Public Utility Law Section

1. Public Utility Law Section Annual Meeting & Seminar Universal Service August 3, 2012 AT&T Conference Center Austin, Texas Joe Cosgrove, Jr., AT&T

2. Table of Contents – Universal Service • Origin of Universal Service 3 • Communications Act of 1934 4 • Telecommunications Act of 1996 5 • FCC Connect America Fund 7 • Texas Universal Service - PURA 8 • TUSF Program Funding 10 • SB 980 and USF 11 • HB 2603 and USF 12 • Texas Commission USF Proceedings 14 • Large Company High Cost Proceedings – 39937/40521 16 • AT&T and Texas USF 17

3. Origin of Universal Service • What is Universal Service? • 1907 – Bell System’s Answer to Competition • Theodore Vail’s vision – national interconnected network • “One System, One Policy, Universal Service” • Originally meant: single provider offering single network to all customers • Evolved to mean: provision of “basic local services” to all customers at “affordable price” supported by implicit subsidies

4. Communications Act of 1934 • “For the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all the people of the United States, without discrimination on the basis of race, color, religion, national origin, or sex, a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges …” 47 USC 151 • But did not set out any mechanisms how to implement/subsidize • States were first to develop ideas on subsidies

5. Telecommunications Act of 1996 • The goals of Universal Service, as mandated by the 1996 Federal Act, are to: • Promote the availability of quality services at just, reasonable and affordable rates for all consumers • Increase nationwide access to advanced telecommunications services • Advance the availability of such services to all consumers, including those in low income, rural, insular, and high cost areas at rates that are reasonably comparable to those charged in urban areas • Increase access to telecommunications and advanced services in schools, libraries and rural health care facilities • Provide equitable and non-discriminatory contributions from all providers of telecommunications services to the fund supporting universal service programs

6. Telecommunications Act of 1996 (cont.) • FCC has authority to change the definition of universal service as “evolving” concept • States are not preempted and may enact rules to preserve and promote universal service if rules not in conflict with FCC rules • The Federal Universal Service Fund, also supported by communications providers with ability to pass-through/collect from their customers, complements the Texas Universal Service Fund

7. FCC Connect America Fund (CAF): Universal Service Reform • Ultimately replaces all existing high-cost support mechanisms • Objective: make broadband available to homes, businesses, and community anchor institutions in areas that do not or would not otherwise have broadband, including mobile voice and broadband in high-cost areas • All eligible telecommunications carriers (ETCs) must offer voice (the supported service) and broadband service • Adopts support for broadband-capable networks as express universal service principle • Serves as Access Replacement Mechanism for Intercarrier Compensation reform • Begins step-down approach for implementing interstate switched access rate parity with intrastate • CAF budget: $4.5B/year for next 6 years ≈ FY2011 levels

8. Texas Universal Service - PURA • In 1987, the Texas Legislature established a Universal Service Funding mechanism, which has changed over time through amendments …. The current Texas rules concerning universal service complement the federal universal service rules • The Texas Universal Service Fund (TUSF) is currently financed by a charge of 4.3% of all taxable telecommunications receipts of Texas’ telecommunications providers (both wireline and wireless). Telecommunications providers are allowed to pass the costs of the TUSF assessment through to residential and business customers on their monthly bills

9. Texas Universal Service – PURA (cont.) • Currently, the TUSF supports several programs including: the Relay Texas and Specialized Telecommunications Assistance Programs, the Tel-Assistance, Lifeline and Link Up programs, and the Small and Rural Local Exchange Carriers Universal Service Fund, and the Texas High-Cost Universal Service Plan

10. TUSF Program Funding– 2012 • Majority of TUSF funding supports the large ($246M) and small company ($103M) high-cost programs. • TUSF also supports Social Service programs ($76M) to assist people with disabilities and/or low incomes. • These programs include Lifeline, TRS, STAP and audio newspaper assistance. *PUC projection as of October 2011

11. SB 980 and USF • In 2011, SB 980 provided that an incumbent local exchange carrier (ILEC) may not receive USF support for a deregulated market that has a population of at least 30,000 population but may receive USF support for a deregulated market that has a population less than 30,000 only if the company establishes to the PUC that it needs the support to provide basic service at reasonable rates; and, • the PUC is required to initiate one or more proceedings to review the Texas USF, determine whether changes are needed to achieve the purposes of Chapter 56, implement any changes it determines are necessary and in the public interest, complete the proceeding(s) no later than November 1, 2012, and provide the PUC findings and any order(s) to the legislature

12. HB 2603 and USF • On the written request of a small or rural incumbent local exchange company that receives monthly per line support amounts, the commission shall disburse funds to the company in fixed monthly amounts based on the company’s annualized amount of recovery for the calendar year ending on December 31, 2010. A company may submit only one request on or before December 31, 2011 • On the written request of a small or rural incumbent local exchange company that is not an electing company under Chapter 58 or 59, the commission annually shall set the company’s monthly support amounts for the following 12 months by dividing by the annualized support amount

13. HB 2603 and USF (cont.) • Commission shall calculate the annualized amount for the initial 12-month period for which company makes an election under this subsection, by: • determining the annualized support amount calculated for the requestor in the final order issued by the commission in Docket No. 18516; • adjusting the support amount determined at the beginning of each calendar year by a factor equal to the most recent consumer price index published at that time, beginning with the 1999 calendar year and ending in the year the company makes an election under this subsection; and • for the 12-month period following the initial period for which a company made an election under this subsection and for subsequent 12-month periods, by adjusting the most recent annualized support amount calculated by the commission by a factor equal to the percentage change in the consumer price index for the most recent 12-month period • This section and any monthly support amount approved under this section expire on September 1, 2013

14. Texas Commission USF Proceedings • 39717 - VoIP Rulemaking • PUC Rulemaking to determine whether TUSF assessments should be applied to VoIP services • 39936 - Report to the Legislature evaluating USF • PUC Report to the Legislature on its review and evaluation of the overall Texas Universal Service Fund and its programs • 39937 - Large Company High Cost Support Rulemaking • PUC rulemaking to address the extension, funding and disbursement of the Texas High Cost Universal Service Plan (Large ILECs) • 40521 – “Reasonable Rate” relating to High Cost Fund • Purpose to determine a reasonable rate for basic service and amount of revenue that would result if charged this rate. This amount will be used to calculate reductions for ILEC support.

15. Texas Commission USF Proceedings (cont.) • 39938 - Small Company High-Cost Support Rulemaking • PUC rulemaking to determine the extension, funding and disbursement of the Texas High Cost Universal Service Plan (Small ILECs) • 39939 - Transparency/Accountability Rulemaking • PUC rulemaking to ensure reasonable procedures are in place regarding the transparency and accountability in the administration of the TUSF • 40153- “Cap” Project • PUC analysis regarding the feasibility of implementing a cap on TUSF assessment/disbursements • 40342 - THCUSP Rulemaking • Proposed plan by Commissioner Pablos to review TUSF high-cost programs for year 2014 and beyond, determine whether to establish new criteria to qualify for continued high cost support

16. 39937 - Large Company High-Cost Rulemaking;40521 – Reasonable Rate for Basic Local Service • At the June 13 Open Meeting the Commission adopted amendments to the high cost rule which would phase down Texas High Cost Universal Service Plan (“THCUSP”) support over four years balanced by allowable increased prices for basic residential phone service. The reductions each year will be 25% of the overall reduction as determined by the difference between current local service rates and a new higher “reasonable rate” for basic local service in the regulated exchanges to help offset the THCUSP reductions • Staff issued a Petition to initiate the "reasonable rate" case on July 9 • On July 19, LECs planning to participate in the total high cost fund reduction plan must filed their election • Interested parties filed their initial proposals (both proposed rate and methodology, intervention deadline) on July 23 • August 20, deadline to submit notice of settlement or request a hearing

17. AT&T’s THCUSP support is a fraction of what it was in recent years2001 – 2012: Actual 2013 – 2016: Projected under new rule • Since 2001, AT&T has reduced its annual support by $155M, or 82% • Under the new rule (Docket 39937) AT&T is projecting to be out of the TUSF. 2013 - $21.6M 2014 - $14.4M 2015 - $ 7.2M 2016 - $ 0M 2009 – 2012 Per Settlement

18. ‘YIELD THE FLOOR” • QUESTIONS?