FairPoint Communications 2010 Annual Report Download - page 21

Table of Contents
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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 and, effective July 1, 2010, our Legacy FairPoint operations in Maine 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 allows 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 switched 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 cap, 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.
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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 a 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 average cost per loop increases
and our operating costs and average cost per loop remain constant or decrease, the payments we will receive from the Universal Service Fund will decline.
Based on historical trends, we believe the total high-cost support payments from the Universal Service Fund to our rural operations likely will continue to
decline. Universal Service Support high-cost support revenue accounted for less than 2% of our total revenue in the year ended December 31, 2010.
Universal Service Fund disbursements may be distributed only to carriers that are designated as “eligible telecommunications carriers” (“ETCs”) by a state
regulatory commission. All of our non-rural and rural LECs are designated as ETCs.
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