BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 1276
                                                                  Page  1

          Date of Hearing:   June 30, 2004

                        ASSEMBLY COMMITTEE ON APPROPRIATIONS
                                   Judy Chu, Chair

                    SB 1276 (Bowen) - As Amended:  June 16, 2004 

          Policy Committee:                               
          UtilitiesVote:11-0

          Urgency:     No                   State Mandated Local Program:  
          No     Reimbursable:              

           SUMMARY  

          This bill:

          1)Extends for four years, until January 1, 2009, two Public  
            Utilities Commission (PUC) programs to provide local telephone  
            rates in high service-cost areas of the state (mainly rural)  
            that are comparable to rates in the remainder of a local  
            telephone company's service area. The programs are currently  
            funded through a surcharge on telephone bills and provide  
            subsidy payments to companies in order offset high service  
            costs. 

          2)Requires the PUC to review one of the two programs, which  
            involves high-cost customers of the state's four largest local  
            telephone companies, and to determine, by January 1, 2006,  
            whether to: 

             a)   Adjust subsidy payments to reflect updated operating  
               costs. 

             b)   Evaluate whether subsidy levels can be reduced while  
               still meeting program goals.

           FISCAL EFFECT  

          1)Extending the current surcharge for the two programs would  
            continue annual revenues of about $540 million for the  
            subsidies and program administration.

          2)PUC costs for program review would be around $100,000. [Public  
            Utilities Reimbursement Acccount]








                                                                  SB 1276
                                                                  Page  2


           COMMENTS  

           1)Background  . The two programs are administered by the  
            PUC--California High Cost Fund - A (CHCF-A) and the California  
            High Cost Fund - B (CHCF-B)--to support universal telephone  
            service in California. CHCF-A provides subsidies to 17 small,  
            rural local exchange carriers providing services in high-cost  
            areas through a 0.21% surcharge on all telephone bills, which  
            raises annual revenues of about $65 million. The subsidies are  
            used to cap residential telephone rates for these companies at  
            not more than 150% of the rates in urban areas. CHCF-B entails  
            a subsidy for providing service in high-cost areas of the  
            larger local telephone companies: SBC, Verizon, Citizens, and  
            Roseville.  This program is funded through a 2.9% surcharge  
            that raises annual revenue of about $480 million. The 2002-03  
            Budget Act transferred a total of $278 million from the two  
            funds to the General Fund.

           2)Opposition  . The Department of Finance (DOF) believes the goals  
            of universal service have been met and that eliminating these  
            programs will not result in a sizable reduction in telephone  
            subscribers. Furthermore, the 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. Contrary  
            to the department's position, however, the Governor's 2004-05  
            Budget proposes program expenditure levels--$59.3 million and  
            $482 million, respectively--that would appear to carry the  
            programs through June 30, 2005, or six months beyond the  
            current sunset date.

           3)Review Recommended  . The Office of Ratepayer Advocates (ORA),  
            within the PUC, recently released a report critical of the  
            CHCF-B, noting that the program has not been reviewed PUC  
            since 1996, hence some areas previously designated as high  
            cost may no longer warrant a subsidy.  The bill requires the  
            PUC to review the program's current subsidy payments by  
            January 1, 2006.

           Analysis Prepared by  :    Chuck Nicol / APPR. / (916) 319-2081