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					   WHERE ARE WE?
HOW DID WE GET HERE?
 WHERE ARE WE GOING?
                       Slide 1
    WHERE ARE WE? HOW
      DID WE GET HERE?
   WHERE ARE WE GOING?

NARUC Telecommunications Education
Session
July 15, 2007
                                                                Overview
2:00     Introduction. Hon. Tony Clark, North Dakota, NARUC
         Telecommunications Committee Chair and Savant

2:10     How to Tell the POTS from the PANS? Dr. Douglas Sicker,
         University of Colorado

3:10:    A Brief History of the Universe (of U.S. Telecommunications
         Policy), Bob Rowe (formerly honorable)

4:15     “Now What Do We Do?” Discussion facilitated by
         telecommunications celebrities

       ETCs and Capital Hill activity. Hon. Phil Jones, Washington State
       USF and Intercarrier Compensation. Hon. Ray Baum, Oregon
       Special access. Hon. John Burke, Vermont
       Video franchising. Hon. Daryl Bassett, Arkansas

5:00     Wrap Up. Hon. Tony Clark


                                                                            Slide 3
                    NARUC
         Telecommunications
        Law & Policy Primer
                     July 2007
Bob Rowe
Senior Partner
Balhoff & Rowe
                                   Overview
 Introduction
 Early History
 Communications Act of 1934 to MFJ
 MFJ to the 1996 Act
 The Act and its Implementation
 Recent Developments and Policy Issues
 Roles and Challenges for State Regulation



                                         Slide 5
Introduction
                                   Some Candidate Themes
   Interplay of anti-trust (ex post) and economic regulation
    (ex ante)
   Monopoly – competition continuum
   Jurisdictional tensions and resolutions
       Approaches to federalism
       Commerce clause
   Litigiousness
       ―Lawyers behaving badly‖?
   Universal service
       Consistent goals over time, pursued through varying/evolving
        means
   Investment and deployment concerns
   Disruptive effects of technology and economic models on
    then-current regulatory regimes
   Different approaches to and assumptions about
    consumer desires and consumer protections
                                                                       Slide 7
                                                                        Level
                                      Retail Rates                      International
 “The policy                       *Rate base/Rate of                   National
                                                                        Regional
 pyramid”                               Return
                                                                        State
                                   *AFORs *Price cap
                                                                        Local
Form                                                             Forum
•Contested case                       Customer
                                                                 •Legislature
•Tariff                           Customer education
                                                                 •Agency
•Rulemaking                       Consumer protection
                                                                 •Court
•ADR                              Retail service quality
                                                                 •Standards body
•Auctions                         Universal Service              •Private dispute
•Collaboration              Customer support – Low Income        resolution
•Contract                    Loop support – High Cost Fund
•Implicit consensus   E911 * Schools & libraries * Rural health care

                                        Wholesale
                   *Rates *Terms *Numbering/LNP *Service quality
            *Interconnection/unbundling *Structural/non-structural safeguards
   General consumer law*Securities* Uniform Commercial Code*General contract law*
              Bankruptcy*Anti-trust *Common law (torts/common carriage)

                             State of nature – Hobbes v. Rousseau                   Slide 8
Stages, Policy and Financial Perspectives




                                      Slide 9
Early History
                                     Early History
   Mann-Elkins Act of 1910
        Gave interstate jurisdiction to the Interstate
         Commerce Commission
        Treated Telcos as ―common carriers‖

     Early   goal was to promote ―universal service‖
        The term was created by AT&T CEO Theodore
         Vail in the early 1900s
        AT&T’s slogan in 1908: ―One Policy, One System,
         Universal Service‖
        A telephone within an arm’s reach of a chicken
         every pot!

                                                          Slide 11
                                  US v. AT&T – Round I
   The Rise of AT&T
     Through    business savvy, it developed a robust long
      distance network, providing the inter-city connection
      for locally owned telcos
     AT&T would only interconnect its long distance
      network with that of local telcos owned by it
     The US sued to block AT&T’s purchase of a regional
      long distance company in Oregon in 1913, arguing
      anti-trust type issues
     AT&T responded with the ―Kingsbury Commitment,‖
      a letter from AT&T’s VP Nathan Kingsbury to the US
      which ultimately led to a consent decree that
      required AT&T to do the following
          AT&T required to divest Western Union
          AT&T had to provide interconnection to independent phone
           companies
          AT&T had to stay-out of the ―radio‖ business
                                                                Slide 12
                                       The Early Years
   Willis-Graham Act of 1921
          Allowed AT&T to flourish, watering-down many of
           the Kingsbury Commitment’s requirements
 AT&T continued its dominance in the local
  and long distance markets
 Small cooperatives and locally-owned local
  telcos began appearing throughout the
  country


                                                       Slide 13
                               Rates & Implicit Subsidies
   State regulation of telcos
      State regulation began as early as 1907 in Wisconsin and New
        York
      Focused on local rate setting utilizing the ―rate of return‖
        methodology
   Most states regulate carriers as either ―price cap‖ or ―rate of return‖
      Price Cap = inflation index – productivity offset =/- exogenous
        factors
      Rate of Return: Revenue requirement = rate base x RoR +
        Expenses
   BOCs are Price Cap at the federal level
   Most rural telephone companies are ―rate of return‖ carriers
      Approximately 1,300 ILECs
     Universal Service
   Many rural ILECs are cooperatives, outside of state commission
    jurisdiction

                                                                      Slide 14
                             Rural and Urban Areas




                                             Source: Department of Agriculture


   Approximately 1,300 incumbent local telephone
    companies in U.S.
     RBOCs   serve majority of rural copper lines
     ―Rural‖ ILECs serve most of remainder
                                                                          Slide 15
                      Rate & Implicit Subsidies
Early regulation allowed for the creation of subsidies
  between different classes of customers to help create
  ubiquitous and affordable service
 Rates for business customers were generally higher to
  help keep rates for residential customers lower, often
  below the cost of providing the service
 Intrastate long distance toll and intrastate ―access
  charges‖ were higher than cost and higher than
  interstate rates
 Later, vertical services became a subsidy source– e.g.
  Caller ID, last call return, call-blocking, etc.


                                                    Slide 16
                                     Rates & Implicit Subsidies
   Rate setting required apportionment of a telco’s costs
    between intrastate and interstate spheres
       In 1930, the US Supreme Court ruled that costs of interstate and
        intrastate telecommunications plant had to be separated to
        determine the adequacy of interstate and intrastate rates Smith
        v. Illinois , 282 U.S. 133 (1930)
            --e.g. some fraction of a local telephone companies costs had to be
             allocated to state with the remainder allocated to interstate
             jurisdiction
       Separations requirement recognized in Section 221 of the
        Communications Act of 1934
            Separations essentially requires two sets of books for a single asset
            Telcos have ―traffic sensitive‖ costs and ―non traffic sensitive‖ costs
                  Traffic sensitive costs are recovered by metered or per minute of use
                   charges (e.g. per minute long distance toll rates)
                  Non-traffic sensitive costs may be recovered through flat-rated charges
                   (e.g. flat monthly charges for basic local phone service)
       In 1947, NARUC and the FCC developed a ―Separations Manual‖
        which assigned ―non-traffic sensitive‖ costs to either state or
        federal state rate bases
                                                                                     Slide 17
                       Rates & Implicit Subsidies
   Federal-State Joint Board on Separations
    established pursuant to the Communications Act
    of 1934 to determine how costs are allocated
    between federal and state jurisdiction
   In 2001, the FCC adopted a 5-year freeze of
    jurisdictional separations at then current levels
     In2006, FCC released an order extending the freeze
      and seeking comment on the future of separations
   FCC and Joint Board currently examining the role
    of jurisdictional separations in a technologically
    evolving telecom market

                                                      Slide 18
                                                 Monopoly Model of Support
                                                           Policymakers regulate carriers to ensure policy-
                                                            based ubiquitous/affordable services in exchange
           Urban               Vertical                     for economic viability of entire enterprise
                                                           Historically, residential and high-cost rural
 Long                                                       consumers benefited from a system of
Distance                                   Business         enterprise-based internal cross-subsidies
                                                              Support included in access and long distance
                                                              Geographic rate averaging

Local                                                         Value-of-service pricing
                                          Residential         Residual pricing of value added/‖vertical‖
                                                                 services
           Rural                Basic                         Rate differentials unrelated to cost
                                                                 differences
                                                           System began to fail when certain sources (lines
                                                            of business) of internal cross-subsidies became
                                                            competitive
           Consolidated monopoly telecom
                                                              LD from approximately 1970
           Lines of business
                                                              Business in the 1990s/2000s
                                                              Residential with VoIP in 2000s

                                                                                                    Slide 19
Communications Act of
        1934 to MFJ
             The Communications Act of 1934
   Communications Act of 1934
     Established the ―Federal Communications
      Commission‖ as the regulator that replaced
      the ―Interstate Commerce Commission‖
     Telecom regulation seen as government
      controlled monopoly
     ―Common carriers‖ must provide service at
      ―just and reasonable‖ prices



                                                   Slide 21
                                   US v. AT&T – Round 2
   US filed a second anti-trust action against Bell in 1949
    (the first resulted in the ―Kingsbury Commitment‖ of
    1914)
   The basis of the suit was Bell’s monopolization of
    customer premises equipment
   Result was a 1956 Consent Decree (referred to as the
    ―Final Judgment‖) that required AT&T to do the
    following:
       Divest its equipment manufacturing arm, Western Electric
       Cancel its exclusive dealings contracts with Western Union
        required to acquire its equipment via competitive bidding
       AT&T would retain Bell Labs but would be required to license its
        patents on a nondiscriminatory and reasonable royalty basis



                                                                    Slide 22
                         Beginnings of Competition
   The FCC’s Carterfone Decision, 15 FCC2nd 605
    (1968), allowed non-monopoly (non-AT&T)
    equipment attachments for private company
    networks
     The beginnings of un-regulated customer premises
      equipment (―CPE‖)
   The FCC approved Microwave Communication,
    Inc.’s, application to operate a long-distance
    telephone system between Chicago and St. Louis,
    18 FCC 2nd 953 (1969)
     MCI   a ―law firm with an antenna‖


                                                     Slide 23
                       Beginnings of Competition
   MCI decision resulted in a flood of applications
    from MCI-affiliated companies and others
    seeking designation as ―specialized common
    carriers‖
   The FCC concluded that the entry of such
    ―specialized common carriers‖ into the market
    would serve the public interest, indicating a pro-
    competition policy Establishment of Policies and
    Procedures for Consideration of Application to
    Provide Specialized Common Carrier Services in
    the Domestic Point-to-Point Mircrowave Radio
    Service, First Report and Order, 29 FCC 2nd 870
    (1971)
                                                   Slide 24
                   Beginnings of Competition
 In 1973, the Bell companies filed tariffs in
  each state in which MCI sought
  interconnection to its local networks
 The FCC ultimately determined that such
  interconnection of local facilities to its long
  distance network was a matter of
  interstate jurisdiction
 Bell Companies subsequently filed these
  same ―private line‖ tariffs with the FCC


                                              Slide 25
                        MCI and Sprint v. AT&T
 MCI and others, including Southern Pacific
  Communications, Co. (later renamed
  Sprint) began filing anti-trust and
  predatory pricing lawsuits against the Bell
  System in the mid-1970s
 Competitors arguments were based on the
  ―essential facilities doctrine‖
     AT&T   was misusing its power over its local
     affiliates to have preferential interconnection
     to local networks

                                                  Slide 26
                            MCI and Sprint v. AT&T
   In 1974, MCI won a $1.8 billion jury verdict (at
    the time, the largest jury verdict in US history)
    against the Bell Companies for predatory pricing
    of inter-city access services
     The jury award was later reduced to $113 million
     MCI was entitled to interconnect for the full array of
      services
     See MCI v. AT&T, 708 F.2d 1081
   Southern Pacific Communications (later Sprint)
    also sued the Bell Companies on anti-trust issues
    but with only limited success


                                                          Slide 27
MFJ to the 1996 Act
                              US v. AT&T – Round 3
   In 1974, the US Justice Department filed its own
    anti-trust suit against the Bell Companies
    alleging Sherman Act violations
   DOJ alleged Bell was stifling competition in the
    long distance market with a two-pronged
    approach
     Discriminatory   interconnection and exchange access
      policies
     Predatory pricing subsidized by regulated local
      exchange revenues


                                                        Slide 29
                                   US v. AT&T – Round 3
   Discovery in the governments case lasted nearly
    six years
   The trial started on January 15, 1981, with the
    Honorable Harold Green of the Federal District of
    the District of Columbia presiding
   Bell argued all of its actions had been sanctioned
    by the FCC and state regulators
   After a year at trial, the parties entered into a
    consent decree that contained four general
    principles
       AT&T had to divest its local operating affiliates
       The local affiliates a.k.a the Bell Operating Companies had to
        provide equal interconnection to all long distance providers
       It prohibited the BOCs from providing long distance, information
        service, or customer premises equipment
       Freed AT&T from the conditions of the 1956 decree
                                                                    Slide 30
                                          Breaking up Ma Bell
   Judge Greene made some minor modifications
    to this decree and ultimately entered the
    ―Modified Final Judgment‖ or ―MFJ‖—the legal
    instrument that broke-up the Bell monopoly and
    which is still in effect today
       Judge Greene wrote of the need to break up the Bell System because of
        its ―domination of the telecommunications industry in general.‖
   Judge Greene supervised the implementation of
    the MFJ which included the following
       First, the US was divided into LATAs (Local Access and Transport
        Areas), geographic service areas
       Second, AT&T assets, customers and employees were divided among
        the corresponding LATAs
       On December 31, 1983, the transfer of assets was complete, the BOCs
        were divided into seven separate regional companies, and Ma Bell was
        no more
       AT&T was freed of obligations of previous consent decrees and allowed
        to do whatever it wanted, except acquire any of the seven regional
        BOCs.
                                                                         Slide 31
                             Breaking Up Ma Bell
 The net result of the MFJ created
  competition in the long distance (aka the
  inter-exchange market)
 BOCs still retained a monopoly over the
  local exchange markets
 AT&T was allowed to enter into
  competition with the BOCs, if it chose to
  do so
 BOCs were prohibited from entering the
  long distance market
     Only   allowed to provide intraLATA services
                                                     Slide 32
                Competition Begins to Take Hold
   Access Charges
     The  ―per minute of use‖ charges local phone companies
      charge long distance companies to originate and
      terminate traffic
     Such traffic is known as ―access traffic‖
     Ozark Plan (1970) -- state and federal regulators
      formalized a policy that long-distance rates should be
      used to subsidize local service
     AT&T paid its local affiliates per minute of use access
      charges that were much higher than the actual costs
      associated with originating and terminating such traffic
     Local phone companies used this money to carry out
      the national policy of universal service—e.g. ensuring
      all Americans, regardless of where they lived, had
      access to basic telephone service
                                                         Slide 33
             Competition Begins To Take Hold
   The MFJ required BOCs to offer ―equal
    access‖
     The  ability for all requesting long distance
      carriers to connect to the BOC network on a
      reasonable and non-discriminatory basis
     BOCs’ were required to file federal and state
      access tariffs stating the terms and conditions
      by which they would offer access services
     MFJ resulted in the emergence of robust
      competition in the long distance (IXC) market
      in the late 80s through the 90s
                                                  Slide 34
                        Competitive Access Providers
   Beginning in the mid-80s, competitive access providers
    (CAPs) began appearing in metro areas
   CAPs built alternative local networks linked large
    businesses directly to IXCs, thus bypassing the BOC local
    network
   In 1992, the FCC allowed CAPs to interconnect directly
    with the BOCs to exchange local traffic
       Interconnection occurred via ―collocation‖—the CAP placed its
        own equipment within the BOC central office and directly
        interconnected to BOC facilities
       The BOCs were allowed to charge the CAPs cost-based rates for
        collocation
       CAPs treated as ―non-dominant‖ carriers and only regulated
        lightly by the FCC
       State commissions began regulating
       Expanded Interconnection Order, 8 FCC Rcd 7374 (1993)

                                                                 Slide 35
 The Act and its
Implementation
               Competition in the Local Exchange
   In the early 90s, some states began
    exploring laws and rules that would allow
    for competition in the local exchange
    markets
     New York, Texas, Illinois, California, others
     NARUC local competition project (1994-96)
          Comprehensive NARUC report released in February
           1996




                                                      Slide 37
                                    The 1996 Telecom Act
   Principles . . .
     Competition (Section 251)
        Open the BOC networks to allow competitors to utilize their
         network elements to offer competitive services
        If the BOCs open their local networks, they would get to
         compete in the lucrative long distance market (Section 271)
     Universal Service (Section 254)
        Make universal service support explicit
        Broaden universal service support program to ensure
         schools, libraries, and rural health care providers have access
         to communications facilities
        Set up the Lifeline and Link Up program to ensure low
         income consumers have access to basic communications
         services
     Broadband (to a limited extent)—Section 706


                                                                   Slide 38
                                     The 1996 Telecom Act
   Competition
     Section 251(c) of the 96 Act requires the BOCs to
      ―unbundle‖ network elements
     The FCC determines which elements are unbundled
      based on whether access to such elements is
      ―necessary‖ and whether competitors’ inability to gain
      access to such element would ―impair‖ its ability to
      compete
     Unbundling allows competing LECs access to
      individual network pieces of the BOCs
          ―local loop‖ (the copper/fiber facility that connects the end
           user to the BOC central office) is generally considered one of
           the most crucial elements needed to allow for competition as
           it is the most capital intensive facility to construct
          ―switching‖ and the ―UNE-P‖ – allowed carriers to resell BOCs
           service at cost-based pricing
                                                                    Slide 39
                               The 1996 Act

 Competition
  State commission may set rates for
   interconnection, UNES, transport and
   termination
  Wholesale rate formula = retail rates
   less costs that will be avoided by the
   incumbent



                                            Slide 40
                                                      The 1996 Act
   Competition
     BOC   had to allow for collocation and direct
      interconnection of facilities with competitors
     Section 271 of the Act said that if a BOC’s service
      territory is irreversibly open to competition, then the
      BOC can enter the long-distance market
          BOCs had to meet a 14-point check-list of items listed in the
           statute
     FCC determined if a state’s market was irreversibly
      open
          Statute requires consultation with FCC and DOJ to determine if
           market is open
     Firstto get 271 approval was Bell Atlantic in New York
      in 1998; Qwest in Arizona was the final BOC in 2003
          Qwest 13 state collaboratives
                                                                      Slide 41
                                             The 1996 Act
   Competition
     Competitorsnegotiate interconnection
      agreements for UNES and interconnection
        These Agreements must be approved and filed
         with state utility commission
        If a dispute during negotiations, the state utility
         commission serves as arbitrator
     Rural local exchange carriers are exempt from
      the unbundling and most of the
      interconnection requirements of Section 251

                                                           Slide 42
                                       The 1996 Act
   Universal Service
     Statutory   goal is to provide access to basic
      and advanced services at reasonably
      comparable rates for all Americans
     Universal service support had to become
      explicit
     Pre-1996 Universal Service support was
      implicitly recovered through LECs charging
      per MOU ―access charges‖ that were higher
      than costs


                                                   Slide 43
                                          The 1996 Act
   Types of universal service
     High cost‖ support to companies serving rural areas
     ―Low Income‖ support to consumers for Lifeline and
      Link-Up programs
     Connect schools, libraries and rural health care
      providers to global network
   Universal Service fund administered by the
    Universal Service Administration Corporation
   State commissions play role by certifying carriers
    as ―eligible telecommunications carriers‖
    A   carrier must be an ETC to receive USF support


                                                         Slide 44
                                    The 1996 Act
   Universal Service
     Total  USF $7.3 billion in 2007, up from $5.3
      billion in 2002
     Schools and Libraries received up to $2.25
      billion per year
     Low Income program received about $800
      million in 2006
     Rural Heath Care program received about $50
      million in 2006
     High Cost program received $4 billion + in
      2007
     Most growth attributable to the growth in the
      number of competitive providers
                                                Slide 45
                                           The 1996 Act
   Universal Service
     Federal-StateJoint Board required by statute
      to conduct universal service proceedings and
      make recommendations to the FCC
     Two types of ―high cost‖ programs
        Non-rural carriers receive support based on
         economic model
        Rural carriers receive support based on actual
         costs, subject to certain limitations
        Competitive carriers (mostly wireless) received the
         identical level of per-line support as incumbents


                                                         Slide 46
                                       The 1996 Act
   Universal Service
     The  1996 encourages states to enact
      instrastate universal service programs
        Many states have legislation
        Several have implemented programs

     Requires  all providers of ―interstate and
      international telecommunications services‖ to
      contribute to the universal service fund
     Carriers recover their contributions via a pass-
      through to their end user customers


                                                  Slide 47
                                     The 1996 Act
   Broadband
     Section 706 states that the FCC and each state
      commission shall encourage the development
      of advanced telecommunications services
     FCC has continued to take steps to remove
      regulation from DSL and cable modem
      broadband services
     Current definition of broadband is > 200 kps
     FCC currently has a proceeding examining
      whether to increase broadband speeds
     FCC has asserted jurisdiction over broadband
      and Internet services
                                                Slide 48
                                                         Competitive Model
                                                Explicit support mechanisms intended
                                                 to eliminate internal cross-subsidies
                                                     Access systems
                     Urban
                                                     Federal/state USF programs
                                                     Access reforms
Long Distance
                                 Business
                                                Competition targets most profitable
                  Explicit                       business lines, eroding profitability &
                  Support
                   (USF)                         making cross-subsidies unsustainable
  Local                                              LD market example
                               Residential
                                                All lines of business must be
                Rural (incl.                     economically justifiable
                 business)
                                                     Allow competition to govern
                                                      competitive markets
                                                     Uneconomic regions receive
                                                      increasingly explicit support
                                                     Policy support matches policy duties
                                                                                     Slide 49
Recent Developments and
           Policy Issues
                                          Broadband
   Broadband deployment has become of
    paramount importance among policymakers
     OECD  rates the US 14th in the world in broadband
      penetration
     US has the highest total number of broadband
      connection of any country in the world
          Approx. 65% via DSL
          Approx. 30% via cable modem (U.S. cable broadband a
           competitive strength)
          Others: Wild Blue, WISPs, etc.




                                                                 Slide 51
Broadband Subs by Technology




                         Slide 52
Broadband Penetration G7
            Thank heaven for Italy




                            Slide 53
Penetration and Population Density




                              Slide 54
Penetration and Per Capita GDP




                           Slide 55
                                                              VOIP
   Voice Over Internet Protocol (―VoIP‖)
    providers
     Utilizeany broadband connection to offer
      basic voice services
        Revising notions of pricing, geographic scope
        Verizon v. Vonage
               Verizon sued Vonage for various VoIP patent
                infringements
     Relationship       of network to applications
          Competition over value



                                                               Slide 56
             Retail Regulation and Customer Service
   Many state commissions and legislators have or are
    revising their retail regulation systems in response to
    changing markets and technologies
   COLR obligations appearing less economic
   State commissions revising approaches to customer
    service and service quality issues
       Choice among services seen as a consumer goal
            No more ―any phone you want as long as it’s a black rotary‖
       Slamming
       Trouble repair
       Customer information
       Implications of bundling of regulated and non-regulated services




                                                                           Slide 57
                        Intercarrier Compensation
   Intercarrier compensation disputes
     Rural carriers rely heavily on intercarrier
      settlement payments (e.g. interstate and
      intrastate access charges, reciprocal
      compensation, etc.) for revenues
     Phantom Traffic
        FCC requires carriers to terminate traffic even if
         they are unable to bill for it
        Several proposals at the FCC; some states have
         implemented solutions of their own


                                                          Slide 58
                                Universal Service
   Universal Service
     The  Joint Board has recommended an
      ―interim cap‖ on the level of funding going to
      competitive ETCs, most of which are wireless
      providers
     The FCC has an open proceeding on long-
      term reform to the high cost universal service
      fund




                                                 Slide 59
                              What is Driving Recent Fund Growth?
                  Total Universal Service Fund                             Growth since 2003   $ change 2006 v. 2003


                     High-cost fund (HCF)—ILECs
         • Virtually unchanged payouts since 2003—no growth once                 -1.8%              -$58 million
         access reforms completed


                      HCF—“competitive” carriers
         • More than $1 billion in funding in 2006 from ~$131 million in         724%               $952 million
         2003—primary source of organic growth



                          Low-income program
         • Up mainly due to offsets of higher SLCs in post-2000 reforms          12.3%               $87 million



                             Rural Health Care
         • Program size is small at $46 million in 2006                         96.0%               $22 million
         • Negligible absolute dollar growth


                          Schools and Libraries
         • Capped at $2.25 billion—program has not paid out total cap           32.2%               $469 million
         • Growth is simply because of lower previous payouts



   USF payments in 2006 approximately $1.47 billion greater than in 2003
   Growth in payouts (post-access reforms) has been driven by …
      $469 million increase in the Schools & Libraries program, accounting for
       approximately 32% of the increase (total 2006 payments still below cap)
      $952 million increase in payments to CETCs, accounting for approximately 65%
       of the total increase in funding – growth to continue absent reform
                                                                                                                       Slide 60
                                      Evolving Role of Wireless
   The Communications Act of 1934 gave the FCC exclusive jurisdiction over
    radio, including wireless telephony services
   Some states have attempted to regulate wireless providers
        E.g. California attempted to implement a set of consumer rights for cell phone
         users
   Section 332 of the Communications Act requires LECs to offer non-
    discriminatory interconnection to wireless providers
   The number of wireless subscribers in the US surpassed the number of
    wireline access lines a few years ago
        Sell handsets, not lines
   Substitution v. complementarity
      Some individuals are opting to forego a wireline connection and simply have a
       wireless phone
      Access substitution (―cutting the cord‖) versus service substitution (long distance
       and second lines)
      Lee Selwyn (2003) wireline and wireless have different
              Functionality
              Service quality
              Scope and pricing
              Cost structure
   New technology approaches to wireline-wireless relationship

                                                                                     Slide 61
                                                                 What’s Next?
   Diverse business models allow comparisons
      Is broadband a separate network?
      Approaches to COLR and rural
      Implications for regulation and policy
      AT&T is once again the largest local and long distance company in America –
       and the largest rural carrier
   Meaningful cross platform competition
      CATV providers are offering telephony services
      Strong and rapid success
      Tend to focus on dense areas, but includes smaller towns as well as larger cities
   Video products
      IPTV- the ability to deliver television content via IP over broadband facilities
      Verizon’s FiOS roll-out
      Most telcos using last-mile copper
      Need to address backbone network as well
      Telcos are attempting to get content deals from the media companies
   Transactions
      Sales of rural properties
      Wireline spins
      Roll ups of smaller companies
   Spectrum the continuing issue
                                                                                          Slide 62
Roles and Challenges for
        State Regulation
                                          Sustainable Policy
    Sustainability - from the verb to sustain meaning: to hold
     up; to bear; to support; to provide for; to maintain; to
     sanction; to keep going; to keep up; to prolong; to
     support the life of.
    Sustainable competition – Economic conditions for a
     viable sector over the long term


                                           Growth                Adoption



Is sustainability a policy goal?
Is one path more sustainable?
Is the answer situation dependent?                  Innovation
What will we learn from the experiment?

                                                                   Slide 64
                                             Five buckets of policy?
Function                               Needed or not?        Who does it and how?
―The Price is Right‖
(Retail rate setting)
―Bugsy sent me‖
(Enforcement)
―Can’t we all get along‖
(Mediation and facilitation)
Information

Consumer protection

Infrastructure support (e.g. 254,
706)

Which functions are needed? How are they best performed? By whom? Do some conflict?
(E.g., would a strict Sec. 252 filing requirement for services not required under Sec. 251
discourage voluntarily negotiated or mediated outcomes?)
                                                                                    Slide 65
Regulatory glide path in converged IP-based world?




                                             Slide 66
                      Combinatorial paths to reform

Legislative
•Likely longer
•General principles
only                   FCC
•FCC implements
                       •Prolonged
                       •Unpredictable
                       •Compromise
                       •Litigated

                                        State
                                        •Generally shorter
                                        •More structured
                                        •Multiple venues
                                        •Incomplete
                                        solutions

                                                             Industry solution
                                                             •Shorter process
                                                             •More financial focus
                                                             •Enforcement?




                                                                              Slide 67
                                                                                 About Balhoff & Rowe
Balhoff & Rowe, LLC, is a specialized professional services firm focused on providing financial-regulatory advice. The principa ls have more than 40 years
of experience in advising investors and regulators on complex investment issues. They have provided services to a wide range of communications
companies, including incumbents, competitive carriers, wireless operators and cable operators. Additionally, the firms has e xpertise in energy and other
utility services. The services of Balhoff & Rowe include research, think -tank projects, professional facilitation, advocacy efforts, financial and restructuring
advice for various companies, carriers and policymakers. The company offers an unparalleled combination of experience, credibility, strategic insight and
access in a rapidly changing environment.


Michael J. Balhoff, CFA, Managing Partner
Michael J. Balhoff, CFA, is managing partner at Balhoff & Rowe, LLC. Previously, Mr. Balhoff headed for 16 years the Telecom munications Equity
Research Group at Legg Mason, which advised investors about equities in media, cable, wireless, telephony, communications equ ipment and regulation.
Prior to joining Legg Mason in 1989, Mr. Balhoff taught at both the graduate and undergraduate levels. He has a doctorate in Canon Law and four master’s
degrees, including an M.B.A., concentration in finance, from the University of Maryland. A Chartered Financial Analyst and a member of the Baltimore
Security Analysts Society, Mr. Balhoff has been named on six occasions as a Wall Street Journal All-Star Analyst for his telecommunications
recommendations. His coverage of telecom was named by Institutional Investor as the top telecommunications boutique in the country in 2003. He has also
testified multiple times before congressional committees, is regularly a featured speaker at conferences for investors and po licymakers, and is widely quoted
in the media, including television, newspapers as well as communications and business journals.

Robert C. Rowe, Esq., Senior Partner
Robert C. Rowe, Esq., is a senior partner at Balhoff & Rowe, LLC. Previously, Mr. Rowe served as the Chairman of the Montana Public Service
Commission which was responsible for regulating telecommunications, electricity, natural gas, water, and some transportation services. Mr. Rowe also
served as President of the National Association of Regulatory Utility Commissioners, Chairman of the NARUC Telecommunications Committee, member
and state chair of the Federal-State Joint Board on Universal Service, member of the Federal-State Joint Conference on Advanced Services, chairman of the
thirteen state Operations Support Systems Collaborative working with Qwest and its competitors to achieve compliance with Sec tion 271 of the 1996 Federal
Telecommunications Act, and member of various advisory boards for university -affiliated programs.

Bradley P. Williams, Esq., Partner
Bradley P. Williams joined Balhoff & Rowe as a principal in 2005. Previously, Mr. Williams was a member of the Strategic Pla nning & Business
Development group at Lowe’s Companies Inc., the Fortune 50 home improvement retailer. Prior to joining Lowe’s, Brad worked w ith Mr. Balhoff in the
award-winning Telecommunications Equity Research Group at Legg Mason, focusing on incumbent and rural local exchange carriers. Prior to joining Legg
Mason, Brad was a co-founder of eSprocket / Beachfire, a venture-backed company that evolved into one of the pioneers in mediation technology solutions
for the financial services sector. Previously, he served as a financial executive for Iron Road Railways Incorporated, a Was hington, D.C.-based holding
company that integrated, through acquisitions, a significant regional freight rail network serving northern New England and e astern Canada. Brad began his
career as an investment banker in First Union’s Capital Markets Group. He has a BA in Economics from the University of North Carolina and a JD from the
University of North Carolina School of Law.

                                                                                                                                                        Slide 68
“Now What Do We
           Do?”
                  If Heisenberg were a regulator
―One cannot simultaneously
  find both the position and
  momentum of an object to
  arbitrary accuracy.‖
   -The uncertainty principle

―Policy solutions tend to look
  simple from a distance,
  and messily complicated
  up close.‖
  - Regulatory corollary



                                            Slide 70
 ETCs    and Capital Hill activity. Hon. Phil
 Jones, Washington State

 USF   and Intercarrier Compensation. Hon. Ray
 Baum, Oregon

 Special   access. Hon. John Burke, Vermont

 Video   franchising. Hon. Daryl Bassett,
 Arkansas


                                                 Slide 71
“You got to be
 careful if you don't
 know where
 you're going,
because you might
 not get there.”


                        Slide 72

				
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