FairPoint Communications 2011 Annual Report Download - page 13

Table of Contents
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We believe we own or have the right to use all of the intellectual property that is necessary for the operation of our business as we currently conduct it.
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We are subject to extensive federal, state and local regulation. At the federal level, the FCC generally exercises jurisdiction over facilities and services of
common carriers, such as us, to the extent those facilities are used to provide, originate or terminate interstate or international communications. State regulatory
commissions generally exercise jurisdiction over common carriers’ facilities, services and rates to the extent those facilities are used to provide, originate or
terminate intrastate communications. In addition, pursuant to local competition provisions of the Communications Act, as amended by the 1996 Act, state
and federal regulators share responsibility for implementing and enforcing certain pro-competitive policies. In particular, state regulatory agencies exercise
substantial oversight over the offerings of ILECs to competing carriers of interconnection and non-discriminatory access to certain facilities and services
designated as essential for local competition.
Telecom Group and our Northern New England operations operate under different regulatory regimes in certain respects. For example, concerning
interstate access, all of the Telecom Group regulated interstate services of FairPoint were regulated under a rate-of-return model, while all of the rate-regulated
interstate services provided by the Verizon Northern New England business were regulated under a price cap model. On May 10, 2010, we received FCC
approval to convert our Telecom Group operations in Maine and Vermont to the price cap model. Our Telecom Group operations in Maine and Vermont
converted to price cap regulation on July 1, 2010. 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 a company flexibility to adjust its rates within these limits. In contrast, rate-of-return regulation permits a company to set
rates based upon its allowed costs and projected revenue requirement, including an authorized rate-of-return determined by the FCC. We have obtained
permission to continue to operate our Telecom Group ILECs outside of Maine and Vermont under the rate-of-return or average schedule regime until the FCC
completes its general review of whether to modify or eliminate the “all-or-nothing” rule. Without this permission, the all-or-nothing rule would require that all of
our regulated operations be operated under the price cap model for federal regulatory purposes. In addition, while all of our operations generally are subject to
obligations that apply to all LECs, our non-rural operations are subject to additional requirements concerning interconnection, non-discriminatory network
access for competitive communications providers and other matters, subject to substantial oversight by state regulatory commissions. In addition, the FCC
has ruled that our Northern New England operations must comply with the regulations applicable to the Bell Operating Companies. Our rural and non-rural
operations are also subject to different regimes concerning universal service.
As described in more detail below, the FCC CAF/ICC Order will modify regulation for us beginning January 1, 2012. Effective January 1, 2012, the
FCC has eliminated the rural/non-rural distinction among ILECs and treats ILECs as either price cap or rate-of-return. Under the new rules, effective
January 1, 2012, our ILECs will be treated as price cap companies for CAF purposes, including the Telecom Group rate-of-return companies. The Telecom
Group rate-of-return companies will continue to be treated as rate-of-return for regulation of interstate switched and special access services. In addition, the
FCC has preempted certain state regulation over our ILECs including capping all state originating and terminating switched access charges and reducing state
switched access charges beginning July 1, 2012 in a two year transition to make state switched access charges equal to interstate switched access charges.
Federal Regulation
We are required to comply with the Communications Act which requires, among other things, that telecommunications carriers offer telecommunications
services at just and reasonable rates and on terms and conditions that are not unreasonably discriminatory. The Communications Act, as amended by the
1996 Act, contains requirements intended to promote competition in the provision of local services and to lead to deregulation as markets become more
competitive.
On March 16, 2010, the FCC submitted the NBP to the United States Congress (“Congress”). The NBP is a plan to bring high-speed Internet services
to the entire country, including remote and high-cost areas. In accordance with the NBP, the FCC commenced several rulemakings that concern, among other
things, reforming high-cost and low-income programs to promote universal service, to make those funds more efficient while promoting broadband
communications in areas that otherwise would be unserved and to address changes to interstate access charges and other forms of intercarrier compensation.
As described in
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