BILL ANALYSIS                                                                                                                                                                                                    Ó

                   Senate Appropriations Committee Fiscal Summary
                            Senator Kevin de León, Chair

          AB 1407 (Bradford) - Public utilities: voice communications  
          service: lifeline program.
          Amended: August 12, 2013        Policy Vote: EU&C 6-1
          Urgency: No                     Mandate: Yes (see staff comment)
          Hearing Date: August 19, 2013                     Consultant:  
          Marie Liu     
          This bill meets the criteria for referral to the Suspense File.
          Bill Summary: AB 1407 would phase out the existing lifeline  
          program for basic landline service and create a new lifeline  
          discount of $11.85 per month for voice communication services  
          from a telephone corporation or eligible wireless and Voice over  
          internet Protocol (VoIP) providers. This bill would prohibit the  
          California Public Utilities Commission (CPUC) from requiring  
          state lifeline providers to offer more than is required under  
          the federal lifeline program.

          Fiscal Impact: 
           Ongoing costs of $275,000 from the Universal Lifeline  
            Telephone Service Trust Administrative Committee Fund  
            (Lifeline Fund) (special) for the CPUC for administration of  
            the program including reviewing and processing reimbursements  
            to lifeline providers.
              Ongoing costs, likely between $3.8 and $4.9 million, from  
              the Lifeline Fund for increased contract costs with the  
              Lifeline Administrator for increased call volumes and  
              increased processing of eligibility applications.
              One-time costs of $210,000 from the Lifeline Fund for two  
              years beginning in FY 2013-14 for increased consumer calls  
              to the CPUC regarding the new lifeline program.
              Unknown increased revenues, likely in the millions to tens  
              of millions of dollars, to the Lifeline Fund as a result of  
              a potential increase in the surcharge rate.
              Unknown costs, likely in the millions to tens of millions  
              of dollars from the Lifeline Fund as a result of increased  
              participation in the expanded lifeline program.

          Background: The Moore Universal Telephone Service Act (PUC §871  
          et seq.) establishes the California lifeline program which  


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          requires telephone corporation providers of residential service  
          to offer eligible low-income customers a lifeline class of basic  
          service at a fixed monthly rate. Providers of the lifeline  
          services receive subsidies to offset the cost of the discount.  
          Currently customers pay no more than $6.84 per month for  
          services, and providers receive $11.50 per month from the state  
          to offset costs after the federal subsidy is applied. The  
          subsidies are paid for by a surcharge of 1.150% assessed on  
          landline, wireless, and VoIP services (deposited in the Lifeline  
          Fund), though only telephone corporations may receive subsides  
          from these programs. 

          The California Lifeline Program has a third-party administer  
          which is responsible for determining customer eligibility for  
          lifeline and providing the CPUC with a list of participants for  
          the purpose of reimbursement. The contract with the third party  
          administrator, currently Xerox, is based on the number of  
          completed applications for lifeline and the number of minutes of  
          customer service provided by their call center. The contract  
          costs are $10 - 15 million annually. CPUC administrative costs  
          for the lifeline program involve distributing the lifeline  
          subsidy to telephone providers, handling appeals to denied  
          eligibility applications, and receiving general customer  
          complaint and inquiry calls.

          Section 54.101(a) of Title 47 of the Code of Federal Regulations  
          establishes technology-neutral requirements to determine  
          eligibility for federal universal service support including  
          voice grade access to the public switched network, access to  
          emergency services such as 911, access to operator services, and  
          a minimum amount of free local usage.

          Proposed Law: This bill would define a lifeline provider as any  
          telephone corporation or a provider of voice communication  
          services that meets the requirements of Section 54.101(a) of  
          Title 47 of the Code of Federal Regulations and collects and  
          remits surcharges for universal service programs. This  
          definition would allow wireless and VoIP providers to  
          participate in the California lifeline program. 

          This bill would repeal the current flat-fee lifeline program and  
          instead would establish a discount of $11.85 per month, in  
          addition to any federally supported lifeline discount, to  
          eligible lifeline customers to use on telephone service of their  


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          choice. The discount would also apply to any bundle or package  
          that includes voice service. The CPUC would be able to adjust  
          the discount amount annually according to the United States  
          Consumer Price Index for All Urban Customers (CPI-U). Providers  
          would receive reimbursement only for the discount amount  
          actually used by the customer. 

          The CPUC would be allowed to assess a surcharge up to 3.3% on  
          intrastate telephone communication services or VoIP service to  
          fund the lifeline program.

          This bill would also establish the following freezes:
                 Lifeline income limits would be fixed to those in effect  
               on January 1, 2013 except for an annual adjustment  
               according to the CPI-U.
                 Through December 31, 2014, the connection charge may not  
               exceed $10. Lifeline providers may receive reimbursement  
               for this customer benefit, limited to $40 per connection.  
               Beginning January 1, 2015, the CPUC may adjust the  
               connection charge and the maximum reimbursement to the  
               provider according to the CPI-U.
                 Through December 31, 2014, existing lifeline services  
               (landline) must be offered at the rates that were in effect  
               on July 1, 2013.

          This bill would require the CPUC to assess penetration rates for  
          the lifeline program by income, ethnicity, and geography and to  
          report these results annually to the Legislature. The CPUC would  
          also be required to report to the Legislature annually on the  
          fiscal status of the lifeline program.

          The CPUC would be required to revise its regulations by May 1,  
          2014 in accordance to this bill and would prohibit the  
          California Public Utilities Commission (CPUC) from requiring  
          state lifeline providers to offer more than is required under  
          the federal lifeline program.

          This bill would also prohibit the CPUC from denying a provider's  
          request to be designated an eligible telecommunication carrier  
          under federal law based on the requesting entity providing any  
          VoIP service.

          Staff Comments: Participation rates in the existing  
          landline-only lifeline program have been decreasing due to  


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          customer demand shifting to wireless technology. As such, this  
          bill is anticipated to sharply increase participation in the  
          state lifeline program by including wireless and VoIP providers.  
          To the extent that participation rates are increased, there will  
          also be increased costs to the Lifeline Fund for an increased  
          number of subsidies. This increase may be offset by an increase  
          in the lifeline surcharge, which may be up to 3.3% under this  

          The increase in participation rates as well as the increase in  
          providers is likely to result in some limited-term and some  
          on-going costs for the CPUC. To revise the existing lifeline  
          regulations, then implement the new expanded lifeline program,  
          including preparing the reports required by this bill, the CPUC  
          will likely need two Public Utilities Regulatory Analysts and a  
          half-time Public Utilities Counsel an ongoing cost of $275,000  

          The CPUC's Consumer Affairs Branch, historically has experienced  
          large spikes in workload when there have been changes in the  
          lifeline program because of increased customer inquiries about  
          the program, lifeline billing complaints, and appeals to  
          declined eligibility applications. For example, in 2006, in  
          response to federal requirements, the CPUC implemented  
          verification requirements for the lifeline program which  
          resulted in a surge of about 6,000 appeals a month. The CPUC  
          ultimately utilized 10 additional limited-term staff to deal  
          with the surge in customer assistance. The CPUC anticipates  
          needing an additional three PYs in the Consumer Affairs Branch  
          for two years at a cost of $210,000 annually. Staff believes  
          that that these costs are reasonable given that the changes in  
          the lifeline program in this bill are substantial. 

          This bill will also have cost impacts to the third party  
          administer, Xerox, who is responsible for verifying eligible  
          lifeline customers. Xerox preliminarily estimates a 40% to 50%  
          increase in applications and calls to their call center at an  
          annual increase in contract costs of $3.8 million to $4.9  
          million. Staff notes that the current participation in the  
          lifeline program is approximately 1.5 million and the industry  
          estimates that up to 3.7 million Californians may be eligible.  
          Presuming that a major barrier to participation in the current  
          lifeline program is the lack of desire for landline service, a  
          40% to 50% increase in participation is plausible and in-line  


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          with the increases anticipated by the CPUC.