For further information contact: Thomas M. Smith (202) or Stephen G. Kraskin,

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1 RBA News FOR IMMEDIATE RELEASE: December 22, 2014 For further information contact: Thomas M. Smith (202) or Stephen G. Kraskin, New Study Confirms That Financial Health Of Rural Rate Of Return Telecom Industry Is Ailing; State Of Rural Telecom Industry Weakened Subsequent To Implementation Of FCC s 2011 USF-ICC Transformation Order Co-authors Harold Furchtgott-Roth and Kathleen Wallman have provided a new perspective on the financial state of the rural rate-of-return industry in their new white paper entitled An Assessment of the Operational and Financial Health Of Rate-of-Return Telecommunications Companies in More Than 700 Study Areas: The Furchtgott-Roth/Wallman study concludes that the operational and financial health of the rural rate-of-return industry has been declining since 2007, and that the decline was more markedly adverse in the period following implementation of the Universal Service Fund (USF) and Intercarrier Compensation (ICC) Transformation Order adopted by the Federal Communications Commission (FCC) under former FCC Chairman Julius Genachowski. The study is based on an analysis of data examining 705 rural rate-of-return carrier study areas. The analysis is based on publicly available data maintained by the National Exchange Carrier Association (NECA), a not-for-profit association created pursuant to FCC rules in NECA s services to the rural rate-of-return carrier industry include rate and tariff development and the management of an industry database. The new white paper study is the product of the collaborative efforts of former FCC Commissioner Harold Furchtgott-Roth, president of Furchtgott-Roth Economic Enterprises, and Kathleen Wallman, president of Wallman Consulting, LLC, who formerly served as a Presidential advisor on economic policy subsequent to serving in several leadership posts at the FCC and currently consults in the field of telecommunications and technology policy. The study was partially underwritten by a grant from the Rural Broadband Alliance (RBA). The new Furchtgott-Roth/Wallman white paper is a follow-up to a paper issued by the authors in November 2013 entitled A Framework to Assess the FCC s 2011 Report and Order on Universal Service and Intercarrier Compensation. Furchtgott-Roth and Wallman concluded

2 Page 2 of 5 that paper stating, In our next report, we hope to discover whether the 2011 Report and Order has nurtured a new broadband-focused universal service policy, or has achieved the opposite a withering of incentives for deployment by the companies best positioned to deliver it. The new study provides the promised quantitative analysis. According to the new study, the data demonstrate that investment by small rural rate-ofreturn carriers slowed significantly after the release of the 2011Transformation Order. Rate-ofreturn carriers are key to delivering the latest telecommunications services, including broadband, in hard-to-reach rural areas of the nation. The study examined seven measures to assess the health of the operations and finances of rate-of-return carriers. These included the following: The number of loops, which are a standard measure of commercial activity and a rough approximation of the customer base of a telephone company; Gross telecommunications plant in service, which identifies the gross value of plant and equipment that have been deployed without consideration of depreciation; Gross telecommunications plant in service per loop; Total telecommunications plant in service minus accumulated depreciation, which assesses the net value of plant and equipment; Total telecommunications plant in service minus accumulated depreciation per loop; Net plant, which measures financial health of the company; and Net financial assets. The deteriorating operational and financial health of wireline rural telecommunications companies serving rural areas is clear, the study concluded. We find that the operational and financial health of the companies was weaker in than in earlier years. For each type of information, we find that rural telecommunications companies in the majority of study areas had operational and financial conditions that were weakened in 2011 and These results are consistent with there being an adverse effect from the FCC s 2011 Report and Order, although we have no formal test for causation. The paper stressed that this did not mean that customers of rural rate-of-return carriers were receiving less service than customers in the area could have obtained where competing wireless and other forms of telecommunications services may be available. The paper concluded the following: More than 90 percent of study areas lost loops in each year; Although gross plant and equipment did not grow at a healthy rate from , the value grew even more slowly after 2010 consistent with a negative effect of the 2011 Report and Order; Gross plant and equipment per study area grew from but the rate of increase declined after This reflects a decline in the number of loops rather than greater investments by telephone companies;

3 Page 3 of 5 The 705 study areas have widespread declining net plant in service; Assessment of statistics for net plant in service per loop shows a decline in the operational financial stability of the study areas after 2010; Changes in net financial assets present a consistent picture of decline but the declines in 2011 and 2012 are more substantial. Furchtgott-Roth and Wallman note in their paper, Our observations collectively indicate that the vitality of the rural rate-of-return companies has declined in the period as compared to the period We do not have a way of attributing this decline to the implementation of the FCC s 2011 Report and Order. We observe that the decline is consistent with the hypothesis that the Report and Order had an adverse effect on the health and viability of the companies. RBA General Counsel Steve Kraskin, commenting on the issuance of the new paper, stated, Everyone interested in universal service deployment and the provision of essential highspeed broadband connectivity throughout our nation should be grateful to Kathleen Wallman and Harold Furchtgott-Roth both for their continuing individual commitments to achievement of the vital universal service policy objectives and for their joint effort that has produced the new white paper. The RBA issued early warnings that the universal service fund distribution rules adopted by the FCC in November 2011 would chill rural infrastructure investment and undermine the financial vitality of the rural telecom industry. Over the past three years, RBA member companies have provided first-hand reports to FCC Commissioners and staff and to members of Congress about how this prediction has unfortunately become reality. A year ago, Harold Furchtgott-Roth and Kathleen Wallman issued their initial white paper, A Framework to Assess the FCC s 2011 Report and Order on Universal Service and Intercarrier Compensation. This new follow-up study and data analysis provides confirmation and quantification of the reality that infrastructure investments by rural rate-of-return carriers declined significantly in the wake of the FCC s 2011 USF-ICC Transformation Order adopted under former FCC chairman Julius Genachowski. The RBA is very appreciative that the FCC, under new leadership over the past year, has initiated removed the flawed mechanisms previously adopted in The Commission has proposed a new framework for universal service fund distribution to better achieve the policy objectives of supporting voice and broadband-capable networks in areas that the marketplace would not otherwise serve and ensuring that consumers in rural, insular and high-cost areas have access to reasonably comparable services at reasonably comparable rates to consumers living in the nation s urban areas. The new study and analysis provided by Harold Furchtgott-Roth and Kathlen Wallman further demonstrates the critical need to move forward with the completion of the new FCC initiatives as expediently as possible in order to restore much-needed economic stability by providing predictability in the rate-of-return carrier universal service distribution mechanisms.

4 Page 4 of 5 All businesses and consumers, including those in rural America, are growing increasingly dependent on high speed- broadband access. Given the reality that broadband connectivity affects nearly all parts of our lives today, we must deal with the fact that the health of the rural rate-of-return industry is also a factor and a barometer of the state of the rural economy. Policymakers now need to assess how federal policy can be changed to support rather than continue to put at risk the ability of rural businesses and consumers to rely on their local telecommunications companies to provide the services they need. This includes ensuring that federal support mechanisms, particularly USF, are sufficient and predictable to meet the evolving telecommunications needs of rural America in the 21 st century. ABOUT HAROLD FURCHTGOTT-ROTH Harold Furchtgott-Roth founded Furchtgott-Roth Economic Enterprises in He frequently comments on issues related to the communications sector of the economy. He served as a Commissioner of the Federal Communications Commission from In that capacity, he served on the Joint Board on Universal Service. He is one of the few economists to have served as a federal regulatory commissioner and the only one to have served on the FCC. Before being appointed to the FCC, he was chief economist for the U.S. House Committee on Commerce and a principal staff member working on the Telecommunications Act of As a visiting fellow at the American Enterprise Institute, he would later write A Tough Act To Follow, a book about the difficulties implementing the Telecommunications Act of Earlier in his career, he was a senior economist with Economists Incorporated and a research analyst with the Center for Naval Analyses. ABOUT KATHLEEN WALLMAN Kathleen Wallman is president of Wallman Consulting, LLC, a telecommunications and technology policy consulting firm. She is also a visiting research professor in the Graduate School of Arts & Sciences, Communication, Culture and Technology Program at Georgetown University. Wallman was appointed by Federal Communications Commission Chairman William Kennard in 1999 to chair the National Coordinating Committee on public safety spectrum and she served as the chief of the FCC s Common Carrier Bureau. She was deputy assistant to President Bill Clinton for economic policy and chief of staff and counselor to the National Economic Council in the White House. She also was deputy counsel to the President in the Office of White House Counsel. Wallman was a partner in the law firm Arnold & Porter and was a law clerk to Judge Laurence Silberman in the U.S. Court of Appeals for the District of Columbia Circuit and to Judge Pauline Newman of the Federal Circuit. ABOUT THE RURAL BROADBAND ALLIANCE The RBA is a coalition of rural incumbent local exchange carriers that operates as a public interest think-tank to advance sensible, evidence-based policies for the deployment and adoption of broadband services for all of the nation s citizens, including consumers and businesses residing in rural, insular, and high cost-to-serve areas of the nation. The RBA is committed to developing and supporting long-term solutions to address needed reform of the universal service mechanisms in order to achieve and maintain universal broadband service deployment in rural America.

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