BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 379
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          Date of Hearing:   June 18, 2012

                    ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
                               Steven Bradford, Chair
                     SB 379 (Fuller) - As Amended:  June 12, 2012

           SENATE VOTE  :   vote not relevant
           
          SUBJECT  :   Telecommunications policies.

           SUMMARY  :   Modifies the California High Cost Fund - A (CHCF-A) 
          program to align the Federal Communications Commission's (FCC) 
          modification of the federal universal service program to allow 
          high-cost support for the California Independent 
          Telecommunications Companies (CITC) broadband-capable facilities 
          in rural areas.  

           EXISTING LAW  : 

          1)States that the California Public Utilities Commission (PUC) 
            has regulatory authority over public utilities, including 
            telephone corporations.

          2)Requires the PUC 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 A (CHCF-A) program, which 
            sunsets on January 1, 2015.

          3)Declares the policies for telecommunications in California 
            which include continuing our universal service commitment by 
            ensuring continued affordability and widespread availability 
            of high-quality telecommunications services to all 
            Californians.

           FISCAL EFFECT  :   Unknown.

           COMMENTS  :   According to the author, "SB 379 will help preserve 
          federal funding coming into rural California and enhance the 
          availability of advanced broadband services in rural areas of 
          the state.  The modern communications network is a broadband 
          network, and California's rural communities need to be connected 
          to the digital superhighway in order to access the economic 
          development, tele-medicine and educational opportunities 
          available through advanced broadband services.  At a minimum, 








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          state policy should support the efforts of our small rural 
          telephone companies to upgrade their networks with 
          broadband-capable facilities in order to meet the requirements 
          of the federal high-cost support program.  SB 379 ensures this 
          outcome by including the goal of rural access to advanced 
          services in the CHCF-A program."

           1)Background  :  Universal service has been an important public 
            policy objective on both the
          federal and state level.  The United States Congress first made 
          universal service a basic goal of telecommunications policy with 
          the passage of the Communications Act of 1934.  In 1983, the 
          California Legislature enacted the Moore Universal Telephone 
          Service Act to ensure that consumers have access to basic voice 
          service that is both affordable and ubiquitously available.  

          In 1987, the California Legislature directed the PUC to 
          establish a rate structure for small independent telephone 
          companies serving rural and small metropolitan areas to mitigate 
          increases in service. To achieve this legislative goal, the PUC 
          created various public programs such as the CHCF to provide a 
          source of supplement revenues to telephone companies serving 
          rural or geographically hard-to serve areas of California.  In 
          1996, the PUC divided the CHCF  into two separate programs 
          labeled A and B: the CHCF-A, to provide high cost support for 
          the small companies, and the CHCF-B, to provide high cost 
          support for large companies.  

          Support from both the federal and state programs is often 
          necessary to cover service providers' costs and keep customer 
          rates affordable.  The CHCF-A is scheduled to sunset on January 
          1, 2015.

           2)FCC activities and orders  :  Recognizing the need for all 
            Americans to have universal access
          to broadband, the FCC in March 2010 released the National 
          Broadband Plan, which included a proposal for transforming the 
          federal universal service program and intercarrier compensation 
          systems to support the provision of affordable broadband in 
          high-cost areas rather than just voice telephone service.  

          In November 2011, the FCC issued a decision adopting this 
          proposal and redirecting the $4.5 billion in USF into a new 
          "Connect America Fund" to support providers in high-cost areas 
          that accept obligations to build out high-speed broadband 








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          networks.  The FCC designated funding for a "Mobility Fund" to 
          accelerate mobile broadband networks, and a "Remote Areas Fund" 
          for the most difficult to serve areas.  While stakeholders 
          continue to evaluate the implications of the Order, states are 
          taking initial steps to implement decisions and determine how 
          state universal service programs align with the federal reforms.

           3)PUC looking at CHCF-A  :  Also in November 2011, the PUC opened 
            Rulemaking 11-11-007
          to review the CHCF-A program.  According to the PUC's Order, "a 
          detailed review of the program is warranted in response to 
          market, regulatory, and technological changes since the CHCF 
          program was first established in 1987."  In its June 1, 2012 
          analysis of SB 379, the PUC states that the "aim of the 
          proceeding is to develop a more efficient, prudent, and 
          forward-looking plan for rural consumers that will reflect 
          realities of the market place and technological advancements to 
          safeguard California ratepayers."

           4)The issue  :  The question before us is whether California 
            should follow the FCC's example of
          modifying the CHCF-A program to explicitly allow it to support 
          investments in broadband-capable infrastructure?  The CHCF-A 
          program was established long before broadband become available 
          when there was only the traditional telephone network to 
          consider.  Technology has dramatically changed since then, and 
          the small independent telephone companies' networks now deliver 
          both telephone and broadband services.  In order to continue to 
          meet CAF's broadband latency, speed, and service quality 
          requirements, both now and in the future, these companies will 
          need to systematically upgrade their networks.  

          According to the small independent telephone companies supported 
          by the CHCF-A program, the state needs to update the CHCF-A 
          program to reflect the new broadband-focus of the federal CAF 
          program in order to preserve their federal universal service 
          rate support.  They argue that without this update, the PUC may 
          not allow cost support from the CHCF-A program for network 
          improvements because they benefit the provision of broadband 
          service, even though the improvements benefit the provision of 
          telephone service as well.

          According to the PUC staff analysis of SB 379, it notes that the 
          PUC has an open rulemaking on the CHCF-A and that "this 
          comprehensive public process is a better way to address any 








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          necessary changes to the CHCF-A program."  The analysis raises 
          their concern that "SB 379 would require ratepayers to subsidize 
          the rate-of-return carriers' deployment of broadband-capable 
          facilities even though California has limited jurisdiction over 
          broadband services and cannot take into account revenues from 
          these unregulated services when determining local rates for the 
          rate of return carriers."  
           
           5)Who's up first?  :  This bill aims to codify the PUC's current 
            practice of administering the
          CHCF-A program, while adding an explicit requirement for the PUC 
          to promote  reasonable  access to advanced services and 
          broadband-capable facilities.  SB 379 also preserves the January 
          1, 2015 sunset date on the CHCF-A program adopted by the 
          Legislature last year in SB 3 (Padilla), ensuring Legislative 
          review before the program can be extended.  

          The bill sponsor, California Independent Telecommunications 
          Companies (CITC), asserts that SB 379 preserves the PUC's 
          regulatory authority to determine whether and to what extent 
          company expenses and investments are reasonable, thereby 
          maintaining the PUC's flexibility in its administration of the 
          CHCF-A program.  

          The PUC staff analysis state, "by locking into state statute 
          funding for high cost broadband as well as telephony for 
          rate-of-return incumbent local exchange carriers (small 
          independent telephone companies), SB 379 would prevent the PUC 
          from making changes to the CHCF-A program as it views necessary 
          in light of changes in FCC universal service support and 
          broadband policy changes, as well as changes in technologies, 
          market dynamics and the changing competitive landscapes in rural 
          California."

           6)What is the cost to ratepayers?  :  The PUC calculates the 
            annual amount of CHCF-A support
          after first factoring in the anticipated revenues from the 
          federal High Cost Loop Support (HCLS).  Federal separations 
          rules ensure that federal and state funding works in concert and 
          that no double recovery occurs.  Consequently, decreases in 
          federal HCLS funding increase the size of the CHCF- A program; 
          and conversely, increases in federal HCLS funding decrease the 
          size of the CHCF-A program.  

          Presently, the small independent telephone companies receive 








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          approximately $25 million annually in federal HCLS and $33.7 
          million in CHCF-A support.  Hypothetically, if these companies 
          lost the $25 million in federal funding because they could not 
          meet the FCC's broadband speed, capacity, and other reliability 
          requirements, the CHCF-A program could increase significantly.

          PUC staff highlight the concern in its analysis of SB 379 that 
          "the combination of less FCC funding and SB 379 could double the 
          amount of subsidies that the small independent telephone 
          companies may request from the CHCF-A program.  This could 
          significantly increase the amount of money that each ratepayer 
          must pay into this fund each month, based on a surcharge on 
          intrastate telecommunications billings."

          CITC asserts that "any increases in the CHCF-A are likely to be 
          incremental, since CHCF-A recipients' networks provide both 
          voice services and access to broadband-enabled services - there 
          are not separate networks that would require independent 
          investments.  Any additional investments will be made to 
          existing networks, and will be subject to the PUC's 
          determination of reasonableness."  CITC further claims that "the 
          surest way to increase the cost of the CHCF-A program would be 
          if California lost the $25 million in federal funding because 
          the CHCF-A program did not support the investments necessary to 
          meet the new federal broadband requirements."

           7)The compromise  : However to address the cost concerns raised by 
            stakeholders, the author
          has agreed to add subparagraph (c), which directs the PUC's 
          administration of the CHCF-A program, the following requirement: 
           (7) Ensure that support is not excessive so that the burden on 
          all contributors to the CHCF-A program is limited  .

           8)Support  :  CITC argues that the Legislature needs to give the 
            PUC clear policy direction that
          the CHCF-A program should support broadband-capable facilities.  
          They argue that if replacement of copper facilities with fiber 
          optic facilities is limited because of an interpretation that 
          funding from the CHCF-A is not available for supporting 
          infrastructure that is capable of providing broadband services, 
          Californians will suffer in three ways: 1) broadband deployment 
          in rural areas will be impaired; 2) California will lose federal 
          cost support because the rural telephone companies cannot meet 
          the required broadband speeds; and 3) either telephone rates 
          will rise to potentially unaffordable levels for rural telephone 








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          company customers or the CHCF-A program will expand to 
          compensate for the lost federal revenues. 

          The California State Association of Counties (CSAC) and Regional 
          Council of Rural Counties (RCRC) write in support of SB 379 
          stating "affordable telephone and other telecommunication rates 
          are vital to both residential and business customers in our 
          member counties. Without the changes to CHCF-A the state could 
          lose $25 million annually of federal support, potentially 
          causing rate increases for all telephone customers and ensuring 
          the delay of broadband deployment."

           9)Opposition  : The California Association of Competitive 
            Telecommunications Companies
          (CALTEL) registered a letter of opposition on a prior version of 
          the bill which
          directed the PUC to create a streamlined "uniform regulatory 
          framework" option for small, rural local exchange carriers that 
          do not participate in the CHCF-A program.  Because the author 
          agreed to strike this provision, CALTEL has removed its 
          opposition.

          The Utility Reform Network (TURN) supports carrier efforts to 
          deploy broadband-capable facilities; however TURN opposes a 
          "mandate to provide subsidy money to promote broadband capable 
          facilities through an all end user surcharges goes far beyond 
          the excitement over fast broadband".  

           10)Technical amendment  : On page 5, lines 25-26, the definition 
            of "rural telephone company" is
          an incorrect reference to federal statute. The author and this 
          committee may wish to amend the bill as follows: "  Qualify as a 
          rural telephone company under federal law (47 U.S.C. Section 
          153(44))  ."

           11)Related previous legislation  :  

          SB 3 (Padilla), Chapter 695, Statutes of 2010: extended the 
          sunset date for the CHCF-A program from January 1, 2013 to 
          January 1, 2015.

          SB 1040 (Padilla), Chapter 317, Statutes of 2010: extended and 
          expanded the California Advanced Services Fund program.

          AB 155 (V. Manuel Perez), Chapter 24, Statutes of 2009:  The 








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          last sentence of Section 281(c)(2) was supposed to clarify that 
          it is permissible for the CHCF-A companies to recover in rate 
          base their portion of the investment in broadband-capable 
          facilities not covered by the CASF grant or ARRA funds.  At the 
          time, the CASF grant was 40% of the cost and the company had to 
          provide 60% of the cost.  Now, the grant is 60% and the company 
          portion is 40%.  The PUC has chosen to interpret the last 
          sentence of Section 281(c)(2) as only applicable when an ARRA 
          grant is part of the package.  As such, if a CASF project's 
          total cost is $10 million, the company would have to invest $4 
          million of its shareholder profits with no opportunity to earn a 
          return on that $4 million investment.  The result is that the 
          CHCF-A companies have been unwilling to apply for CASF grants.   
           

          SB 780 (Wiggins), Chapter 342, Statutes of 2008: absorbed 
          Senator Cox's SB 1144, which created a separate code section for 
          the CHCF-A program (Section 275.6) outside of the CHCF program 
          section (Section 739.3) and extended the CHCF-A program sunset 
          date from January 1, 2009 to January 1, 2013.

          SB 1149 (Wiggins), Chapter 388, 2008: extended the sunset date 
          on the Rural Telecommunications Infrastructure Grant Program 
          from January 1, 2009 to January 1, 2013.  This program was 
          funded at $10 million annually from the CHCF-A surcharge, but 
          was modified by SB 1149 to allow unspent funds to be rolled into 
          the next year up to a $40 million max because there had been no 
          grant applications.  The PUC then encouraged rural ILECs to 
          partner with their counties to apply for grants to fund the 
          installation of facilities to reach areas currently without any 
          telephone service.  

          The last grant application by Siskiyou Telephone on behalf of 
          Godfrey Ranch was rejected by the PUC as unreasonably costly 
          (T-17316 defeated on a 1-4 vote at the November 10, 2011 
          Commission Business Meeting: 
           http://docs.cpuc.ca.gov/PUBLISHED/AGENDA_RESOLUTION/145868.htm ). 
           
          Since any remaining areas in the state that do not have service 
          would be just as costly as the Godfrey Ranch application, this 
          grant program is considered no longer viable and no one is 
          seeking its extension.

          SB 1193 (Padilla), Chapter 393, Statutes of 2008: created the 
          California Advanced Services Fund.








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           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          Calaveras Telephone Company
          California Communications Association 
          California Independent Telecommunications Companies (CITC) 
          (Sponsor)
          California State Association of Counties (CSAC)
          Ducor Telephone Company
          Ponderosa Telephone
          Regional Council of Rural Counties (RCRC)
          Sebastian
          Siskiyou Telephone
          Small School Districts' Association (SSDA)
          Volcano Communications Group

           Opposition 
           
          California Association of Competitive Telecommunications 
          Companies (CALTEL) (unless amended)
          Division of Ratepayer Advocates (DRA) (unless amended)
          The Utility Reform Network (TURN) (unless amended)


           Analysis Prepared by  :    DaVina Flemings / U. & C. / (916) 
          319-2083