BILL ANALYSIS
SB 1276
Page 1
Date of Hearing: June 14, 2004
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Sarah Reyes, Chair
SB 1276 (Bowen) - As Amended: June 9, 2004
SENATE VOTE : 27-5
SUBJECT : Telecommunication: telephone service rates.
SUMMARY : Extends the requirement for the California Public
Utilities Commission (CPUC) to provide affordable telephone
rates in high cost areas. Specifically, this bill extends the
requirement for CPUC to develop a program to ensure universal
telephone service is provided in high cost areas at affordable
areas until 2009 and requires CPUC to conduct an audit of the
program.
EXISTING LAW requires CPUC to develop a program to ensure
universal service is provided in high cost areas at affordable
rates until January 1, 2005.
FISCAL EFFECT : Unknown.
COMMENTS :
Purpose of this bill is to extend the requirement for CPUC to
develop, implement, and maintain a fair and equitable local rate
structure aided by transfer payments to telephone companies
providing service to high cost areas.
This bill extends the sunset date from January 1, 2005 to
January 1, 2009.
Background: There are two separate programs administered by
CPUC (1) the California High Cost Fund - A (CHCF-A) and, (2) the
California High Cost Fund - B (CHCF-B) to support universal
telephone service in California.
California High Cost Fund - A: This program was created out of
the High Cost Program in 1985 and modified in 1988 as a result
of proposed drastic reductions in access charges. Access
charges are the fees charged to interexchange carriers like AT&T
for terminating and originating long distance calls on the local
networks of either independent telephone companies or Regional
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Bell Operating Companies (RBOCs).
CHCF-A provides supplemental revenues to 17 small, rural local
exchange carriers (lec) providing services in high cost areas
through an all end user surcharge assessed on intrastate
telecommunications services. Furthermore, in order to draw
funds from the program the eligible carriers local rates cannot
exceed 150 percent of the local rate charged by Pacific Bell.
Carriers in CHCF-A also receives support from the Federal High
Cost Fund (FHCF) to support universal service. The amount
received from FHCF is deducted from the draws from CHCF-A amount
each year but the requirements for carriers to be eligible for
FHCF is based on whether a their actual loop costs exceed 115
percent of the national average cost per loop. The elimination
of CHCF-A might jeopardize the ability of small independent
carriers to access federal funds due to a lack of participation
by the state to partner with the federal government to promote
universal service.
Detrimental Impact to Public Safety: The elimination of CHCF-A
support mechanism for small independent carriers would be
devastating to the public safety of these communities. These
carriers rely on support from CHCF-A for 30 to 80 percent of
their intrastate revenue and the elimination of it would result
in them not being able to stay in business. All of these
carriers in CHCF-A are carriers of last resort in their
communities and are required to provide basic phone service to
their customers, which includes the ability to access 911
emergency service. By eliminating the support mechanism the
state would jeopardizing the health and safety of individuals
living in these areas and their ability to call for emergency
service because the cost of providing basic phone service would
be too high for these carriers to continue to operate.
Elimination of CHCF-A Would Widen the Digital Divide in Rural
Communities: Elimination of CHCF-A support mechanism would
exacerbate the digital divide between communities that have
access to the Internet and communities that do not. According
to the Consumer Federation of America report titled Does the
Digital Divide Still Exist? Bush Administration Shrugs, But
Evidence Says"Yes" less then one-quarter of those with incomes
below $25,000 have the Internet at home, while over three
quarters of those with incomes above $50,000 do. This sharp
contrast between lower and upper income households represents a
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very substantial divide in the population. Without a support
mechanism like CHCF-A, small independent phone carriers would be
forced to either raise the costs of Internet access where it
would be unaffordable to most families or stop providing the
service altogether.
California High Cost Fund - B: This program was created by CPUC
in 1996 in Decision No. 96-10-066. The decision established the
term basic service and specified all the service elements to be
included. An all end user surcharge was established and
carriers of last resort (COLR), who serve high cost areas in
their service territories, were able to draw from the funds to
support equitable local rates. Furthermore, CPUC in their
decision required the five large and mid size local exchange
carriers to reduce their rates, excluding basic service, by an
equal percentage to what they were drawing from the fund to
prevent double dipping.
In the decision CPUC adopted a cost proxy model sponsored by
Pacific Bell that resulted in a statewide average cost of $20.30
for basic telephone service to serve as the cut off point for
determining if an area is high cost and therefore eligible for
the subsidy.
Consequences Of Not Having the CHCF-A and CHCF-B Statute Re
extended: The goals of both CHCF-A and CHCF-B are to provide
fair and equitable basic phone service to high cost and hard to
serve areas. The elimination of the program would result in
rate increases for rural customers served by small independent
telephone carriers from an average of $16.85 per month for basic
telephone service to $149.00 per month for the smallest
carriers. This increase would make telephone service
unaffordable for these customers served by some of the smallest
telephone carriers and kill the goal of providing universal
telephone service as required by both the state and federal
government.
Office of Ratepayer Advocates (ORA) Review of CHCF-B Program:
In March ORA had released a report titled Review of the
California High Cost Fund B: A $500 Million Subsidy Program for
Telephone Companies . In the report ORA had found that carrier
claims to the fund increased dramatically since its creation
without regard to whether the carriers need the subsidy or not.
Furthermore, the program has not been reviewed by CPUC as
required which has resulted in a lack of information on the
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effectiveness of the subsidies and whether the amounts are too
high in proportion to the costs to the carriers to provide the
service.
The language in this bill requiring an audit of utilities
earning above their market-based rate of return and comparing it
to the amount they receive in subsidies from CHCF-B should be
deleted since it is contradictory to the intent of the review
process. The language should be deleted since the original
intent of the review is to determine whether the funding
methodology for CHCF-B is up to date and if the program is
providing funding support to carriers for areas no longer deemed
high cost.
The review process was not intended to be punitive by denying
subsidy amounts to regulated carriers earning above a market
based rate of return. Instead the review process was designed
to evaluate two issues (1) whether the per loop costs of serving
high cost areas would decrease over time due to technological
advances and, (2) whether competition would bring the marginal
costs of providing service in these areas down.
Department of Finance (DOF) Believes Goals of Universal Service
Have Been Met. DOF opposes this bill because it believes the
goals of universal service have been met and eliminating these
programs will not result in a reduction in telephone subscribers
sizable enough to threaten this achievement. Furthermore, DOF
believes the programs provide subsidies to individuals who
choose to live in rural locations and that since housing costs
in rural locations tend to be significantly less than in urban
and suburban locations, the savings from these lower costs are
available to rural residents to offset higher telecommunications
costs.
Department of Finance Fails to Take Into Account Socio-Economic
Factors in Making Their Assessment About the Need for Universal
Service Programs. Based on 1999 data from the Great Valley
Center a major determinant of the standard of living in the
Central Valley is the household income. The data from that year
showed that the previous 10 years, average household income in
the Central Valley averaged approximately 20 percent lower than
in the state as a whole. Furthermore, individuals and families
are moving into the Central Valley not out of choice but out of
need due to the unavailability of affordable housing close to
their work in areas such as San Jose and San Francisco.
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Furthermore, recent studies are showing that more and more
Americans are joining the ranks of the working poor as a result
of unaffordable healthcare, skyrocketing housing costs and
growing childcare costs. The financial conditions of the
working poor in rural areas like the Central Valley would only
be magnified by eliminating the support mechanisms like CHCF-A
and CHCF-B and thereby increasing their basic phone service by
more than $100 a month in some areas.
REGISTERED SUPPORT / OPPOSITION :
Support
AT&T
SureWest
California Telephone Association
Regional Council of Rural Counties
Ponderosa Telephone
Frontier
Sierra Telephone
SBC (support as amended April 1, 2004)
Opposition
Department of Finance
Analysis Prepared by : Daniel Kim / U. & C. / (916) 319-2083