The Telecom Industry: Landscape, Trends, Regulatory Considerations

1. The Telecom Industry: Landscape, Trends, Regulatory Considerations Mid-America Regulatory Conference 2010 Kansas City, Missouri June 9, 2010 Tom Gerke Executive Vice Chairman CenturyLink

2. Reality Check Americans have a voracious appetite for broadband Wireless data usage is exploding (smartphones); 230 million wireless users in the US Wireless data growth pressuring wireless AND wireline networks Industry consolidation in the rural sector (Fairpoint, Frontier, CenturyLink) Higher competition in high-population density low-cost areas Lower competition in low-population density high-cost areas Traditional implicit subsidy for high-cost areas largely eroded Payment for use of the network at risk Technology out-pacing present regulations 2

3. Federal activity casting doubt on future role and timing Lack of consistency regarding telecom regulation Legislatures increasingly active on telecom reform issues Regulatory parity still not a reality for most ILECs Support for high-cost rural areas increasingly at-risk; “digital divide” The State of the States… Today’s Telecom Environment 3

4. Major Federal Items Under Consideration • National Broadband Plan • Broadband Expansion • Universal Service Reform • Intercarrier Compensation Reform • Broadband Adoption • Network Regulation (“Net Neutrality”; “Third Way”) • Possible Legislative Activity • Privacy Issues • Special Access • Broadband Stimulus Funding

5. Pressure on existing regulated revenues Competitive issues and consumer price tolerance in competitive markets Incumbent carrier of last resort (COLR) obligations Escalating demand for affordable and faster broadband in highest cost markets Long-term view of what the individual states need to achieve their telecommunications goals Changes and the Reality of Rural Economics… While many forces are changing our industry, one thing that hasn’t changed is the cost characteristics of serving rural areas Distance coupled with lack of density are key cost drivers Bringing broadband to remaining rural areas adds additional costs Implications for Universal Service

6. Sweet Springs, Missouri Investment OverviewDistance and Density Drive Costs Wire Center Total Lines Served 1,077 122 sq. mi. Investment per Line $6,610 City Center Lines Served 138 per sq. mi. Investment per Line $2,650 Outside City Center Lines Served 2.4 per sq. mi. Investment per Line $17,960

7. Pitfalls to Avoid ABNORMALLY HIGHER CONSUMER COSTS: Disproportionate monthly service rates that may force many citizens in rural areas either off the network or push broadband services out of their reach. EMPLOYMENT IMPACTS: Stymied economic development efforts that are dependent on new and expanding telecommunications services and may result in job losses in the sector. PRESSURE ON BROADBAND INVESTMENT: Rural telecom providers are working to bring broadband service – and the economic stimulus that goes with it – across their service areas. Inadequate network reimbursements by carriers that still use our network will hamper this investment.

8. Baseline Principles for Success Successful Reform = Good Outcomes for All Stakeholders In considering Reform Policy, several key components should be included: • A long-term view of desired telecommunications outcomes • A balanced, transitional approach that allows consumers and providers to adjust to an evolving telecom environment • Retail rates that do not create rate shock or exceed competitive levels • Funding mechanisms that supports high cost areas and help to bridge critical transitions • Incentives to reduce arbitrage and phantom traffic • Reasonable carrier rate levels that are sufficient to create a balanced, overall revenue structure • Infrastructure investment that supports policy objectives Key Goals: Create a clarified and predictable approach that: Benefits consumers; Attracts private investment in support of broadband deployment; and Enables states to achieve long-term telecommunications objectives for public safety, telemedicine, COLR and education.