BILL ANALYSIS Ó 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE ALEX PADILLA, CHAIR SB 379 - Fuller Hearing Date: August 29, 2012 S As Amended: August 20, 2012 FISCAL B 3 7 9 DESCRIPTION Current law authorizes the California Public Utilities Commission (CPUC) to regulate telephone corporations and establish just and reasonable rates through a rate proceeding for each small independent telephone company. Current law requires the CPUC to establish and maintain universal service programs, including the California High Cost Fund A program (CHCF-A), to support small independent telephone companies' provision of basic voice service in rural, high-cost areas of the state. The program, funded by a customer surcharge on intrastate communications service, sunsets January 1, 2015. Current decisions of the CPUC authorize small independent telephone companies to recover in rates, supplemented by CHCF-A support, the cost of facilities to provide voice service. Current federal law and decisions of the Federal Communications Commission (FCC) provide universal service funding to providers serving rural, high-cost areas to help pay for facilities that provide customers both voice and broadband service, and condition receipt of those federal funds on meeting broadband deployment milestones and minimum network speeds. This bill requires the CPUC, in administering the CHCF-A, to promote customer access to advanced services in rural areas and to include in small company rate calculations the cost of all reasonable investments necessary to provide voice services and deployment of broadband-capable facilities. This bill requires that CHCF-A support be available only to a company subject to CPUC rate regulation and that is a Carrier of Last Resort with the obligation to fulfill all reasonable requests for service within its service territory. BACKGROUND Universal Service Policy - Ensuring the availability of high quality, affordable telephone service for all Americans has always been a bedrock principle of telecommunications policy. Separate state and federal programs provide subsidies to help carriers pay the cost of facilities in rural, remote, and sparsely populated areas where it is very expensive to provide service. The goal is to keep rates affordable and everyone connected. State Program Supports Voice Service - The CPUC administers the CHCF-A to support provision of voice service by the 14 small rural telephone companies under rate-of-return regulation. Funding is from an all-end-user surcharge assessed as a percentage of all customers' intrastate communications service charges (excluding Lifeline service to low-income customers). The CPUC adjusts the surcharge annually to ensure adequate funding to cover all the companies' funding requirements and program administrative costs. The current budget is about $50 million for 2012-13, with a surcharge of 0.4 percent of intrastate service charges. Each company's draw from the CHCF-A is determined as part of a rate proceeding, either a general rate case (GRC) with evidentiary hearings before an administrative law judge in which the Division of Ratepayer Advocates (DRA) and other parties participate, or a less formal advice letter process administered by the CPUC's Communications Division staff. In either process, the CPUC determines a "revenue requirement" necessary to cover expenses, a return on capital investment, and a profit. Based on this revenue requirement, customer rates are established, subject to the statutory maximum of 150 percent of rates for comparable services in urban areas. Support from the CHCF-A covers the difference between the company's revenue requirement and the revenue generated from rates. The CPUC does not include in the rate calculation the revenue a company or an affiliate earns from providing Internet access service, which is under the jurisdiction of the FCC. Federal Program Now Supports Broadband Service - Federal rules specify cost recovery of the portion of a company's network that is deemed to be for interstate services, with support from a federal universal service program. Although originally focused on networks to provide only voice service, the FCC in late 2011 issued a major decision revamping the former Universal Service Fund into the Connect America Fund (CAF) to provide subsidies for facilities that provide broadband (and voice) service. Carriers that accept CAF funding must meet broadband buildout requirements and demonstrate that their networks provide minimum broadband speeds of 4 megabits per second (MBPS) downstream and 1 MBPS upstream. It is estimated that California carriers could lose a total of at least $25 million in federal funding per year if they do not make additional investments to improve the speeds of their networks. CPUC Proceedings - In 2011 the CPUC opened a rulemaking (R.11-11-007) to undertake a comprehensive review of the CHCF-A program in order 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." Among the reasons cited to support the review was the FCC's shift to support broadband, along with the observation that any reduction in federal high cost support translates into an increase in support from the CHCF-A. COMMENTS 1. Author's Purpose . According to the author, this bill will align California's universal service program with recent changes at the federal level and thereby preserve about $25 million of federal support for building broadband networks that will provide California's rural communities access to e-commerce, e-government, and the information superhighway. 2. Federal and State Broadband Policy Goals . Congress and the FCC, through the National Broadband Plan, and this state through legislation and CPUC decisions have made it a top priority to bring broadband facilities to all corners of the nation and California currently lacking high-speed Internet access. This bill furthers these federal and state broadband goals in at least two ways. It codifies policy direction for the CPUC's administration of the CHCF-A to support investment in today's modern broadband technology rather than in the minimal facilities needed for providing voice service. It also helps prevent loss of substantial federal funds specifically targeted for broadband facilities in rural areas. 3. Improper Subsidy of Broadband ? The CPUC, TURN, and DRA oppose this bill, claiming that the issues it addresses are under consideration in the CPUC rulemaking on the CHCF-A. They also claim that the bill could as much as double the size of the A Fund, thereby impacting all customers, although the bill's sponsor disputes this claim. In addition, they object to providing ratepayer-funded subsidies for broadband facilities without giving the CPUC authority to consider the revenue a rural company earns from unregulated services delivered with the same broadband facilities that the CHCF-A would subsidize. Recent amendments seek to address these concerns. An Assembly Utilities and Commerce Committee amendment requires the CPUC to ensure that support to companies is "not excessive" so that customer impact is limited. An Assembly Appropriations Committee amendment requires companies to provide the CPUC information about revenues from unregulated broadband revenues, which they could otherwise assert they are not required to provide given FCC jurisdiction over these services. 4. Only Two Years Until Sunset Review . Although this bill establishes a new directive for the CHCF-A to align with federal changes to support broadband, its long-term impact may be minimal. The bill requires the CPUC to determine the amount of a company's A Fund subsidy as part of a GRC. Thus, the bill's provisions are not triggered until a GRC is filed. A proposal is pending before the CPUC to stay any new GRC until the CPUC completes its CHCF-A proceeding, which the CPUC states will be the middle of 2013 at the earliest. In addition, even after a GRC is filed, the bill preserves the CPUC's discretion to determine, based on the facts in each case, what is a "reasonable investment" necessary for providing voice and broadband service. This question will presumably be debated by all parties in the GRC, including DRA and TURN. Moreover, all of the provisions of this bill are part of the CHCF-A program that sunsets at the end of 2014, thereby ensuring legislative review in less than two years. In the meantime, all parties can continue to monitor the impacts of the CAF's new broadband requirements, address related issues in the CPUC's proceeding, and potentially get some experience with one or more GRCs under this bill. All of these developments will help the Legislature determine whether the purposes of this bill are being achieved and then further refine the CHCF-A program for years beyond 2014. 5. Ratepayer Impact . This bill could increase demand for CHCF-A funding, which could lead to an increase in the customer surcharge that pays for this program. Any potential increase to the CHCF-A surcharge could be offset, however, if the bill prevents loss of federal funding that would have to be back-filled by more CHCF-A funding. PRIOR VOTES Assembly Floor (78-0) Assembly Appropriations Committee (17-0) Assembly Utilities and Commerce Committee (12-0) Senate Floor (40-0)* Senate Energy, Utilities and Communications Committee (11-0)* *Prior votes are not relevant. POSITIONS Sponsor: California Independent Telecommunications Companies Support: California Communications Association California State Association of Counties Ducor Telephone Company Ponderosa Telephone Regional Council of Rural Counties Small School Districts' Association Sebastian Sierra Telephone Siskiyou Telephone Volcano Communications Group Oppose, unless amended: California Public Utilities Commission Division of Ratepayer Advocates The Utility Reform Network Jacqueline Kinney SB 379 Analysis Hearing Date: August 29, 2012