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
                                                                        
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                                      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