BILL ANALYSIS Ó SB 1364 Page A Date of Hearing: June 23, 2014 ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE Steven Bradford, Chair SB 1364 (Fuller) - As Amended: May 27, 2014 SENATE VOTE : 37-0 SUBJECT : Telecommunications universal service programs. SUMMARY : This bill would extend the sunset date of the California High Cost Fund-A (CHCF-A) and High Cost Fund-B (CHCF-B) universal telecommunications service programs to January 1, 2019. Specifically, this bill : 1)Extends the sunset date of CHCF-A and CHCF-B from January 1, 2015 to January 1, 2019. 2)Requires the California Public Utilities Commission (PUC), in administering the universal service programs and state participation in federal universal service programs, to prioritize policies that maximize the amount of federal funding to California. 3)Deletes a provision of law related to universal service program funds, which states that "moneys in the funds are the proceeds of rates and are held in trust for the benefit of and to compensate telephone corporations for their costs of providing universal service." EXISTING LAW a)Requires the PUC to establish and maintain universal service programs to ensure statewide affordable telephone service and access to broadband and advanced communications services, funded by customer surcharges on landline, wireless, and Voice over Internet Protocol (VoIP) service. (Public Utilities Code § 270 to 285) b)Requires the PUC, until January 1, 2015, to establish and maintain the California High Cost Fund-A to subsidize small independent telephone corporations' provision of basic service in rural areas of the state. (Public Utilities Code § 275.6) c)Requires the PUC, in administering CHCF-A, to promote access SB 1364 Page B to advanced services in rural areas and to include the cost of all reasonable investments necessary to provide voice services and deployment of broadband-capable facilities in the rate base of small independent telephone corporations. (Public Utilities Code § 275.6) d)Requires the PUC, until January 1, 2015, to establish and maintain the California High Cost Fund-B to subsidize large providers that are Carriers of Last Resort for provision of basic telephone service to residential customers in high-cost areas. (Public Utilities Code § 739.3) FISCAL EFFECT : Unknown. COMMENTS : 1)Author's statement: According to the author, "SB 1364 will help to maintain lower rates for rural customers and provide access to telecommunications services that would be otherwise unavailable without state and federal high cost support. Rural residents and businesses have a critical need to be connected through both the telephone and the Internet for public safety, economic, educational and other reasons. Building, operating and maintaining telecommunications networks in rural areas is extremely expensive on a per customer basis due to tough terrain, greater distances between customers, and sparse populations. Due to these factors, there's generally no business case for providing affordable communications services in rural areas without cost support from federal and state universal service programs. Many technologies, such as wireless and Voice over Internet Protocol (VoIP), would not be available in rural areas if not for the existing networks built by the telecommunications companies receiving cost support from universal service programs." 2)Universal telephone service. Universal telephone service is the principle that all Americans should have access to high-quality, affordable telecommunications services. Both federal and state programs provide subsidies to carriers that help pay for the costs associated with providing service in rural, remote, and sparsely populated areas (i.e., where service would otherwise be of high cost). The programs are SB 1364 Page C funded by bill surcharges paid by most landline, wireless, and VoIP customers. The goal is to keep everyone connected through affordable rates, as many argue the value of the network increases when everyone is connected to the telecommunications network. 3)Federal universal service: the Connect America Fund (CAF). In 2011, the Federal Communications Commission (FCC) reformed its universal voice service programs to accelerate broadband (and voice) build-out to rural, high-cost areas. CAF is funded by customer surcharges on interstate services, and carriers that accept funding must meet minimum network (i.e., broadband speed) requirements. If carriers do not meet these requirements, millions in annual federal funding to California is at risk. 4)Universal service in California. California has established various public programs to promote universal service.<1> The California High Cost Fund-A (CHCF-A) and High Cost Fund-B (CHCF-B) support universal telephone service in rural, high-cost areas. In conjunction with federal funding, these programs ensure rates for Californians in rural areas remain reasonable and comparable to rates in urban areas. CHCF-A and CHCF-B are administered by the PUC and funded by a customer surcharge on all telecommunications customers' intrastate services. The PUC adjusts the surcharge, typically on an annual basis, to ensure sufficient funding for carrier claims and administrative costs. a) CHCF-A. This fund supports small rural telephone companies under rate-of-return regulation. Although thirteen companies are eligible for support from CHCF-A, only ten companies currently receive funding. The 2014 budget is about $34 million, with a surcharge levied at 0.18% of intrastate service charges. The level of support received by a carrier is determined as part of a PUC rate proceeding - either via a general rate case (GRC) proceeding or an advice letter. In both cases, the PUC calculates a "revenue requirement" needed to cover expenses, a return on capital investment, and a profit. Customer rates are established based on the revenue requirement, and are subject to a statutory maximum of 150% of rates for comparable services in urban areas. The ------------------------- <1> http://www.cpuc.ca.gov/puc/telco/public+programs/ SB 1364 Page D difference between the revenue requirement and the revenue generated from rates is covered by CHCF-A. The PUC opened a rulemaking in 2011 to review CHCF-A to determine the "most appropriate, efficient, and effective means of minimizing rate disparity and promoting California's goal of providing universal service."<2> The review was initiated in response to the increased use of other technologies in telecommunications, such as the FCC's shift to support broadband (and the observation that a reduction in federal funding will correspond to increased support from CHCF-A). The proceeding has been repeatedly delayed, with all rate cases on hold, and is not expected to be completed until December 2014 at the earliest.<3> b) CHCF-B. This fund supports large companies that are "Carriers of Last Resort" - currently AT&T California, Verizon of California, Frontier Telecommunications Company of California, and Cox California Telecom. Pursuant to CHCF-B program rules, a Carrier of Last Resort must offer basic telephone service to all residential customers within a designated service area, and is eligible for CHCF-B support to offset the cost of providing service in the high-cost Census Block Groups in their service areas where the cost of service exceeds $36 per month. The PUC has opened a rulemaking to update the carrier claim process to reflect 2010 Census Block Groups. A proposed decision has been issued to adopt provisions implementing updated cost calculations.<4> Carrier claims from CHCF-B have been declining in recent years, from about $50 million in 2010-11 to a projected $22.4 million in 2014-15. The 0.30% CHCF-B surcharge rate established in 2011 was reduced to 0% on February 1, 2014, reflecting anticipated repayment of a $134 million loan to the State of California. --------------------------- <2> PUC Order Instituting Rulemaking R.11-11-007 <3> R.11-11-007. http://docs.cpuc.ca.gov/PublishedDocs/Efile/G000/M090/K936/909367 59.PDF <4> R-09-06-019. http://docs.cpuc.ca.gov/PublishedDocs/Efile/G000/M090/K098/900983 93.PDF SB 1364 Page E 1)Recent 270(b) amendments. In addition to the main goal of this bill - an extension of the sunset on CHCF-A and CHCF-B - the bill proposes to amend Section 270(b) of the Public Utilities Code. Specifically, it seeks to remove the first sentence of 270(b), which reads "Moneys in the funds are the proceeds of rates and are held in trust for the benefit of ratepayers and to compensate telephone corporations for their costs of providing universal service." The Senate Energy Committee analysis states the intent behind this amendment is to conform statute with AB 841 (Buchanan, 2011), which required VoIP customers to pay all the surcharges. The analysis expresses concern that statutory references in Section 270(b) to "ratepayers" and "telephone corporations" are no longer accurate because VoIP service is not always provided by a "telephone corporation" and the charges for service are not utility "rates." However, removal of language stating that moneys in the funds are held in trust may have unintended consequences - the Legislature may borrow from these funds and not reimburse the monies at a later point. Therefore, the author may wish to consider an amendment reinserting the phrase "held in trust" into Section 270(b), as follows: "Moneys in the funds are held in trust and may only be expended pursuant to this chapter and upon appropriation in the annual Budget Act or upon supplemental appropriation." As this section of code affects several universal service funds other than CHCF-A and CHCF-B (including the Lifeline, Deaf and Disabled, Payphone Service, Teleconnect, and the California Advanced Services Funds), it is unclear the extent to which this sequence of amendments - in a bill whose primary goal is to extend the CHCF-A and CHCF-B programs - will affect the administration of these other universal service funds. 2)Amendments maximizing federal funding to California. Maximizing California's participation in the federal high cost programs can minimize expenditures of the state high cost programs. However, California has been making net contributions to the federal universal service programs (i.e., paying in more than receiving back) - amounting to $380 million in 2012. This bill contains provisions directing the SB 1364 Page F PUC, in administering the universal service programs and state participation in federal universal service programs, to prioritize practices and policies that maximize the amount of federal funding to California. The author may wish to consider an amendment to this provision that encourages (rather than directs) the PUC to maximize federal funding, as follows: "The commission, in administering the universal service program funds listed in subdivision (a), and in administering state participation in federal universal service programs,shall make it a priority, and take all reasonable steps consistent with the state's universal service policies and goals,is encouraged to maximize , consistent with the state's universal service policies and goals, the amount of federal funding to Californiaand to Californiaparticipants in the federal programs." 3) Related legislation . AB 1693 (Perea, 2014) requires the PUC to resolve A-Fund company rate cases within one year of filing or proposed rates go into effect. 4)Support and opposition. Supporters state that extension of the sunset on CHCF-A and CHCF-B will help ensure that affordable telephone service remains available in rural, high-cost areas of the state. They further state the bill will help maintain lower rates for rural customers and provide access to telecommunications services that would be otherwise unavailable without state and federal high cost support. In opposition unless amended, The Utility Reform Network (TURN) argues that recent amendments proposing revisions to Public Utilities Code Section 270 create unnecessary risk for ratepayers. TURN contends that these amendments impact all of the Commission's Public Purpose Programs (including the High Cost Funds, LifeLine, the Teleconnect Fund and the Deaf and Disabled Program) by fundamentally changing the focus of the programs. TURN states that elimination of the term "telephone corporation" from this section of statute may allow those telecommunications companies that have refused to submit to the jurisdiction of the Commission to receive ratepayer funded subsidy money. This is because some telecommunications companies have repeatedly argued that they are not subject to SB 1364 Page G the requirements and responsibilities of telephone corporations set out in the Code and PUC regulations. Furthermore, TURN states it does not support a policy that prioritizes federal funding at the expense of addressing state-specific concerns. REGISTERED SUPPORT / OPPOSITION : Support AT&T California Communications Association (CalCom) California State Association of Counties (CSAC) California's Independent Telecommunications Companies (CITC) Frontier Communications Office of Ratepayer Advocates (ORA) Rural County Representatives of California (RCRC) Opposition The Utility Reform Network (TURN) (unless amended) Analysis Prepared by : Brandon Gaytan / U. & C. / (916) 319-2083