FairPoint Communications 2005 Annual Report Download - page 29

Service Fund support), there is no assurance that future changes in access charge rates will be implemented on a revenue neutral basis. 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 access charges we receive may be reduced as a result of wireless competition. Finally, the Federal Communications Commission is
currently weighing several proposals to comprehensively reform the intercarrier compensation regime in order to create a uniform system of intercarrier
payments. Any such proposal eventually adopted by the Federal Communications Commission will likely involve significant changes in the access charge
system and could potentially result in a significant decrease or elimination of access charges altogether. Decreases or losses of access charges may or may not
result in offsetting increases in local, subscriber line or Universal Service Fund revenues. 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, 2005, approximately 8% 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. This revenue stream fluctuates 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. The national average cost per loop in relation to our average cost per loop has increased and we believe that 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 have declined and will likely continue to 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 other 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 of 1996, or 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
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