BILL ANALYSIS
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THIRD READING
Bill No: SB 1276
Author: Bowen (D)
Amended: 4/1/04
Vote: 27
SENATE ENERGY, U.&C. COMMITTEE : 5-1, 4/13/04
AYES: Bowen, Alarcon, Dunn, Murray, Sher
NOES: McClintock
NO VOTE RECORDED: Morrow, Battin, Vasconcellos
SENATE APPROPRIATIONS COMMITTEE : 8-2, 5/3/04
AYES: Alpert, Aanestad, Bowen, Burton, Escutia, Karnette,
Machado, Murray
NOES: Battin, Ashburn
NO VOTE RECORDED: Johnson, Poochigian, Speier
SUBJECT : Telecommunications: telephone service rates
SOURCE : Author
DIGEST : This bill extends, from January 1, 2005 to
January 1, 2009, the requirement that the State Public
Utilities Commission maintain a program that establishes a
telephone rate structure designed to reduce disparities in
(1) rates charged by small, independent telephone
corporations serving rural areas, referred to as California
High-Cost Fund A, and (2) rates charged by larger telephone
companies in other high-cost areas, referred to as
California High-Cost Fund B. The programs, which provide
subsidies to eligible telephone companies, are funded with
surcharges imposed on telephone bills.
CONTINUED
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ANALYSIS : Current law requires the State Public
Utilities Commission (PUC) 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:
1. Calaveras Telephone Company
2. California-Oregon Telephone Company
3. Citizens Telecommunications Company of the Golden
State
4. Citizens Telecommunications Company of Tuolumne
5. Ducor Telephone Company
6. Evans Telephone Company
7. Foresthill Telephone Company
8. Happy Valley Telephone Company
9. Hornitos Telephone Company
10. Kerman Telephone Company
11. Pinnacles Telephone Company
12. The Ponderosa Telephone Company
13. Sierra Telephone Company
14. Siskiyou Telephone Company
15. Verizon West Coast Incorporated
16. The Volcano Telephone Company
17. Winterhaven Telephone Company
The CHCFA provides these companies with a $37 million
annual subsidy funded by a 0.21 percent surcharge on
telephone bills. The subsidy is used to cap residential
telephone rates for these companies at not more than 150
percent of the rate charged residential customers in urban
areas.
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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 percent 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 PUC as
their statutory foundation, which is slated to sunset on
January 1, 2005. This bill extends that section until
January 1, 2009.
Comments
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 percent 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.
Do The Programs Work? The Office of Ratepayer Advocates
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(ORA) has recently released a report critical of the CHCFB,
noting the program hasn't been reviewed by the PUC 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 PUC to review the
CHCFB to ensure it's fulfilling its purpose in a
cost-effective way.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
The proposed 2004-05 budget projects $59 million in the
CHCFA, and $482 million in the CHCFB.
SUPPORT : (Verified 5/4/04)
SBC
NC:cm 5/4/04 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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