BILL ANALYSIS Ó SB 379 Page 1 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, SB 379 Page 2 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 SB 379 Page 3 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 SB 379 Page 4 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 SB 379 Page 5 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 SB 379 Page 6 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 SB 379 Page 7 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. SB 379 Page 8 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