and administrative proposals or challenges which could change the manner in which the
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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES