Windstream 2010 Annual Report Download - page 69

Windstream Corporation
Form 10-K, Part I
Item 1. Business
Inter-carrier Compensation and Universal Service
The Company’s local exchange subsidiaries currently receive compensation from other telecommunications providers,
including long distance companies, for origination and termination of interexchange traffic through network access
charges and local interconnection charges that are established in accordance with state and federal laws. In 2010, the
Company received $285.9 million in inter-carrier compensation revenues and incurred $82.0 million in inter-carrier
compensation expense.
It is expected that the FCC will initiate rulemaking proceedings on the NBP’s framework and proposals for inter-carrier
compensation and universal service reform in the first quarter 2011. In the past, Windstream has filed proposals for
inter-carrier compensation and universal service reforms with the FCC. Windstream continues to support reform that
provides adequate and targeted universal service support as well as inter-carrier compensation reform that provides
adequate transitions and a reasonable opportunity to recover revenue reductions. Generally, our per minute intrastate
switched access rates are six times higher than our interstate switched access rates, creating incentives for carriers
using our network to alter the call records in order to receive the lower interstate rates. Specifically, Windstream
supports transitioning intrastate switched access rates to interstate levels over an extended period, increasing end user
rates modestly to a reasonable benchmark while also establishing an additional universal service support mechanism to
minimize the near term revenue impact from this rate rebalancing. This is consistent with certain inter-carrier
compensation reform efforts recently enacted in some of our states as further discussed below.
During 2010, Windstream received $159.6 million in federal universal service support. The $8.1 billion federal
universal service program is designed to provide affordable telecommunications services to customers that live in high-
cost rural areas, low-income consumers, rural health care providers, and schools and libraries. This program is
currently under legislative, regulatory and industry scrutiny as a result of the growth in the fund and structural changes
within the telecommunications industry. The primary structural change is the increase in the number of Eligible
Telecommunications Carriers (“ETCs”) receiving money from the high-cost component of the USF. As discussed
above, the FCC is considering comprehensive reform of various aspects of universal service as part of the NBP.
On February 9, 2011, the FCC released a Notice of Proposed Rulemaking (“NPRM”) to modernize and reform the
inter-carrier compensation and universal service mechanisms. In the short term, the NPRM proposes reforms to address
phantom traffic, access stimulation and the appropriate treatment for VoIP traffic. The NPRM also proposes short term
reforms of the universal service mechanism, including using competitive bids to distribute funding for broadband
deployment, as well as reconfiguring and eliminating certain high-cost mechanisms. Specifically, the NPRM proposes
to modify the distribution formulas for the High Cost Loop and to eliminate Local Switching Support and Interstate
Access Support. In the long term, the NPRM proposes to gradually reduce per-minute access charges and develop a
system, including universal service support, to partially off-set resulting revenue reductions. In addition, the NPRM
proposes to shift all existing high-cost support to the Connect America Fund (“CAF”) which will fund broadband
deployment and maintenance of broadband networks. The Company cannot predict the timing and substance of the
ultimate outcome of these proceedings or the impact on our revenues, expenses and requirements.
Under the existing universal service framework, the amount of universal service support a service provider is eligible
to receive can vary dramatically depending on the form of regulation governing it, as well as certain other
classifications determined under the Telecommunications Act of 1996. Such disparate treatment among carriers results
in similar geographic areas with similar high-cost characteristics receiving materially different amounts of USF
support. Windstream favors reform that eliminates these arbitrary classifications and determines the amounts of USF
support to all high-cost areas consistently.
STATE REGULATION
Local and Intrastate Rate Regulation
Most states in which our ILEC subsidiaries operate provide alternatives to rate-of-return regulation for local and
intrastate services, either by law or PSC rules. We have elected alternative regulation for our ILEC subsidiaries in all
states except New York. We continue to evaluate alternative regulation options in New York where our ILEC
subsidiary remains subject to rate-of-return regulation.
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