BILL ANALYSIS                                                                                                                                                                                                    



                                                                       


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                              UNFINISHED BUSINESS


          Bill No:  SB 1276  
          Author:   Bowen (D), et al
          Amended:  8/17/04
          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

           SENATE FLOOR  :  27-5, 5/27/04
          AYES:  Aanestad, Alarcon, Alpert, Ashburn, Bowen, Burton,  
            Cedillo, Chesbro, Denham, Ducheny, Dunn, Escutia,  
            Figueroa, Florez, Karnette, Kuehl, Machado, Margett,  
            McPherson, Perata, Romero, Scott, Soto, Speier,  
            Torlakson, Vasconcellos, Vincent
          NOES:  Ackerman, Brulte, Hollingsworth, McClintock, Morrow
          NO VOTE RECORDED:  Battin, Johnson, Murray, Oller, Ortiz,  
            Poochigian, Sher, Vacancy

           ASSEMBLY FLOOR  :  77-2, 8/19/04 - See last page for vote


           SUBJECT  :    Telecommunications:  telephone service rates:   
          universal
                      sevice programs

                                                           CONTINUED





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           SOURCE  :     Author


           DIGEST  :    

          This bill extends the requirement for the State Public  
          Utilities Commission to provide affordable telephone rates  
          in high cost areas and appropriates funds for the support  
          of the California Teleconnect Program.

           Assembly Amendments  (1) add a provision requiring the State  
          Public Utilities Commission to review the California  
          High-Cost Fund A and California High-Cost Fund B programs'  
          current subsidy levels, (2) appropriate funds for the  
          support of the California Teleconnect Program, (3) add  
          language relating to fund purposes and program structure,  
          and (4) add co-authors and urgency clause.

           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:

          1.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 (a) rates  
            charged by small, independent telephone corporations  
            serving rural areas, referred to as California High-Cost  
            Fund A, and (b) 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.

          2.Requires the PUC to conduct an audit for the program to  
            evaluate whether subsidy levels can be reduced while  
            meeting the goals of the program.

          3.Specifies that the money in the funds are the proceeds of  
            rates and are held in trust for the benefit of ratepayers  







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            and to compensate telephone corporations for their costs  
            of providing universal service.

          4.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.

          5.Appropriates from the California Teleconnect Fund  
            Administrative Committee fund to the PUC $17.974 million  
            to fund telephone operations providing discounted rates  
            to qualifying schools, libraries, hospitals, health  
            clinics, and community organizations pursuant to PUC  
            Decision 96-10-066.

           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  







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          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.

          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  







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          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  
          (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.  

           Teleconnect Fund Appropriation Added to Bill  .  This bill  
          also includes an appropriation of $17,974,000 for transfer  
          from the California Teleconnect Fund Administrative  
          Committee Fund to the 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, the PUC reaffirmed its commitment to  
          universal service, and in accordance with state and federal  
          directives, created the California Teleconnect Fund to  
          provide discounted rates for a family of telecommunications  
          services for schools and libraries, government-owned health  
          care providers and qualifying community based  
          organiazations.

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

          In the Governor's 2004-05 Budget, the funding support for  
          the California Teleconnect Fund program was eliminated.

           FISCAL EFFECT  :    Appropriation:  Yes   Fiscal Com.:  Yes    
          Local:  No

          According to the Assembly Appropriations Committee,  
          extending the current surcharge for the two programs, the  







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          High Cost Fund A and the High Cost Fund B, will continue  
          annual revenues of approximately $540 million for the  
          subsidies and program administration.  PUC costs for the  
          program review will be around $100,000 from the Public  
          Utilities Reimbursement Account.

           SUPPORT  :   (Verified  5/4/04) (Unable to reverify at time  
          of writing)

          SBC
          State Public Utilities Commission (8/12/04)


           ASSEMBLY FLOOR  : 
          AYES:  Aghazarian, Bates, Benoit, Berg, Bermudez, Bogh,  
            Calderon, Canciamilla, Chan, Chavez, Chu, Cogdill, Cohn,  
            Corbett, Correa, Cox, Daucher, Diaz, Dutra, Dutton,  
            Dymally, Firebaugh, Frommer, Garcia, Goldberg, Hancock,  
            Harman, Jerome Horton, Shirley Horton, Houston, Jackson,  
            Keene, Kehoe, Koretz, La Malfa, La Suer, Laird, Leno,  
            Leslie, Levine, Lieber, Liu, Longville, Lowenthal,  
            Maddox, Maldonado, Matthews, Maze, McCarthy, Montanez,  
            Mountjoy, Mullin, Nakanishi, Nakano, Nation, Negrete  
            McLeod, Oropeza, Pacheco, Parra, Pavley, Plescia, Reyes,  
            Richman, Ridley-Thomas, Runner, Salinas, Samuelian,  
            Simitian, Spitzer, Steinberg, Strickland, Vargas, Wesson,  
            Wiggins, Wolk, Yee, Nunez
          NOES:  Haynes, Wyland
          NO VOTE RECORDED:  Campbell


          NC:cm  8/21/04   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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