www.usac.org

The Universal Service Fund & USAC’s Role in Administration

Craig DavisDirector, High Cost Program

Rural Cellular AssociationMarketing, Finance and Business Conference

September 21, 2006St. Louis, MO

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USF & USAC

The Universal Service Fund (USF) is one fund with four programs

USAC is a not-for-profit corporation selected as the permanent administrator of the federal USF

In 2005, USAC disbursed approximately $6.52 billion in universal service support

USAC administers support programs for:– High cost companies serving remote and rural areas– Low-income consumers – Schools & libraries – Rural health care providers

Through USAC, the USF provides communities across the country with affordable telecommunications services

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All telecommunications companies contribute to the USF based on their interstate and international revenues

USAC collects and disburses these funds to participants in the four support programs

Participants in the Schools and Libraries and Rural Health Care programs apply directly to USAC for support

Rural and non-rural telecommunications companies eligible for High Cost program support submit cost, expense, and other data to USAC to qualify for support

Low-income consumers apply for discounts for local telephone service or installation through their local telephone companies, which are reimbursed by the USF for providing the discounts

How does theUSF Work?

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High Cost Program

The High Cost Program ensures that consumers in rural areas have access to and pay rates for telecommunications services that are reasonably comparable to those services provided and rates paid in urban areas

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High Cost Program

Provides assistance to rural, non-rural, and competitive carriers that are designated as eligible telecommunications carriers (ETCs) by a State (or the FCC)

Without it, consumers in high cost areas would pay significantly more for service due to factors such as dense terrain or sparse population, which raise the cost of building telecommunications networks

High Cost support benefits consumers in all 50 States and territories by providing support to 1,700 service providers

Over $21 billion has been disbursed to companies designated as ETCs since 1998

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High CostComponents

High Cost Loop Support– Support for the "last mile" of connection for rural companies in

service areas where the cost to provide this service exceeds 115% of the national average cost per line

– Safety Net Additive Support• Support above the HCL cap for carriers that make significant

investment in rural infrastructure in years when HCL support is capped

– Safety Valve Support• Additional support, above the HCL cap, that is available to

rural carriers that acquire high cost exchanges and make substantial post-transaction investments to enhance network infrastructure

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High CostComponents

Local Switching Support– Provides interstate assistance and is designed to help carriers

recoup some of the high fixed switching costs of providing service to fewer customers. LSS helps keep rural customers’ rates comparable to rates in more densely populated urban areas

High Cost Model Support– Keeps the cost for telephone service comparable in all areas

(urban and rural) of a state. HCM support is distributed at the wire center level and is targeted to carriers serving wire centers with forward-looking costs that exceed the national benchmark

Interstate Access Support– Helps to offset interstate access charges for price cap

companies

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High CostComponents

Interstate Common Line Support

– Helps to offset interstate access charges and is designed to permit rate-of-return carriers to recover their common line revenue requirement, while ensuring that subscriber line charges (SLCs) remain affordable to customers

– Long Term Support was merged into ICLS, effective July 1, 2004

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High Cost SupportSummary of Key Differences

Support

Components

Capped Disaggregation True-Up

Data Required

Rural v. Non-Rural

Price Cap v.

Rate-of-Return

High Cost Loop

Yes (For ILECs only)

Based on carriers’

disaggregation plans

No Rural only Price cap and

rate-of-return

Local Switching

No Based on carriers’

disaggregation plans

Yes – 12/31

each year

Rural only Mostly

rate-of-return;

few price cap

High Cost Model

No Wire center No Non-rural only

Mostly price cap

Interstate Access

Yes

(targeted cap)

UNE zone No Mostly non-rural;

some rural

Price cap only

Interstate Common Line

No Based on carriers’

disaggregation plans

Yes – 12/31

each year

Mostly rural; few non-rural

Rate-of-return

only

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High Cost ProgramGeneral Eligibility Criteria

In order to receive support, incumbent and competitive carriers must meet certain general eligibility criteria– Must be designated as an ETC by either a state

commission or the FCC, if the state lacks jurisdiction– Must certify that all High Cost support will be used

only for the provision, maintenance, and upgrading of services and facilities eligible for support

• State certifies for HCL, LSS, and HCM, unless the state lacks jurisdiction (in which case the carrier self-certifies) – October 1st of each year

• Carrier self-certifies for IAS and ICLS – June 30th of each year

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High Cost2005 Disbursements by Component

(Unaudited – in thousands)

Total: $3.82 billion

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Low Income Program

The Low Income Program, commonly known as Lifeline and Link Up, provides discounts that make basic, local telephone service affordable to help over 7 million low-income consumers stay connected

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Low IncomeComponents

Low-income consumers apply for discounts for service or installation through their local telephone provider, which are reimbursed from the USF for providing the discounts– Lifeline

• Reduces eligible consumers' monthly charges for basic telephone service

– Link Up• Reduces the cost of initiating new telephone service

– Toll Limitation Service• Allows eligible consumers to subscribe to toll blocking or toll

control at no cost

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2005 Low IncomeDisbursements by Component

(Unaudited – in thousands)

Total: $808.57 million

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Rural Health CareProgram

The Rural Health Care Program provides reduced rates to rural health care providers for telecommunications and Internet services necessary for the provision of health care

Support is available for telecommunications services and monthly Internet access charges used for the provision of health care

Support for telecom services is the difference between rural and urban rates. Internet access services are discounted at 25%

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Rural Health CareCommitments

Funding Year 2006 Commitments: $47 million (projected)

Projected Commitments

A Funding Year runs from July 1 to June 30

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School and LibrariesProgram

The Schools & Libraries Program provides discounts to help schools (K-12) and libraries in every U.S. state and territory receive affordable telecommunications and Internet access

– Priority One Support• Telecommunications Services• Internet Access

– Priority Two Support• Internal Connections• Basic Maintenance of Internal Connections

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Schools & LibrariesCommitments and Disbursements(unaudited – as of July 12, 2006)

Funding Year 2005 Commitments: Over $1.7 billion (to date)

All Funding Year Commitments: Over $17 billion (to date)

A Funding Year runs from July 1 to June 30

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USF ContributionsRevenue Data

All providers of telecommunications are required to contribute to the USF based on their projected collected interstate and international end-user telecommunications revenues, net of projected contributions

Carriers make 5 revenue filings per year with USAC

USAC makes quarterly revenue filings with the FCC

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USF Contributions

Demand Data– USAC files universal service demand data with the

FCC on a quarterly basis– This includes projected demand for all four USF

programs plus USAC’s administrative costs

Contribution Factor– Based on the quarterly carrier revenue and projected

demand data filed by USAC, the FCC calculates the quarterly contribution factor

– USAC bills carriers based on the contribution factor and then disburses support to eligible entities

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USF ContributionsContribution Factor Trend

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Contributors Find guidance on USAC’s Website concerning: Filer ID, Revenue

Reporting, Invoices, and Appeals. http://www.usac.org/fund-administration/contributors/

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Revenue ReportingSchedule of Filings

FCC FormForm Due

DateRevenue Reported

Downward Revision Deadline

499-Q February 1 Projected 2nd Quarter: April - June

45 days from due date

499-A April 1 Historical Prior Year:January - December

1 year from due date(March 31)

499-Q May 1 Projected 3rd Quarter:July - September

45 days from due date

499-Q August 1 Projected 4th Quarter: October - December

45 days from due date

499-Q November 1 Projected 1st Quarter (following year): January - March

45 days from due date

When a form due date falls on a weekend or holiday, the form is due the following business day. The Due Date is the date the form is due to USAC (it is not a postmark date).

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Form 499Telecommunications Reporting Worksheet

Contributions are based on projected collected end-user interstate and international revenues

USAC enters your quarterly projected collected revenue into an FCC-determined contribution calculation using FCC-established contribution and circularity factors to arrive at your monthly obligation

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Contribution Calculation

Projected collected interstate + Projected collected international = Revenue base

Revenue base x FCC Contribution factor = Unadjusted Contribution

Unadjusted Contribution x FCC Circularity factor = Circularity Deduction

Unadjusted Contribution - Circularity Deduction = Total Quarterly Contribution

Total Quarterly Contribution ÷ 3 = Monthly obligation

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Contribution andCirculatory Factors

Established quarterly by the FCC for assessing USF obligations– Estimated Factors: Factors included in the Form 499

instructions that help companies anticipate whether they are likely to be de minimis before the actual factors are available

– Quarterly Contribution Factors: Factors established quarterly by the FCC to indicate the percent of end-user revenue that should be contributed to the fund

– Quarterly Circularity Factors: Factors established quarterly by the FCC to eliminate the circularity of being assessed Universal Service fees on pass-through charges

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De Minimis Exemption

If contribution to USF in any given year is less than $10,000 then not required to submit a contribution for that year

Companies must demonstrate that they are de minimis on both the current 499-A and the current 499-Q to be exempt from billings in that quarter

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Safe HarborInterstate Revenues

You must choose either to report actual revenues or to use the safe harbor for all of your affiliated legal entities. The same method must be used by all of your affiliates

64.9% of interconnected VoIP telecom revenues 37.1% of cellular and broadband PCS telecom

revenues 12% of paging revenues 1% of analog SMR dispatch revenues

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FCC Report and Order and Notice ofProposed Rulemaking - June 27, 2006

Wireless Providers– The FCC increased the safe harbor to 37.1%

of revenue that is subject to the USF contribution factor

– Any wireless telephony provider that uses a traffic study to determine its actual interstate revenues must provide that data in its quarterly FCC Form 499-Q filings with USAC

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Projected CollectedRevenue

Do not subtract international settlement payments from revenue reported

Any charge that is included on a bill in order to recover contributions must be included

Note that federal universal service pass-through charges are considered 100% interstate and should be reported

Federal Subscriber Line Charges are considered 100% interstate and should be included

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Bundled Services

Includes fixed local exchange service with interstate toll service for a single price

Revenues for the whole bundle, except for tariffed subscriber line and PICC charges, should be reported (on Line 404 of the Form 499A)

The portion of revenues associated with interstate and international toll services must be identified

Filers should make a good faith estimate of the amounts of interstate and international revenues from bundled local/toll service if they cannot otherwise determine these amounts from corporate records

Upon request, the methodology must be made available to the FCC and USAC

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IPIA Audits

Improper Payments Information Act (IPIA) Audits– FCC OIG determined that USF disbursements (i.e.,

HC, LI, RHC, S&L) should be included in the FCC’s plan to comply with IPIA

– Audits will review payment processes, identify error rate of improper payments, and make plans to reduce improper payments

– In June 2006, USAC issued RFPs to perform audits on the High Cost, Rural Health Care, and Low Income programs and on USF contributions

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IPIA Audit Objectives

Provide an opinion as to whether USF beneficiaries are in compliance with the FCC’s rules and regulations governing the USF program (and USAC’s implementing procedures)

Detect and deter waste, fraud, and abuse by USF contributors and beneficiaries of the four programs

Identify areas for improvement in the compliance of beneficiaries with applicable law and in the administration of the four programs

Identify improper payments made from the USF related to the selected beneficiaries for the fiscal year under audit

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IPIA Audits

Contributor Revenue – 90– Review of revenue as reported on the 2006 FCC

Form 499-A (1/1/05 - 12/31/05) High Cost – 65

– Payments made from the program (10/1/04 – 9/30/05) Low Income – 60

– Payments made from the program (10/1/04 – 9/30/05) Rural Health Care – 89

– Payments made from the program (10/1/04 – 9/30/05) Schools and Libraries – 157

– Payments made from the program (10/1/04 – 9/30/05)

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Visit us on the web at www.usac.org Call us at 202-776-0200

Craig DavisDirector - High Cost Program

USAC2000 L St., NW, Suite 200Washington, DC 20036

Thank You

For additional information or program data, please contact James Mardis, External Relations, at 202-772-5258 or via email at jmardis@usac.org.