FairPoint Communications 2010 Annual Report Download - page 22

Table of Contents
On May 1, 2008, the FCC adopted an interim emergency cap on the amount of high-cost support that competitive ETCs may receive, pending the FCC’s
adoption of comprehensive reform. Such support for each state was capped at the level of support that competitive ETCs were eligible to receive during
March 2008 on an annualized basis. The cap became effective on August 1, 2008 and is expected to constrain growth in the total amount of high-cost support
available to competitive ETCs. The FCC is currently considering other revisions to the distribution mechanisms for Universal Service Fund high-cost
support. The proposals under consideration include using “reverse auctions” to determine recipients of rural high-cost support, using a model to determine the
appropriate level of support in all areas where there is no private sector business case for providing voice and broadband services and accelerating targeted
funding toward broadband deployment in unserved areas. The FCC is also seeking comment on near-term proposals to reduce current high-cost fund
payments. These and other proposed rule changes could reduce our support in the future, reduce the support available to our competitors or provide for new
support, such as for broadband services. We cannot predict what course the FCC will take on universal service distribution reform, but it is possible that the
remedy selected by the FCC could materially affect the amount of universal service funding we will receive. If our rural LECs were unable to receive Universal
Service Fund payments, or if those payments were reduced, many of our rural LECs would be unable to operate as profitably as they have historically in the
absence of the 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.
We receive additional support under the FCC’s rules in the forms of Interstate Access Support (“IAS”) and Interstate Common Line Support (“ICLS”). We
receive IAS support in all three of our federal price cap study areas (Maine, New Hampshire and Vermont). We also continue to receive ICLS support in our
rate-of-return study areas. These forms of support replace revenues previously collected through interstate access charges. The FCC is seeking comment on a
proposal to eliminate IAS and transfer the funding to a “Connect America Fund” for broadband (see below). We have no assurance that either of these support
programs will remain unchanged if the FCC revises its rules governing universal service and intercarrier compensation.
We also benefit indirectly from support to low-income users under the Lifeline and Linkup universal service programs. The FCC has asked the Federal-
State Joint Board for Universal Service to recommend changes to these low-income programs to address, among other things, access to broadband and
eligibility for support. We have no assurance whether we or our competitors will be affected by any such changes.
On February 9, 2011, the FCC released a Notice of Proposed Rulemaking and Further Notice of Proposed Rulemaking In the Matters of Connect America
Fund, A National Broadband Plan for our Future, Establishing Just and Reasonable Rates for Local Exchange Carriers, High-cost Universal Service Support,
Developing a Unified Intercarrier Compensation Regime, Federal-State Board on Universal Service, and Lifeline and Linkup (“NPRM on ICC/USF”). This
NPRM on ICC/USF proposes significant changes to all intercarrier compensation and USF funding for local exchange carriers, such as us. In general, the
NPRM on ICC/USF proposes to retarget existing USF funding to a new program called Connect America Fund (“CAF”), which is designed to increase
availability of broadband services to areas which are currently unserved. It proposes to reduce and/or eliminate intercarrier compensation for voice traffic, in
anticipation of an all Internet Protocol (“IP”) network. Intercarrier compensation includes state and interstate switched access charges and reciprocal
compensation payments for traffic exchanged between LECs. The FCC proposes both short-term and long-term changes and transitions from the current
regime to the new regime. It is not known what changes the FCC will adopt in this proceeding, when the changes will occur, or what impacts this will have on
our business.
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Federal universal service programs are currently funded through a surcharge on interstate and international end-user telecommunications revenues.
Declining long-distance revenues, the popularity of service bundles that include local and long-distance services, and the growth in size of the fund, due
primarily to increased funding to competitive ETCs, all prompted the FCC to consider alternative means for collecting this funding. As an interim step, the
FCC has ordered that providers of certain VoIP services must contribute to federal universal service funding. The FCC also increased the percentage of
revenues subject to federal universal service contribution obligations that wireless providers may use as their methodology for funding universal service. One
alternative under consideration would be to impose surcharges on telephone numbers or network connections instead of carrier revenues. Any further change in
the current assessment mechanism could result in a change in the total contribution that LECs, wireless carriers or others must make and that would be
collected from customers. We cannot predict whether the FCC or Congress will require modification to any of the universal contribution rules, or the ultimate
impact that any such modification might have on us or our customers.
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