BILL ANALYSIS                                                                                                                                                                                                    



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          SENATE THIRD READING
          SB 1276 (Bowen)
          As Amended August 17, 2004
          2/3 vote.  Urgency

           SENATE VOTE  :27-5  
           
           UTILITIES AND COMMERCE     11-0 APPROPRIATIONS      14-2        
           
           ----------------------------------------------------------------- 
          |Ayes:|Reyes, Aghazarian,        |Ayes:|Chu, Berg, Laird,         |
          |     |Calderon, Canciamilla,    |     |Corbett, Correa,          |
          |     |Diaz, Jerome Horton, La   |     |Goldberg, Leno, Nation,   |
          |     |Malfa, Levine, Maddox,    |     |Negrete McLeod, Pavley,   |
          |     |Ridley-Thomas, Wesson     |     |Ridley-Thomas, Wesson,    |
          |     |                          |     |Wiggins,                  |
          |     |                          |     |Yee                       |
          |     |                          |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |     |                          |Nays:|Haynes, Keene             |
          |     |                          |     |                          |
           ----------------------------------------------------------------- 
           SUMMARY  :  Extends the requirement for the California Public  
          Utilities Commission (PUC) to provide affordable telephone rates  
          in high cost areas and appropriates funds for the support of the  
          California Teleconnect Program.  Specifically,  this bill:  

          1)Extends the requirement for PUC to develop a program to ensure  
            universal telephone service is provided in high cost areas at  
            affordable areas until 2009 and requires PUC to conduct an  
            audit of the program to evaluate whether subsidy levels can be  
            reduced while meeting the goals of the program.

          2)Specifies that money 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.

          3)Specifies the program to be structured so that any charge  
            imposed to promote the goals of universal service reasonably  
            equals the value of the benefits of universal service to  
            contributing entities and their subscribers.

          4)Appropriates from the California Teleconnect Fund  
            Administrative Committee Fund to the PUC $17.974 million to  








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            fund telephone corporations providing discounted rates to  
            qualifying schools, libraries, hospitals, health clinics, and  
            community organizations pursuant to PUC Decision 96-10-066.

          5)Includes an urgency provision.

           FISCAL EFFECT  :  According to Assembly Appropriations Committee  
          extending the current surcharge for the two programs the High  
          Cost Fund A (HCFA) and the High Cost Fund B (HCFB) would  
          continue annual revenues of about $540 million for the subsidies  
          and program administration.  PUC costs for the program review  
          would be around $100,000 from the Public Utilities Reimbursement  
          Account.

           


          COMMENTS :  

          1)This bill extends the requirement for PUC 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 and  
            includes an urgency clause.

          2)Teleconnect fund appropriation added to this bill:  This bill  
            also includes an appropriation of $17,974,000 for transfer  
            from the California Teleconnect Fund Administrative Committee  
            Fund (CTF) to PUC to fund telephone corporations providing  
            discounted rates to qualifying schools, libraries, hospitals,  
            health clinics, and community organizations pursuant to PUC  
            Decision 96-10-066. 

          In this decision, PUC reaffirmed its commitment to universal  
            service, and in accordance with state and federal directives,  
            created CTF to provide discounted rates for a family of  
            telecommunications services for schools and libraries,  
            government-owned health care providers and qualifying  
            community based organizations.

          SB 669 (Polanco), Chapter 677, Statutes of 1999, codified six  
            advisory boards under PUC's authority to administer various  
            universal service programs like High Cost Fund programs and  
            CTF.  Funding for these programs were subject to the annual  








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            Budget process.

          In the Governor's 2004-05 Budget the funding support for CTF  
            program was eliminated.

          3)Background on HCFA and HCFB programs:  There are two separate  
            programs administered by PUC HCFA and HCFB 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 Bell Operating Companies (RBOCs).

          HCFA provides supplemental revenues to 17 small, rural local  
            exchange carriers (LECs) 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% of the local rate charged by Pacific Bell.

          Carriers in HCFA also receive support from the Federal High Cost  
            Fund (FHCF) to support universal service.  The amount received  
            from FHCF is deducted from the draws from HCFA amount each  
            year but the requirements for carriers to be eligible for FHCF  
            is based on whether a their actual loop costs exceed 115% of  
            the national average cost per loop.

          The elimination of HCFA 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.

          4)Detrimental impact to public safety:  The elimination of HCFA  
            support mechanism for small independent carriers would be  
            devastating to the public safety of these communities.  These  
            carriers rely on support from HCFA for 30 to 80% 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 HCFA 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  








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            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.

          5)Elimination of HCFA would widen the digital divide in rural  
            communities:  Elimination of HCFA 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 very substantial divide in the population.  Without a  
            support mechanism like HCFA, 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.

          6)California High Cost Fund - B:  This program was created by  
            PUC 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, PUC 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 PUC 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.

          7)Consequences of not having HCFA and HCFB statute re-extended:   
            The goals of both HCFA and HCFB 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  








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            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.

          8)Office of ratepayer advocates (ORA) review of HCFB 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 PUC as required which has resulted in a lack of  
            information on the effectiveness of the subsidies and whether  
            the amounts are too high in proportion to the costs to the  
            carriers to provide the service.

          9)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.

          10)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% 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 HCFA  
            and HCFB and thereby increasing their basic phone service by  
            more than $100 a month in some areas.


           Analysis Prepared by  :    Daniel Kim / U. & C. / (916) 319-2083 

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