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 California  and to California   
               participants 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