BILL ANALYSIS                                                                                                                                                                                                              1

                                 ALEX PADILLA, CHAIR

          SB 3 -  Padilla                                        Hearing 
          Date:  April 5, 2011                 S
          As Amended:         March 29, 2011      FISCAL       B
           Current law  requires the California Public Utilities Commission 
          (CPUC) to establish and maintain universal service programs to 
          ensure that affordable telephone service is available in rural, 
          high-cost areas of the state, including the California High Cost 
          Fund B program, which sunsets on January 1, 2012.

           This bill  would extend the sunset date of the California High 
          Cost Fund B program to January 1, 2014.

           Current law  requires that all providers of telecommunications 
          services contribute to universal service programs.

           This bill  would require the CPUC to require providers of 
          telecommunications service using Voice over Internet Protocol 
          (VoIP) to contribute to state universal service programs and 
          would add an urgency clause so that statutory authority is in 
          effect prior to CPUC action in a pending VoIP proceeding.

           Current law  requires that state universal service programs not 
          be inconsistent with federal universal service law and 
          regulations of the Federal Communications Commission (FCC).

           This bill  would require the CPUC to report to the Legislature no 
          later than October 1, 2012, on whether proposed changes to FCC 
          universal service regulations require conforming changes to 
          state law.

          Universal service is long-standing state and federal policy - 
          Universal service - ensuring the availability of high quality, 
          affordable telephone service for all Americans -- has been a 


          bedrock principle of telecommunications policy nationwide since 
          enactment of the Communications Act of 1934.  But methods of 
          achieving universal service have evolved over time with changes 
          in the marketplace and technology.  The challenge is how to keep 
          rates affordable in rural, sparsely populated areas with rough 
          terrain where the cost of providing service is high.  
          Historically, when the old AT&T ("Ma Bell") provided both local 
          and long distance service, rates for customers in high-cost 
          areas were kept affordable in part with revenue from above-cost 
          long distance charges.  In addition, telephone companies 
          traditionally have set local service rates based on the average 
          cost of providing service across their service areas, 
          effectively a subsidy from densely populated urban areas to 
          enable lower rates in high-cost rural areas.

          Competition in long distance markets and the breakup of AT&T in 
          1984, followed by local service competition with the 
          Telecommunications Act of 1996, led to federal and state 
          universal service programs funded by explicit customer charges 
          rather than embedded subsidies.  California has two programs to 
          promote universal service in rural, high-cost areas: (1) 
          California High Cost Fund A, which provides direct support to 
          the 14 small rural telephone companies that are under 
          rate-of-return regulation; and (2) California High Cost Fund B, 
          which provides support for large local exchange carriers (AT&T, 
          Verizon, Frontier, and SureWest) for the high-cost areas of 
          their service territories where the cost of providing basic 
          service exceeds $36 per month.  The CPUC establishes the 
          surcharge rate for each fund in an annual resolution based on 
          carrier claims and balance in the funds.  The B Fund surcharge 
          currently is 0.45% of intrastate services, and the A Fund 
          surcharge is 0.0% of intrastate services.
          Universal service support evolving with technologies - State and 
          federal universal service programs are structured to support 
          landline voice telephone service.  However, the FCC has several 
          pending proceedings that propose significant transformation of 
          federal universal service programs to provide efficient, 
          targeted support for broadband  and  voice service, rather than 
          just voice service, as outlined in the FCC's National Broadband 
          Plan released in March 2010.  According to the FCC, broadband 
          has transformed virtually every aspect of modern life - the 
          workplace, commerce, education, health care, government 
          services, and public safety, making universal access to 


          broadband a necessity in today's 21st century digital economy.  
          Therefore, the FCC's proposals would modify universal service 
          policies to promote investment in broadband facilities capable 
          of providing video, data and high-speed Internet access, as well 
          as voice service and would make changes as to how the recipient 
          of federal universal service support for serving high cost areas 
          is determined.

          At the state level, the CPUC has taken initial steps to update 
          California's universal service programs.  In November 2010, the 
          CPUC opened the door for wireless, VoIP, and other 
          non-traditional carriers to offer service to customers eligible 
          for the low-income program.  The CPUC also is considering how to 
          expand the definition of "basic service" to include more than 
          landline voice service for purposes of the B Fund program. In 
          January 2011, the CPUC opened a proceeding that responds to a 
          recent FCC ruling that interconnected VoIP providers must 
          contribute to the federal programs and that states may require 
          VoIP contribution to state universal service programs.  The FCC 
          recognized that as an ever-growing number of customers get voice 
          service from VoIP rather than landline providers, the funding 
          for universal service programs diminishes.  The CPUC has 
          proposed requiring interconnected VoIP providers to contribute 
          to state universal service programs, although there is a 
          significant question whether the CPUC has sufficient authority 
          under state law to require this.

              1.   Author's Purpose  .  According to the author, the purpose 
               of this bill is to ensure that California continues 
               programs that help every Californian get connected to the 
               telecommunications network at affordable rates in order to 
               increase the value of the network for all subscribers and 
               to ensure that these programs are appropriately modified to 
               reflect changes in technology and the telecommunications 

              2.   VoIP Contribution  .  Stakeholders, including VoIP 
               providers, are in general agreement with the CPUC's 
               proposal to require VoIP contribution to state universal 
               service programs.  But there is substantial disagreement 
               about whether the CPUC can require this contribution 
               through its regulatory authority over "telephone 


               corporations."  Most stakeholders have advocated for 
               legislation granting the CPUC explicit authority for this 
               limited purpose.  The Utility Reform Network, on the other 
               hand, argues that the CPUC should rely on existing 
               authority to require VoIP contribution, claiming it is "a 
               bad precedent to create a regulatory framework that would 
               require the Commission to come to the Legislature for 
               authority to adopt any requirements for VoIP customers."  
               This bill provides the CPUC explicit authority to require 
               VoIP contribution and expressly states that this shall not 
               be construed to enlarge or diminish any regulatory 
               authority over VoIP service providers under existing law, 
               thereby leaving open and taking no position on the question 
               of whether a VoIP provider is a telephone corporation for 
               any purpose, including being subject to service quality and 
               customer service regulation.  This bill also includes an 
               urgency clause so that the authority to require VoIP 
               contribution is effective as soon as possible to support 
               CPUC action in the pending proceeding

              3.   Technical Correction  .  The section of the bill on page 
               3, lines 3 and 4 requiring VoIP providers to contribute to 
               state universal service programs refers to "contributions 
               from intrastate end users of interconnected Voice over 
               Internet Protocol" service.  In order to be consistent with 
               the FCC's wording, the author and committee may wish to 
               consider amending the bill to instead refer to "intrastate 
               revenues of interconnected VoIP service providers."

              4.   FCC Action  .  This bill states legislative intent that 
               the CPUC participate in all proceedings of the FCC relating 
               to changes in universal service regulations and open 
               proceedings as necessary to consider conforming changes in 
               state programs.  It also requires the CPUC to report to the 
               Legislature no later than October 1, 2012, on whether 
               changes in state law are required so that California's 
               programs are not inconsistent with federal law.  Changes in 
               the federal program are significant to California not just 
               to avoid preemption but to maximize federal high-cost 
               support for California.  Providing affordable service to 
               the most remote high-cost areas in rural California 
               requires support from both federal and state programs. The 
               report to the Legislature by October 2012 will allow 
               sufficient time for any statutory changes, if necessary, 


               when the program is up for renewal in 2013.

              5.   Related Legislation  .  SB 379 (Fuller) amends statement 
               of telecommunications policy to express support for 
               continuation of universal service support for the small 
               telephone companies that draw from the California High Cost 
               Fund A. AB 841 (Buchanan) is a spot bill the author intends 
               to amend to require the CPUC to require VoIP contribution 
               to state universal service programs.


          Frontier Communications
          Regional Council of Rural Counties

          The Utility Reform Network (unless amended)


          Jacqueline Kinney 
          SB 3 Analysis
          Hearing Date:  April 5, 2011