BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 1276| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 445-6614 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ 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 SB 1276 Page 2 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 SB 1276 Page 3 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 SB 1276 Page 4 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 SB 1276 Page 5 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 SB 1276 Page 6 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 **** END ****