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 AB 1407 (Bradford) Page 1 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 AB 1407 (Bradford) Page 2 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 AB 1407 (Bradford) Page 3 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 bill. 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 annually. 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 AB 1407 (Bradford) Page 4 with the increases anticipated by the CPUC.