BILL ANALYSIS                                                                                                                                                                                                          1
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                 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
                                DEBRA BOWEN, CHAIRWOMAN
         

         SB 1276 -  Bowen                                  Hearing Date:   
         April 13, 2004             S
         As Amended:         April 1, 2004                 FISCAL  2/3 vote  
         requirement                B

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                                       DESCRIPTION
          
          Current law  requires the California Public Utilities Commission  
         (CPUC) to develop a program to ensure universal telephone service is  
         provided in high-cost areas at affordable rates.  This requirement  
         expires on January 1, 2005.

          This bill  extends that requirement until January 1, 2009.

                                        BACKGROUND
          
         California has a long tradition of supporting universal telephone  
         service.  This tradition extends to rural areas in the state and  
         manifests itself in two separate programs, each dependent on the same  
         statute.  The California High Cost Fund - A (CHCFA) is a program  
         which subsidizes 17 small, rural local telephone companies:

                    Calaveras Telephone Company
                    California-Oregon Telephone Company
                    Citizens Telecommunications Company of the Golden State
                    Citizens Telecommunications Company of Tuolumne
                    Ducor Telephone Company
                    Evans Telephone Company
                    Foresthill Telephone Company
                    Happy Valley Telephone Company
                    Hornitos Telephone Company
                    Kerman Telephone Company
                    Pinnacles Telephone Company
                    The Ponderosa Telephone Company
                    Sierra Telephone Company
                    Siskiyou Telephone Company
                    Verizon West Coast Incorporated
                    The Volcano Telephone Company








                 Winterhaven Telephone Company

      The CHCFA provides these companies with a $37 million annual subsidy  
      funded by a 0.21% surcharge on telephone bills.  The subsidy is used  
      to cap residential telephone rates for these companies at not more  
      than 150% of the rate charged residential customers in urban areas.

      The second universal service program is the California High Cost Fund  
      - B (CHCFB), which provides a subsidy to companies providing service  
      in high-cost areas of the larger local telephone companies:  SBC,  
      Verizon, Citizens, and Roseville. This subsidy provides these  
      companies with $483 million a year funded by a 2.7% surcharge on  
      telephone bills.  One purpose of this program is to encourage  
      competition in the residential telephone service arena and any  
      company providing that service in those areas is eligible for that  
      subsidy.

      Both of these programs rely on Section 739.3 of the Public Utilities  
      Code as their statutory foundation, which is slated to sunset on  
      January 1, 2005.  This bill extends that section until January 1,  
      2009.

                                      COMMENTS
       
       1.What Happens If The Sun Sets?   What will happen if the statutory  
        basis for the CHCFA and CHCFB expires at the end of this year isn't  
        clear, but it's likely the two surcharges, a combined 2.91% of the  
        intrastate telephone bill, will be deleted. 

        While that will result in a small rate reduction for urban  
        telephone customers, the 17 small rural telephone companies will  
        need to raise their rates by $37 million to make up for that  
        shortfall, with the increase most likely to show up in higher basic  
        residential rates.  SBC, Verizon, Citizens and Roseville will also  
        likely increase their basic residential rates to make up for the  
        $483 million shortfall.  

        There will also be pressure to allow these companies to charge  
        different rates for different parts of their service area (e.g.  
        rate de-averaging), which would result in higher residential rates  
        in rural areas and relatively lower rates in urban and suburban  
        areas.  To the extent it exists, this residential rate re-balancing  
        will have a bearing on competition as competitors focus their  
        attention on the areas where residential telephone service is  
        offered at higher than cost.

       2.Do The Programs Work?   The Office of Ratepayer Advocates (ORA) has  







           recently released a report critical of the CHCFB, noting the  
           program hasn't been reviewed by the CPUC since 1996.  Consequently,  
           some areas which were designed as high cost in 1996 may no longer  
           be high cost and may no longer warrant a subsidy.  The ORA urges  
           the CPUC to review the CHCFB to ensure it's fulfilling its purpose  
           in a cost-effective way.   The author and committee may wish to  
           consider  amending the bill to direct the CPUC to perform such a  
           review.

                                        POSITIONS
          
          Sponsor:
          
         Author

          Support:
          
         SBC

          Oppose:
          
         None on file


         Randy Chinn 
         SB 1276 Analysis
         Hearing Date:  April 13, 2004