FairPoint Communications 2009 Annual Report Download - page 29

Table of Contents
Interstate Access Charges
Our local exchange subsidiaries receive compensation from long-distance telecommunications providers for the use of their network to originate
and terminate interstate inter-exchange traffic. With respect to interstate traffic, the FCC regulates the prices we may charge for this purpose, referred to
as access charges, as a combination of flat monthly charges paid by end-users, usage-sensitive charges paid by long-distance carriers, and recurring
monthly charges for use of dedicated facilities paid by long-distance carriers. The amount of access charge revenue that we will receive is subject to
change.
Our ILEC operations in Maine, New Hampshire and Vermont are subject to price cap regulation of access charges. Under price cap regulation,
limits are imposed on a company's interstate rates without regard to its costs or revenue requirements. These limits are adjusted annually based on FCC-
specified formulae, such as for inflation, as well as through occasional regulatory proceedings, but will generally give us flexibility to adjust our rates
within these limits. In contrast, our rural operations are subject to interstate rate of return regulation, permitting us to set rates for those operations based
upon our allowed costs and projected revenue requirement, including an authorized rate of return of 11.25%. In an order dated January 25, 2008, the
FCC granted our request for a waiver of the "all or nothing" rule, which will allow us to continue to operate under both of these regimes until the FCC
completes its general review of whether to modify or eliminate the all or nothing rule, or makes other comprehensive changes to its access charge rules.
The FCC has made various reforms to the existing rate structure for access charges, which, combined with the development of competition, have
generally caused the aggregate amount of access charges paid by long-distance carriers to decrease over time. Other reform proposals are now pending,
and additional reforms were recommended in the NBP. These proposals could require ILECs to convert all rate-of-return operations to price caps, or to
restructure, reduce, or eliminate access charges and recover the lost revenue through end-user charges or Universal Service Support. The FCC has also
sought comment on whether access charges should apply to VoIP or other IP-based service providers. The FCC also is considering whether to restrict
some of the pricing flexibility enjoyed by price cap ILECs, which includes some of our Northern New England operations. We cannot predict what
changes, if any, the FCC may eventually adopt and the effect that any of these changes may have on our business.
Universal Service Support
Current FCC rules provide different methodologies for the determination of universal service payments to rural and non-rural carriers. In general,
the rules provide high-cost support to rural carriers where the company's actual costs exceed a nationwide benchmark level. High-cost support for non-
rural carriers, on the other hand, is determined by nationwide cost proxy model. Under the current FCC rules, our non-rural operations receive support
under the non-rural model methodology in Maine and Vermont. The FCC's current rules for support to high-cost areas served by non-rural LECs were
remanded by the U.S. Court of Appeals for the Tenth Circuit, which had found that the FCC had not adequately justified these rules. In 2010, in
response to the Tenth Circuit remand, the FCC issued an order which justified its prior conclusion. The FCC is also considering proposals to update the
proxy model upon which non-rural high-cost funding is determined, as well as other possible reforms to the high-cost support mechanisms for rural
and non-rural carriers, including redirecting the fund over time to support broadband communications in areas that otherwise would be unserved.
The high-cost support payments that are received from the Universal Service Fund are intended to support our operations in rural and high cost
markets. Under current FCC regulations, the total Universal Service Fund support available for high-cost loops operated by rural carriers is subject to a
cap. The FCC prescribes the "national average cost per loop" each year to keep the total available funding within the cap. Payments from the Universal
Service Fund will fluctuate based upon our average cost per loop compared with the national average cost per loop. For example, if the national
25