3. Program History, and Technological
and Regulatory Change

The Legislature adopted the Moore Universal Telephone Service Act in 1983 to address the expected increases in local telephone service charges due to the breakup of the AT&T Bell system into long-distance and local service carriers.¹³ Until divestiture, AT&T's rate structure allowed higher cost local service and discounted service to low-income customers¹⁴ to be supported by long distance service charges. With the corporate separation of these components of telephone service, regulators expected that customers would be required to absorb a higher portion of actual local service costs through higher basic monthly service rates, which would present a serious financial obstacle for many customers.¹⁵

The purpose of the Moore Universal Service Act was to provide rate relief for customers "who are most vulnerable to the rising costs of phone service," including "the needy, the elderly, the handicapped or infirm, and rural residents."¹⁶ The Commission noted that it had "many options available to it under the Moore Act for setting LifeLine rates," and then adopted a 50% discount on the otherwise applicable residential service rate.¹⁷

In 1995, the Commission initiated revisions to its Universal Service rules, including the LifeLine program, to address the then-new competition in the provision of local exchange service.¹⁸ The Commission first set forth the two essential elements of universal service:

· a minimum level of telecommunications services is available to virtually everyone in the state, i.e., there is ubiquitous presence of telecommunications services throughout the state, and

· the rates for such services remain reasonable.¹⁹

The Commission's regulation of local exchange carriers has evolved over the 20 years since the Moore Act was adopted by the Legislature and implemented by the Commission. ²⁰

In 2005, the Commission undertook its most recent comprehensive review of its regulation of local exchange carriers. On August 30, 2006, the Commission adopted D.06-08-030 which further changed rate regulation for California's four largest incumbent local exchange carriers - Pacific Bell, Verizon, SureWest Telephone, and Citizens Telecommunications Company of California dba Frontier Telecommunications Company of California - by adopting a Uniform Regulatory Framework.²¹ With the objective of symmetrically regulating all providers of telecommunications service, the decision eliminated all retail price regulations for all business services.²² Retail price regulation for residential service, with the exception of basic service, was also eliminated.²³ The existing price caps on basic residential service were to remain in place until January 1, 2009, after which these four carriers would have unlimited authority to set prices for basic residential service.²⁴ Geographically averaged residential basic service rates would no longer be required.²⁵

The Uniform Regulatory Framework (URF) decision also relaxed the procedural requirements for these four incumbent local exchange carriers when offering new services and filing tariffs.²⁶ These carriers can now provide new services with full pricing flexibility. The carriers were also authorized to allow all tariffs to go into effect on a same day filing, but any tariffs that impose price increases or service restrictions require a 30-day advance notice to all affected customers.²⁷

The URF decision continued price regulation for basic residential telephone service until January 1, 2009, consistent with the intent of the California Legislature as expressed in the Digital Infrastructure and Video Competition Act (DIVCA).²⁸ Subsequently as part of the High Cost Fund-B review, the Commission on September 18, 2008 extended pricing restrictions for basic telephone service and adopted a transitional plan to permit adjustments in retail rates for basic telephone service until January 1, 2011.²⁹ In the URF decision, the Commission recognized the important role of affordable LifeLine service, and acknowledged the need to "rethink the relationship between LifeLine and basic residential rates" in this proceeding.³⁰

When Assemblymember Moore proposed the legislation in 1983 that would become today's LifeLine program, the technology and regulation of local exchange service was substantially different. Cost-of-service determined local exchange rates have given way to competitive market service bundles and prices, and the nationwide monopoly provision of wireline service has been replaced with competition from wireless and internet-based telephone providers. Through the 40-year history of LifeLine, the Commission has interpreted the specific implementation details of the LifeLine program to remain true to its objective of providing affordable telephone service to low-income Californians. A brief history of actions in California related to the LifeLine program can be found in Appendix B. After reviewing the extensive history of the LifeLine program, we believe the principles adopted by the Commission in 1996 remain valid today:

1. It is the policy of the Commission to ensure that high-quality basic telecommunications services remain available and affordable to all Californians regardless of linguistic, cultural, ethnic, physical, geographic, or income considerations.

2. It is the policy of the Commission that in order to avoid stratification between information rich and information poor consumers, there should be a progressive expansion of the definition of basic service, as appropriate, and through the implementation of other policies, programs, and incentives to promote the deployment of advanced telecommunications technology to all customer groups.

3. It is the policy of the Commission to ensure that consumers have access to information needed to make timely and informed choices about basic service and ULTS.

4. It is the policy of the Commission to provide consumers with the ability to choose among competing basic service carriers regardless of the technologies employed by the carriers who provide basic service.

5. It is the policy of the Commission to ensure that basic service carriers adhere to interconnectivity, interoperability, common carriage, reliability, privacy and security guidelines.

6. It is the policy of the Commission to provide incentives as needed to promote deployment of advanced telecommunications technology to all customer segments, and to position health care, community, and government institutions to be early recipients of the benefits of the information age.

7. It is the policy of the Commission to provide a competitively neutral universal service mechanism which will minimize market distortions. The mechanism must provide for competitive provisioning of basic service, access to universal service funds, and a funding source which is broad-based and sustainable.³¹

We add an eighth principle today, it is the policy of the Commission to ensure that carriers provide consumers an evolving level of telecommunications services and take into account advances in telecommunications and information technologies and services.

As we review the current LifeLine program in today's decision, we will use these principles to guide us in our interpretation of the Moore Act to develop a forward looking program that meets the needs of modern Californians.

3.1. California LifeLine Today

The California LifeLine rate was effectively a set price for all incumbent local exchange carriers - 50% of AT&T California's (AT&T) monthly rate for basic residential telephone service - which was $5.47 for flat rate service and $2.91 for measured service in 2008.³² Specifically, the California LifeLine General Order requires the flat rate and measured service rate equal "the lower of 50% of the utility's regular tariffed rate" or "one-half of AT&T California's regular tariffed rate."³³

Local exchange carriers are reimbursed from the LifeLine program for the difference between the California LifeLine rate and the applicable basic residential service rate of the incumbent local exchange carrier serving the area.³⁴ Thus, as AT&T is reimbursed for the 50% reduction for California LifeLine customers from the Universal LifeLine Telephone Service program,³⁵ a competitive carrier operating in AT&T's service territory in 2008 would be reimbursed up to $5.47 (50% of AT&T's 2008 basic rate) even if the competitive carrier's actual basic rate exceeded that of AT&T. Other California carriers with basic rates higher than AT&T's rate, such as Verizon,³⁶ receive substantially more money from the fund as a result.

The disparity in payment amounts between companies means that the average discount provided by California LifeLine was $8.39 per month per customer in 2007. The average discount has grown to $9.26 for the first part of 2010. As the California LifeLine Program pays the full difference between the basic rate of each carrier and the California LifeLine rate, the program pays as much as $11.02 per customer per month for Eligible Telecommunication Carriers (ETCs) and $20.53 for non-ETCs.³⁷ Prior to the CPUC's decision extending the cap on basic rates, the total FY 2009-2010 projected budget was $331 million, and the fund size has grown about 20% over the past five years. The California LifeLine Program is larger than all the other state universal service programs combined.

In 2010, Frontier, Verizon, and SureWest chose not to make any change to their basic rates of $16.85, $19.91, and $19.99, respectively, while AT&T increased its rate to $16.45, a lower amount than the authorized cap, and lower than the three other URF carrier rates were in 2006. The California LifeLine rate increase was limited to $0.73 changing from $6.11 to $6.84 in 2010. This resulted in an increase to the California LifeLine Program of approximately $2.22 per customer which increased the total annual California LifeLine budget by more than $63 million in 2010. Somewhat offsetting this increase in costs is a lower demand that has resulted, in part, from the implementation of third-party application and renewal procedures in 2006 and the move to pre-qualification in 2009.

The Commission extended its "Set Price" California LifeLine methodology until the end of 2010 and limited the total increase for California LifeLine customers at a cost of increasing the annual California LifeLine budget by an additional 20% to 25% per year.³⁸ While reductions in household participation have offset some of the increases, we have created a state LifeLine fund that is not transparent to the consumers that receive the benefit or those that pay the cost. Thus, while the current methodology could be maintained, we could only do it at a significant cost. The interim methodology is not the best long-term methodology for LifeLine consumers and non-LifeLine consumers that must pay for the program.

¹³ Re Moore Universal Telephone Service Act, 14 CPUC2d 616, 617 (D.84-04-053). In 1983, the Moore Universal Telephone Service Act was implemented (Pub. Util. Code Section 871, Stats. 1987, Chap. 163, Sec. 2) with the goal of offering high quality basic telephone service at affordable rates to the greatest number of citizens.

¹⁴ See Re General Telephone Company (1969) 69 CPUC 601, 676, See also Re Pacific Telephone & Telegraph (1969) 69 CPUC 55, 83. The Commission modified the California LifeLine service from 1969 to 1984 through general rate cases of the telephone companies.

¹⁵ D.84-04-053, 14 CPUC2d at 618.

¹⁶ Id. at 622-623.

¹⁷ Id. at 623, citing Pub. Util. Code § 874.

¹⁸ Re Universal Service and Compliance with the Mandates of Assembly Bill 3643, 60 CPUC2d 536 (D.95-07-050).

¹⁹ Id. at 546.

²⁰ In 1989, the Commission adopted an incentive-based regulatory framework which, rather than solely focusing on costs, used a price cap indexing mechanism to create incentives for efficiency by the carriers. This approach came to be known as the New Regulatory Framework (or "NRF"). See, e.g., Order Instituting Rulemaking/Order Instituting Investigation on the Commission's Own Motion to Assess and Revise the New Regulatory Framework for Pacific Bell and Verizon California Incorporated,, D.02-10-020 ("NRF IV").

²¹ Re Uniform Regulatory Frameworks for Local Exchange Carriers, D.06-08-030.

²² Id. at Ordering Paragraph 5.

²³ Id.

²⁴ Id. at Ordering Paragraph 3. The Commission subsequently extended rate caps until January 1, 2011 in D.08-09-042.

²⁵ D.06-08-030 at Ordering Paragraph 1 as modified by D.08-09-042 at Finding of Fact 30 and Ordering Paragraph 4.

²⁶ URF Decision D.06-08-030 at Ordering Paragraph 8. See also D.07-09-018.

²⁷ URF Decision, D.06-08-030 mimeo at 183, 201-202, FoF 78, Ordering Paragraph 9.

²⁸ DIVCA is the Digital Infrastructure and Video Competition Act of 2006 (DIVCA), Assembly Bill 2987 (Ch. 700, Stats. 2006), codified at Pub. Util. Code §§ 5800, et seq.

²⁹ D.08-09-042 at Ordering Paragraphs 1-4.

³⁰ D.06-08-030 at 154.

³¹ Re Universal Service and Compliance with the Mandates of Assembly Bill 3643, 68 CPUC2d 524, Appendix B, Section 3 at 672 (D.96-10-066).

³² AT&T's rates effective through December 31, 2008.

³³ General Order 153 §§ 8.1.4 and 8.1.5.

³⁴ General Order 153 § 9.3.2.

³⁵ D.84-11-028 established General Order 153 for the implementation, funding, and administration of the Moore Universal Telephone Service Act and officially named the program the Universal LifeLine Telephone Service (ULTS) program. The official name was changed to California LifeLine in 2005. California Public Utilities Commission Report to the California Legislature, Universal Telephone Service to Residential Customers in Accordance with California Public Utilities Code Section 873, June 2006, at 12-13, available at http://docs.cpuc.ca.gov/published/Graphics/57534.PDF. See also D.08-08-029, mimeo. at 32.

³⁶ Verizon's local residential service rates are $10.24 for measured service (AT&T's rate is $5.83) and $17.66, or for certain areas, $17.25, for flat rate service (AT&T's rate is $10.94). Verizon's California LifeLine customers, however, pay the same rate as customers located in AT&T's territory, and the California LifeLine fund makes up the difference between the California LifeLine rate and Verizon's otherwise applicable rate.

³⁷ Eligible Telecommunication Carriers (ETCs) are designated by the Commission pursuant to 47 U.S.C. § 214(e) to be eligible to receive federal universal service support. The Federal California LifeLine program provides up to $10 per month - $6.50 in lieu of carriers charging a Subscriber Line Charge (SLC) to California LifeLine subscribers, and an additional $3.50 match to ETCs in California. This $3.50 match means that the California LifeLine program pays AT&T only $6.11 (plus administrative fees) compared to paying Verizon $9.97 (plus administrative fees) for every California LifeLine subscriber each month. The $6.11 is calculated by taking the AT&T basic rate, $16.45, subtracting the $6.84 paid by the LifeLine customer means the state and federal subsidy must total $9.61; deducting the $3.50 federal match from $9.61 leaves $6.11 for California LifeLine to pay directly to the carrier.

³⁸ See D.08-09-042 at OPs 5, 6, and 11.