Frontier Communications 2011 Annual Report Download - page 24

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
21
Risks Related to Regulation
Changes in federal or state regulations may reduce the switched access charge revenues we receive.
A significant portion of Frontier’s total revenues (approximately $319.0 million, or 6%, in 2011 and
approximately $285.5 million, or 8%, in 2010) are derived from switched access charges paid by other carriers for services
that Frontier legacy operations or the Acquired Business, as the case may be, provides (or provided) in originating and
terminating intrastate and interstate long distance traffic. As a result, Frontier expects a significant portion of the
Company’s revenues will continue to be derived from switched access charges paid by these carriers for services that the
Company will provide in originating and terminating this traffic. The amount of switched access charge revenues that the
Company will receive for these services is regulated by the FCC and state regulatory agencies.
On November 18, 2011, the FCC adopted the USF/ICC Report & Order. Intercarrier Compensation, which is the
payment framework that governs how carriers compensate each other for the exchange of traffic, will transition over a
number of years beginning in mid-2012 to a near zero rate for terminating traffic by 2017. Carriers will be able to recover a
portion of those revenues through end user rates and other replacement support mechanisms. Additionally, the Order
requires VoIP providers to pay interstate terminating interconnection charges and requires all carriers terminating traffic to
provide appropriate call information, thus prohibiting so-called “phantom traffic”. The Order preempts the states with
regard to the regulation of intrastate terminating access rates. The reform of the Universal Service Fund shifts the existing
High-Cost portion of the fund from supporting voice services to supporting broadband deployment in high-cost areas. The
USF/ICC Report & Order has been challenged by certain parties in court and certain parties have also petitioned the FCC to
reconsider various aspects of the Order. Accordingly, although we believe that the USF/ICC Report & Order will provide a
stable regulatory framework to facilitate Frontier’s ongoing focus on the deployment of broadband into its rural markets,
Frontier cannot predict the long-term impact at this time.
The FCC also has an ongoing proceeding considering whether to make changes to its regulatory regime governing
special access services. When and how these proposed changes will be addressed is unknown and, accordingly, Frontier
cannot predict the impact of future changes on the Company’s results of operations.
Certain states also have their own open proceedings to address reform to intrastate access charges and other
intercarrier compensation. In addition, Frontier has been approached by, and/or is involved in formal state proceedings
with, various carriers seeking reductions in intrastate access rates in certain states. Although the FCC has pre-empted state
jurisdiction on certain access charges, many states are still considering moving forward with their proceedings. Frontier
cannot predict when or how these matters will be decided or the effect on the Company’s subsidy or switched access
revenues. However, future reductions in the Company’s subsidy or switched access revenues may directly affect the
Company’s profitability and cash flows as those regulatory revenues do not have an equal level of associated variable
expenses.
We are reliant on support funds provided under federal and state laws.
A significant portion of Frontier’s total revenues (approximately $300.1 million in the aggregate, or 6%, in 2011
and approximately $212.3 million in the aggregate, or 6%, in 2010) are derived from federal and state subsidies for rural
and high cost support, commonly referred to as universal service fund subsidies. The USF/ICC Report & Order changes
how federal subsidies will be calculated and disbursed, with this change being phased in beginning in 2012. These changes
will transition the federal Universal Service High-Cost Fund, which supports voice service in high-cost areas, to the
Connect America Fund (CAF), which will support broadband deployment in unserved and underserved high-cost areas. As
part of this transition, in 2012 price cap carriers will receive the same amount of support from all USF high-cost programs
as in 2011. As part of the 2012 CAF Phase I implementation, the FCC will make available for price cap ILECs an
additional $300 million in interim incremental high cost broadband support for broadband deployment to unserved areas.
The FCC anticipates that it will replace this interim program with a Phase II CAF long-term solution in 2013, though the
interim program may continue if no solution is put in place. Frontier will receive a portion of the $300 million CAF Phase I
interim support, although the extent is not yet known. The USF/ICC Report and Order requires carriers receiving the
interim support to deploy broadband in areas that are currently unserved based on a formula that will expect deployment to
a certain number of new locations. The exact formula is currently under reconsideration at the FCC and the outcome of that
decision is not yet known. Some states where Frontier operates continue to evaluate the manner in which they will
determine state subsidy eligibility.