BILL ANALYSIS SB 1276 Page 1 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 SB 1276 Page 2 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 SB 1276 Page 3 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 SB 1276 Page 4 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 SB 1276 Page 5 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. SB 1276 Page 6 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 FN: 0007755