5. Discussion

The Commission recognized in opening this Rulemaking in 2006 that consumers are purchasing communication services in new ways. Consequently, our current public purpose programs, including LifeLine, must be revised to reflect these new communications options. Through this Rulemaking, the Commission set out to reform California LifeLine in a way that would "continue our universal service commitment by assuring the continued affordability and widespread availability of high-quality telecommunications services to all Californians."¹⁴¹

These changes to the California LifeLine methodology we adopt today take the best elements from the various options proposed by parties and blend them into a new methodology that offers consumers a sufficient level of certainty and a great deal of flexibility. The changes to California LifeLine methodology adopted by this decision will best ensure consumers in California have affordable access to the communication service of their choosing. We also include a proposal that will provide additional protection for low income ratepayers during this period of change.

Throughout this proceeding, parties welcomed the review of the California LifeLine Program and agreed on the need to de-link the California LifeLine rate from AT&T's basic rate.¹⁴² We believe this is a necessary step to take at this time. Among other things, we believe the California LifeLine rate must be de-linked from the AT&T basic rate in order to ensure ongoing compliance with Section 874 of the Public Utilities Code.¹⁴³ Parties had different views as to how the California LifeLine Program should operate after it is de-linked from the AT&T basic rate.

DRA suggested the Commission should develop an independent basis for determining what low-income customers find affordable.¹⁴⁴ In the recent decision extending the basic rate caps for two more years until the end of 2010, D.08-09-042, the Commission took note that approximately 25% of households in California are subscribers to California LifeLine, and that as part of the overall reforms to the California LifeLine Program, an update to the Affordability Study would be useful in ensuring that our policies continue to meet the goal of 95% subscribership.

Subsequent to D.08-09-042, the Legislature adopted SB 780, which among other things requires the Commission to "prepare and submit to the Legislature a report on the affordability of basic telephone service in areas funded by the California High-Cost Fund-B" by July 2010.¹⁴⁵ The Legislature authorized funding in the Fiscal Year 2009-2010 budget so that the affordability study could accomplish the goals of both SB 780 and D.08-09-042.

The survey was conducted during the first half of 2010, and Commission Staff published its report on September 30, 2010. The study includes a report on the affordability of basic telephone service in areas funded by the California High-Cost Fund-B Administrative Committee Fund as required by Sec. 739.3(f) and gathers information on prices and costs of basic telephone service, and penetration and utilization rates by income, ethnicity, age, and other relevant demographics. The statewide survey facilitates analysis of the impacts of LifeLine in California so that we can ensure the reforms to the LifeLine program adopted in this proceeding continue to meet the goals of the Legislature and the Commission. We have taken the results of the 2010 Affordability Study into account in making the changes to California LifeLine adopted today.

In reviewing data from the affordability study, we see that the typical cost for phone service has not changed significantly for the median consumer between 2004 and 2010, and in constant dollars has slightly declined.¹⁴⁶ Further, study results for 2010 indicate that 71 percent of consumers find their total telephone service bills affordable and 80 percent in high cost areas find basic rates including surcharges and taxes affordable.¹⁴⁷ The result is consistent with the 2004 result when 81 percent said that phone service was either very easy, or somewhat easy to afford.¹⁴⁸ Additionally, according to the Commission's most recent Universal Service Report, the price of basic telephone service and the price of LifeLine service in inflation adjusted dollars is respectively the same as, and more affordable than when the Moore Act was adopted in 1984.¹⁴⁹ Such information in conjunction with the 2010 Affordability Study and other studies underscore the continuing affordability of basic telephone service rates.¹⁵⁰ In addition, the study shows that the typical bill for LifeLine consumers is $10.90 less than that of non-LifeLine consumers.¹⁵¹ Such a result is consistent with the rate structure of the current LifeLine program as LifeLine consumers pay between $9.61 and $13.15 less than the basic rate offered by any carrier.¹⁵² Finally, during the course of this proceeding, no party presented an argument why the affordability study would drive changes to the LifeLine methodology, and we do not find the results compelling any different action than what we enact in this decision. If anything the study reinforces the approach we take in reforming the methodology to a Specific Support Amount.

The Affordability Study is helpful in providing a snapshot of the overall picture of consumer affordability based on current costs, but there are many other data points for the Commission to consider in evaluating the effectiveness of the LifeLine program and the overall success of California's universal service policies. For example, the Commission's Subscribership Report shows that households having an annual income of less than $10,000 consistently have a penetration rate below the 95 percent goal, and only just recently have households under $20,000 annual income exceeded the 95 percent goal.¹⁵³ There are still thousands of households that report they do not have access to phone service and most of those have the lowest household incomes in the state. Another relevant factor is the increasing reliance on wireless service in lieu of landline service. The Affordability Study estimates that 23 percent of California households subscribe only to wireless service, 59 percent subscribe to both landline and wireless service, and 18 percent subscribe to landline only service.¹⁵⁴ Further, about half of all LifeLine subscribed households also subscribe to wireless, whereas 83 percent of non-Lifeline subscribers do. Another factor is the ability and willingness of consumers to pay for phone service.

The Affordability Study shows that the current discount provided by the California LifeLine Program reduces the landline phone bill for low income consumers compared to those non-subscribers having similar income. While the study shows that most subscribers earning under $24,000 or less annually would tolerate a 37 percent increase in bills and shift to wireless service should bills increase too-much, there remains a small segment of about 1.6 percent of customers who may forgo phone service entirely if rates exceed a tolerable amount.¹⁵⁵ In reviewing all of the changes to the communications environment, and taking into consideration the proven success in the current program, we recognize there are many considerations to take into account in structuring how California LifeLine should work to keep phone service affordable going forward.

5.1. Methodology to Calculate California
LifeLine Subsidy

Our objective in opening this proceeding was to assess whether the Telecommunications Public Policy Programs are meeting their respective statutory purposes and requirements, and to identify and remedy any deficiencies. The Commission has long considered the 95 percent¹⁵⁶ subscribership goal as the best measure of affordability when evaluating the universal service programs, including California LifeLine, and because of its universal service programs, California continues to exceed that standard.¹⁵⁷ We conclude that California Lifeline should be updated to reflect the principle of competitive and technological neutrality consistent with federal and state law in order to continue to meet the 95% subscribership goal.¹⁵⁸ We determine that our changes to California LifeLine must consider that LifeLine customers need to have some amount of consistency with regard to the rate they pay. We have scrutinized numerous options for reforms to California LifeLine and select the best option to ensure the long-term success of California LifeLine in the future.

We also examine in Section 5.2 why the reasons the Commission previously has relied on in excluding non-traditional wireline providers from participating in California LifeLine are no longer valid and why providers using alternative technologies, such as wireless and VoIP, should be eligible to participate in the California LifeLine Program just as any other provider of service. Further, we confirm that other services that include the basic service elements and provide residential telephone service are also eligible to participate in California LifeLine throughout the State. Providers of those services are eligible today to seek reimbursement from the California LifeLine Fund.

5.1.1. Delinking LifeLine Price from Basic Residential Service Rate

Effective January 1, 2011, URF carriers will be authorized to change at will the price for basic residential service, without regard to carrier costs. The 1983 Moore Act did not contemplate this evolution in regulation resulting from changes in telecommunications services and markets.

To develop a forward-looking LifeLine program, the LifeLine price must be set based on something other than the otherwise applicable price for basic residential service. Most parties agree that delinking the two is essential. The parties have posited the following three scenarios: (1) a Set Price; (2) a Floating Subsidy (tied to each carrier's actual basic rate); or (3) a Specific Support Amount ($10-$12 initially). The assigned Commissioner sought comments in the July 2007 ruling and scoping memo on the ideas of Set Price and the Specific Support Amount. We have summarized the three options below.

5.1.1.1. Set Price Option

The "Set Price" option would effectively continue the existing program, because the Commission has designated that 50% of the AT&T basic rate is the California LifeLine Rate (set price) for all carriers. Under the Set Price option, if the Commission designates, for example, $6.11, as the monthly rate to be paid by California LifeLine customers, for each California carrier, the Commission would pay the difference between each carrier's basic rate and the $6.11 from the California LifeLine Fund. Adopting a Set Price for all customers who qualify for California LifeLine offers the advantage of having the same price for all California LifeLine customers no matter who the telecommunications provider is.

The most positive attribute of the Set Price methodology is the consistency in marketing California LifeLine with the existing marketing campaign. A California LifeLine customer would have certainty as to his LifeLine phone cost and could budget for it, though non-California LifeLine customers would have more volatility as adjustments in the surcharge amount would occur more frequently. These positive attributes would be outweighed by the negative attributes of the Set Price option

The cost to California consumers of the Set Price option would be the highest of the three options because the Set Price would be half the lowest basic rate reported by any carrier that provides service to California LifeLine customers. The Commission would have to monitor the market to ensure that the Set Price is appropriately adjusted over time (e.g., at least yearly) as prices fluctuate. The result is that the Commission would have a significant level of uncertainty in the program size.

The Set Price option would also limit choices for low-income consumers. By setting the price that carriers could charge to California LifeLine customers, the Commission may inadvertently cause only the minimum services to be provided to those customers, thus restricting LifeLine subscribers' options.

While the Set Price scenario can be accomplished in a manner that largely comports with the California LifeLine statute, it would be administratively burdensome. It would require the Commission to monitor the basic rates of all the carriers providing California LifeLine service and adjust the LifeLine price to ensure it remains below 50 percent of the lowest of the carriers' basic rates.

While the Set Price option would carry the highest program cost because it would result in the highest surcharge and thus have the most negative impact on non-California LifeLine customers, it also would offer a large benefit to low-income customers as they would pay just half of the lowest basic rate in the state.

5.1.1.2. Floating Subsidy Option

The second option is a "Floating Subsidy" of 50 percent of each individual company's lowest priced service that includes all the components of basic service. This option would not have the Commission set either the rate all LifeLine customers pay, or the specific benefit amount by which carriers would have to reduce LifeLine customer bills. In allowing both components of the LifeLine program to move with the market or "float," the Commission would create a flexible program that would treat the LifeLine customers of each carrier in a comparable manner and adjust for the individual circumstances of each carrier.

The positive attributes of the Floating Subsidy include the ease of statutory compliance. California LifeLine customers would have reasonable price certainty in that each carrier's LifeLine rate would be half of the carrier's basic rate. California non-LifeLine customers, however, would experience more rate volatility as adjustments in the surcharge amount would occur more frequently to peg collections to disbursements.

Projecting the fund size of the Floating Subsidy option would be less certain, but it undoubtedly would be less than the other two alternatives. However, it is not the preferred option because the uncertainty in pricing and the challenges in marketing this option could reduce the number of participants. The Floating Subsidy projects to be the least cost option, but carries a high opportunity cost as it is the approach least likely to maintain the current high subscriber level (95 percent) reflected in our universal service goals.

In letting the California LifeLine rate for each carrier float with its individual basic rate, California LifeLine rates could vary greatly, which would complicate our marketing efforts if the message were based simply on rates. Moreover, the number of carriers providing California LifeLine service and their ability to frequently adjust rates may leave marketing efforts outdated before they are launched.

The Floating Subsidy would be the most difficult option administratively as per-customer distribution amounts could vary monthly by carrier and would be different for each carrier. The Floating Subsidy option also presents uncertainty in LifeLine program cost expectations each month and makes the annual planning cycle a difficult challenge.

As the Floating Subsidy option would carry the lowest LifeLine program cost, it would result in the lowest surcharge and thus have the most positive impact on non-LifeLine customers. However, most low-income customers would be worse off as the average low-income rate would be highest under the Floating Subsidy option, and some low-income customers could even end up paying more than non-low-income customers of other carriers.

5.1.1.3. Specific Support Amount Option

Under the Specific Support Amount option, the Commission would designate an initial monthly subsidy of some amount, for example, $5.00, to be paid to carriers to directly reduce the monthly bills of California LifeLine customers. Adopting a Specific Support Amount for all customers who qualify for California LifeLine, without regard to the telecommunications service provider or technology may provide greater flexibility to low-income customers to select services beyond basic residential landline phone service, including wireless communications services. The actual amount received by each carrier may be less depending on the rate charged to the California LifeLine customer. Such an approach would acknowledge the range of providers of voice communications services beyond traditional wireline service providers, and would enhance technological neutrality by allowing a LifeLine customer to choose the provider that best meets his or her unique needs.

Using the rates known at this time (which are all less than the caps authorized in D.08-09-042 for 2009), a hypothetical example of how the Specific Support Amount (based on $12.00 from California LifeLine) for the four URF companies in 2009 would be is as follows:



In its initial comments, AT&T provided the most comprehensive proposal for the Specific Support concept, which AT&T calls a "fixed benefit." AT&T acknowledged that moving to a fixed benefit would require significant changes to GO 153. AT&T proposed that the Commission set a fixed benefit amount structured to meet the needs of low-income customers, which would be credited on the customer's bill. Providers would seek reimbursement for the fixed amount from the claims process. Such an approach would simplify administration of the California LifeLine program because the reimbursement amount would no longer be calculated based on the provider's usual rate but rather would be limited to the actual benefit distributed to customers.

As explained more fully below, we adopt this option for setting the California LifeLine subsidy, with some modifications to only permit carriers to update their LifeLine rate once a year and to cap each carrier's LifeLine rate at 50 percent of its basic rate.

5.1.2. Adopted Rate Scheme: Specific
Support Amount

After evaluating all of the options against the goals of the Moore Act and our overall universal service goals, we have determined that the Specific Support Amount methodology is the best option. A Specific Support Amount process for California LifeLine will provide the greatest flexibility to low-income customers to select the communication service that best meets their unique needs.

We are aware that participation in California LifeLine has decreased over the past few years, specifically after implementation of the third party application and renewal processes. The basic per-subscriber cost figures used here to evaluate the program, however, have not changed significantly:

We have studied these issues closely over the course of this proceeding and continue to agree with the majority of parties who support the selection of a Specific Support Amount, with some modifications.¹⁵⁹ Parties disagreeing with the changes claim that more time is needed to further study potential LifeLine reforms. As shown in Appendix A, the record in this proceeding is quite extensive and complete. The issues to be addressed have not materially changed over the last four years and parties have provided no new ideas or facts which could be further explored, despite even more time allotted by the assigned Commissioner in 2009. The time has come to make a decision and move forward.

One of the concerns with the Specific Support Amount option is that LifeLine customers could potentially pay varying amounts during the year as a carrier's basic rate changes. Since 2008, the basic rate has changed over time and for each URF carrier, albeit within a capped range until 2011. We realize that LifeLine customers have become accustomed to having a fixed rate that does not vary over time. We do not believe that a LifeLine rate fixed in perpetuity recognizes the dynamic nature of the telecommunications industry or marketplace.

We are, however, mindful of the concern that many LifeLine customers may need some consistency in their monthly expenses for phone service so that they may properly budget their monthly living costs.¹⁶⁰ If we simply adopted the Specific Support Amount methodology, LifeLine customers could end up paying different amounts throughout the year because the amount of the subsidy would remain constant over the period of a year, but carriers may change their basic rates whenever they wish.¹⁶¹ Therefore, we will set the LifeLine rate of each participating carrier only once a year.¹⁶² The LifeLine rate will be calculated by subtracting the Specific Support Amount and the federal Lifeline subsidy from the carrier's basic rate as of a particular date, as determined by CPUC staff. Each carrier's LifeLine rate will be updated on an annual basis. This is consistent with what was contemplated by the Moore Act, which states, in relevant part, "[t]he Commission shall annually do the following . . . Set the rates and charges for that service . . ."¹⁶³ The methodology we adopt today does not limit carriers from changing their basic service rates.¹⁶⁴

The Specific Support option can be implemented immediately and would not be impacted by the end of the basic rate cap on January 1, 2011. After 2010, the Specific Support option would be consistent with the communications market because it would provide low-income consumers choices in service providers and types of service. Low-income consumers would have the same option in choosing communication services as non-low-income consumers, and would not be limited to only wireline service options. By setting the benefit that carriers must pass through to California LifeLine customers, the Commission ensures that low-income consumers are not restricted in purchasing the types of services they need.

The fund size of the Specific Support Amount option falls generally in the middle of the three options and the Specific Support Amount fund size would be dependent on the size of the benefit provided to each California LifeLine subscriber. The Commission would not have to monitor the market each month and could easily ensure the Specific Support Amount is appropriately adjusted over time as prices fluctuate. The result is that the Commission would have reasonable certainty as to LifeLine program size without the uncertainty the other two options would pose.

The following chart provides a high, middle, and low estimate of the total fund size after 2011 for the Specific Support Amount option:

The range of possible outcomes is based on whether the Specific Support Amount is sized to keep average rates at a level similar to today's fixed rate, or some other higher level. The size of the fund would impact the consumers that will be paying the surcharge and the chart shows how varying the benefit impacts other consumers. The average rate and California LifeLine payment amounts would vary based on how much the low-income consumer pays, ranging from a rate similar to today up to half the $20.00. The California LifeLine Program pays for the remaining amount of the service. The chart also shows the current program and projects a 2011 figure based on current figures increased by the $3.25 amount allowed by the Commission in D.08-09-042 for URF carriers, apportioned to both the consumer and the California LifeLine Program.¹⁶⁵

The Specific Support Amount has the advantage of being easier to administer because the amount needed for collection depends on only one variable - the number of California LifeLine customers. Further, every carrier , including wireless and VoIP providers, gets the same per California LifeLine customer subsidy from the fund. As the California LifeLine Program would provide the same amount per customer to the carrier, its billing systems could easily handle the process once any initial adjustments are made.¹⁶⁶ Strong arguments have been made that the Specific Support Amount could also cover all carrier administrative costs and other fees. The Specific Support Amount is both provider- and technology-neutral consistent with Section 871.5(d).¹⁶⁷ In addition, it is the easiest of the options to administer for reporting and payment purposes.

Compared to the other options, waste, fraud, and abuse issues would also be the least likely to occur with the Specific Support option as carriers would be paid a fixed amount for each California LifeLine customer served. The Specific Support amount should be at least $3.50 in order to maximize the Federal Lifeline support available to California consumers.¹⁶⁸

The Specific Support Amount complies with Section 874 of the Public Utilities Code, which requires that California LifeLine customers not be charged more than half of the basic rate. As the basic rate may fluctuate over time for all carriers, and for each URF carrier after 2010, the California LifeLine subsidy would have to be set sufficiently greater than 50% of the average basic rate in order to ensure statutory compliance. If the amount is set at 55% of the highest basic rate of the URF Carriers of Last Resort (COLRs), we can establish reasonable certainty in program revenue and costs and help manage the market expectations of California LifeLine customers. We must ensure, however, that carriers do not charge LifeLine customers more than half of their basic rate, pursuant to Section 874. Therefore, we also cap each carrier's LifeLine rate at 50% of its basic service rate. Where possible, when implementing a program to meet specific statutory goals, the program should not depend on actions outside of the Commission's control. As the terms of the Federal Lifeline program are beyond the Commission's jurisdiction, the Specific Support Amount should be set at a level that will ensure compliance with the Moore Act.¹⁶⁹

In adopting the Specific Support Amount approach, the Commission may seek statutory changes to the Moore Act after 2010 to avoid having to continuously update the support amount. Statutory changes, however, are not necessary to design and implement a change to a Specific Support amount based on the methodology set forth in this decision.

5.1.2.1. Calculation

After December 31, 2012, each carrier will establish a LifeLine rate that is no more than 50% of its basic service rate and no less than $5.00 per month on an annual basis. The LifeLine rate should be computed by first deducting from a carrier's basic rate the Federal Tiers 2-3 Subsidy¹⁷⁰ (currently $3.50) available to the carrier and then deducting up to the full value of the Specific Support Amount. If a carrier's basic rate minus the combined subsidy from the Federal subsidy and the Specific Support Amount would result in a LifeLine rate that is lower than $5.00 per month, then the carrier shall only deduct from a customer's bill the portion of the Specific Support Amount that would result in a $5.00 LifeLine rate for the customer. This portion of the Specific Support Amount would limit the amount of reimbursement of monthly recurring charges that a carrier is authorized to seek from the California LifeLine Program. In situations where a carrier's basic rate minus both the matching Federal subsidy and the Specific Support Amount results in a LifeLine rate that is more than 50% of the carrier's basic service rate, a carrier's LifeLine rate will be capped at no more than 50% of the basic service rate.

Thus, the new LifeLine rate shall be no more than 50% of the carrier's basic service rate and no less than $5.00. On August 1 of each year, URF COLRs will file with the CPUC's Communications Division (CD) their basic rates that were in effect on July 31 of that year. CD will establish the Specific Support Amount based on 55 percent of the highest URF COLR's basic rate. Each carrier participating in the California LifeLine Program will establish a LifeLine rate for its customers to become effective January 1 and must notify its customers at least 30 days in advance of any change its LifeLine rate. The LifeLine rate in affect on January 1 shall not be changed until January 1 of the following calendar year unless a change in the carrier's basic rate would result in a LifeLine customer paying more than 50 percent of the basic service rate. In such situations, a carrier must lower its LifeLine rate to ensure that LifeLine customers pay no more than 50 percent of the carrier's basic rate.¹⁷¹

Prior to December 31, 2012, the same methodology for setting the Specific Support Amount will apply . As discussed below, as of the effective date of this decision until December 31, 2012, carriers may only charge a LifeLine rate of no more than $6.84. Some LifeLine customers currently have LifeLine rates greater than $6.84, such as those that have an Extended Area Service rate. Carriers for such customers may seek additional reimbursement from the LifeLine fund only to the extent the resultant LifeLine rate would be greater than it is today. Customers that currently have LifeLine rates greater than $6.84 should continue to pay no more than the LifeLine rate they are paying today.¹⁷²

CD staff will annually review the basic rate amounts charged by carriers in California and establish a Specific Support Amount based on 55 percent of the highest URF COLR's basic rate. Carriers shall reduce California LifeLine customers' monthly bills by the Specific Support Amount such that the customer pays no less than a $5.00 LifeLine rate. Carriers may seek reimbursement from the California LifeLine Program for discounts provided to eligible low-income customers.¹⁷³ Changes to the California LifeLine rules and GO 153 in accordance with the revised Specific Support Amount process shall be made.

CD staff will prepare a Resolution proposing a methodology for calculating the Specific Support Amount in upcoming years based on the formula discussed above. To summarize here, the California LifeLine Specific Support Amount shall be set at 55% of the highest basic rate of the URF COLRs as reported to the Commission. In its resolution, Staff should propose the method for determining the highest basic rate of the URF COLRs and a proposed process for making the annual changes. Staff should also include in the resolution the proposed Specific Support Amount for 2011 and shall include an annual date (i.e., July 1 of each year) when carriers may set their LifeLine rate for the year. To facilitate preparation of the resolution, we order that URF COLRs shall provide to the CD Director on or before August 1, 2011, their basic rate(s) effective as of July 31, 2011. The resolution will also describe the process for setting the Specific Support Amount for subsequent years, including how Commission staff will prepare a letter to the carriers detailing the new Specific Support Amount.

On an annual basis, CD staff will review carriers' rate changes and adjust the Specific Support Amount to ensure that all LifeLine customer receive at least a 50 percent reduction in his/her basic service rate, in compliance with the Moore Act and Commission universal service decisions. On an annual basis, CD staff will also set the annual LifeLine rate as described in this order, for each carrier participating in the California LifeLine Program.

The initial California LifeLine Specific Support Amount is calculated by using the 2010 Verizon Basic Rate of $20.91. We establish an $11.50 California LifeLine discount - 55% of 20.91 is slightly more than $11.50, which we round up or down in five cent increments¹⁷⁴ for ease of administration to $11.50.¹⁷⁵ The actual reimbursed amount received by each carrier may be less depending on the rate charged to the California LifeLine customer. Further, as discussed infra, we will calculate the amount owed to the carrier after application of the $3.50 in matching Federal support before applying the California LifeLine Specific Support Amount. The initial total discount would thus be as much as $15.0 ($11.50 from California LifeLine and $3.50 from Federal Lifeline). Carriers shall reduce customer bills by the total reimbursement amount they receive from both the state and federal governments. By January 1, 2013, carriers shall specifically show such reduction as separate line items on the bill so that the basic rate, the LifeLine discount (from both the state and federal programs), waiver of the CPUC user fee and public program surcharges, and the resultant LifeLine rate are all provided to the customer. Carriers shall only update their LifeLine rate on an annual basis.

In order to ensure an orderly phase-in of the new methodology and provide a transition period to both carriers and LifeLine customers, we will cap the LifeLine rate at $6.84 for the next two years for most customers. The $5.00 price floor for the LifeLine rate will also be in effect during this transition period. Thus, carriers shall not charge less than $5.00 or more than $6.84 from the effective date of this decision until January 1, 2013. Carriers will receive a Specific Support Amount subsidy up to $11.50 during this time period. For customers that have a LifeLine rate greater than $6.84 today, such as those in EAS areas, the cap is their current LifeLine rate instead of $6.84.

We also cap the LifeLine rate for subscribers of regular measured service (1MR) at $3.66.¹⁷⁶ A $2.50 floor for measured service will be in effect during this transition period.

In summary, from the effective date of this decision until January 1, 2013, carriers may charge LifeLine customers less than $6.84 or $3.66 for regular basic or measured service, respectively. The California LifeLine support will be reduced in cases where a carrier has a rate lower than the combined Federal and state subsidy amounts. However, in no case will California LifeLine support be provided where the resulting rate is less than $5.00 for regular basic LifeLine service.¹⁷⁷ Similarly, California LifeLine support will not be provided where the resulting 1MR rate would be less than $2.50. URF carriers will establish prices based solely on market forces after 2010 and the Specific Support Amount will be established by the Commission on an annual basis in order to maintain compliance with the California LifeLine statutory scheme.¹⁷⁸

After the transition period, non-ETCs that do not claim Federal Lifeline/Linkup funds will be presumed to have received the full Federal subsidy in calculating the state Specific Support Amount. During the transition period in 2011 and 2012, non-ETCs may receive up to the full $11.50 Specific Support Amount in order to reduce their rate to an amount between $5.00 and $6.84.¹⁷⁹ See examples in the table below:

During the Transition Period 2011-2012

After 2012

California LifeLine will continue to allow carriers to provide additional services bundled with the basic service elements. A contrary result would be a significant change in California policy and is not necessary to accomplish our universal service goals. We do not agree with the concern that allowing consumers to bundle the services they purchase would result in overcompensation to the carrier. Carriers are limited to the same specific subsidy as they would have received if the customer had not purchased the bundled service.¹⁸⁰

The Commission recognizes that a monthly $11.50 subsidy is somewhat larger than the current per customer average payment to LifeLine carriers, but it is within the range for what that average payment could be in the future based on historic growth rates and changes to the basic rate. Such a figure also results in a fund size that is well within the range that has previously been realized by LifeLine. In addition, the $3.50 in matching federal support could bring the total discount to LifeLine customers to $15.00. An $11.50 California LifeLine subsidy whether coupled with the matching Federal support or not will ensure continued high subscribership levels of low-income customers in California.

5.1.2.2. Carrier Requirements

The Specific Support Amount is provider- and technology-neutral consistent with the goals outlined in Public Utilities Code section 871.5(d).¹⁸¹ Each carrier¹⁸² will receive the same California LifeLine per-customer support from the fund with a few exceptions noted in this decision. Because the California LifeLine Program will provide a uniform subsidy amount per customer to the carrier, carrier billing systems will need to be adjusted to reflect the discounted rate. Based on the input of the parties, annual adjustments to the California LifeLine support amount should be easily accommodated by the carriers' billing systems.

We recognize that carriers will need time to implement the revised California LifeLine process.¹⁸³ However, because customers will see significant benefits from the new California LifeLine Specific Support Amount program and in light of current economic conditions,¹⁸⁴ we conclude that the new LifeLine methodology should be implemented as expeditiously as possible. Accordingly, we establish July 1, 2011 as the effective date for completing the transition from the current program to the California LifeLine Program based on the Specific Support Amount methodology. We direct CD staff to establish a schedule and convene at least the first workshop within 45 days of the effective date of this decision. This implementation workshop is part of this Phase I decision and is on a more accelerated schedule than the Phase II schedule discussed at the end of this decision. We also direct CD staff to address all the implementation requirements for traditional wireline carriers, including proposed changes to GO 153, and to present a proposed resolution to the Commission within 120 days of the last workshop.

Currently, carriers are required to track and report by month a number of factors, including weighted average number of LifeLine customers, administrative costs, number of minutes their employees spend discussing LifeLine with customers, balancing accounts for pass-through costs (Federal excise taxes), etc., and to report the data on a 28-line claim form and attach supporting documentation to that form.¹⁸⁵ Continuing the current administrative process is problematic given the other proposed program reforms. Accordingly, Commission staff will redesign the claim form to gather information needed to process, verify, and audit carrier LifeLine claims. CD shall have a draft redesigned claim form prepared within 30 days of the effective date of this decision. Parties may discuss any further suggested revisions to the draft redesigned claim at the first workshop.

Under current rules, LifeLine customers are not assessed surcharges for our public programs (CTF, CHCF-A, etc.). LifeLine customers also do not pay the Federal excise tax, the CPUC user fee, or any state/local taxes. These charges are currently claimed by carriers from California LifeLine and passed through to the respective taxing authorities.

With this Decision, the California LifeLine program will continue to reimburse carriers for non-LifeLine Federal excise and state/local taxes and carriers may include those taxes on LifeLine consumer bills. California LifeLine customers will also still be exempt from paying into the state public purpose program funds and from paying CPUC user fees on LifeLine services. California LifeLine customers should not be included in the calculation of those fees such that there should be no flow of funds associated with customer bills or carrier reimbursements. However, carriers may no longer claim from the LifeLine fund reimbursement for any Federal makeup costs resulting in not having ETC status.¹⁸⁶ This includes the End User Common Line (EUCL) charge or Service Line Charge (SLC).

Beginning with implementation of this Decision, CD staff will collect end-of-month (EOM) customer counts by carrier from the California LifeLine Administrator. The Specific Support Amount will be paid based on these counts. In addition, carriers will continue to be responsible for ensuring their claims properly apportion connection and conversion incidents during the month for reimbursement, as well as the breakdown between 1FR and 1 MR LifeLine customers. Staff will propose a revised claim form within 30 days of the issuance of this decision that will include instructions for how carriers will report their apportionment of connection and conversion incidents as well as the Flat/Measure split based on the LifeLine Administrator counts to aid in the claims process. LifeLine will continue to reimburse carriers for California LifeLine benefits passed through to the customer for connection and conversion discounts. The Commission may revisit this issue in the future to ensure that carriers are not inappropriately claiming multiple connection/conversion charges for the same customer and that they are keeping their connection charges at a reasonable price.¹⁸⁷

Carriers will continue to have the responsibility for reporting with each claim their rate both before and after application of California LifeLine and Federal Lifeline support payments as well as the number of eligible customers. Carriers shall reduce California LifeLine customers' monthly bills by the Specific Support Amount, and, in no case, shall the LifeLine rate be more than 50% of a carrier's basic rate. For voluntary providers, the LifeLine rate shall be calculated based on the lowest cost rate plan that meets our basic service requirements. California LifeLine customers should have transparency in understanding the benefits they are receiving and carriers should adjust their bills to reflect not only the resulting LifeLine rate but also the starting point for the discount, the Specific Support Amount credit and the starting point and the credit for connection and conversions.¹⁸⁸ We recognize that such billing system changes may not be made easily. While we encourage carriers to make such changes as expeditiously as possible, we require such changes be implemented no later than January 1, 2012. In addition, we remind carriers that they are required to give thirty-days' notice to their customers whenever a change is made to the Specific Support Amount that would result in an increase to the rate paid by the customer.¹⁸⁹

5.1.2.3. Impact on Customers and Low-Income
Customers

The Specific Support Amount approach would maximize the types of services and providers a customer could choose. Marketing the Specific Support Amount alternative would be consistent with the current marketing campaign designed around the concept of buying telephone service for less than 25 cents a day. Marketing could be designed to dovetail with that theme, emphasizing an $11 to $15 discount on a low-income consumer's communication services.

Adopting the Specific Support Amount option would result in a surcharge amount that is less that the Set Price option and more than the Floating Subsidy option. Thus, the Specific Support Amount option would have a fair impact on non-LifeLine customers as the surcharge would not be unduly high. The Specific Support Amount option would also result in a higher subscribership rate to the LifeLine Program than either the Set Price or Floating Subsidy options. It would also benefit low-income customers as they would have the choice of paying a low basic rate and not be limited in the types of services or providers from which they make their purchase. Such a result is most likely to satisfy broad statutory goals set forth in the Public Utilities Code.¹⁹⁰

5.1.2.4. Setting a Price Floor for California
LifeLine Rates

Setting a Specific Support option raises the question of whether a price floor is still necessary for basic rates, as well as whether there should be a separate minimum price for LifeLine service. In maintaining a basic rate price floor in D.06-08-030, the Commission was concerned that funding for the California LifeLine Program would be unpredictable given the potential fluctuation in carrier draws.¹⁹¹ The Commission was also concerned about the need to address the potential for dramatic swings in end-user surcharges.¹⁹² In a competitive marketplace, we do not see any reason to maintain the current price floor on 1MR and 1FR service, and our experience over the past few years has dissuaded us of concerns that carrier draws would be unpredictable. Accordingly, we remove this last price floor on 1MR and 1FR service so that carriers can charge customers less than AT&T's 2006 basic service rates.

However, for purposes of the California LifeLine Program, it makes sense to adopt a price floor of $5 for the program so that every customer is contributing some amount to LifeLine, and to help moderate the price fluctuations among the different carriers. We believe that the LifeLine customer should be invested in the purchase of phone service to understand that there is a cost associated with it. Thus, the Commission shall limit California LifeLine support paid to carriers to the lesser of the Specific Support Amount or the amount that results in the California LifeLine subscriber having a $5.00 monthly rate.¹⁹³

A similar limitation applies to subscribers of regular measured service (1MR) such that the support paid to carriers is the lesser of the Specific Support Amount or the amount that results in the California LifeLine subscriber having a $2.50 monthly rate. Enhanced Federal Lifeline may further reduce rates for qualifying low-income individuals living on tribal lands.

5.2. Voluntary Participation in California
LifeLine for Non-Traditional Carriers

In initiating this OIR, we acknowledged that our programs need to evolve to keep up with changing technology.¹⁹⁴ We have heard significant support from consumers for continuing to allow voluntary participation of wireless carriers in California LifeLine.¹⁹⁵ We pursued this issue through the scoping memo, proposing a fixed benefit approach, and plan to consider this issue in a subsequent phase of this proceeding.¹⁹⁶ Comments did not support undertaking such a two-step process.¹⁹⁷

After reviewing the parties' comments, we remain convinced that the contemplated two-step approach, i.e., adopt a fixed benefit, then extend it to other providers, is not necessary as the program already allows for other providers to participate.¹⁹⁸ As discussed below, in today's decision we adopt a new approach to LifeLine rates and carrier reimbursement. This proceeding's record contains overwhelming evidence supporting the continuation of LifeLine in a technology-neutral manner. California LifeLine should serve as a channel to greater access as technologies are employed in residential use by consumers.¹⁹⁹

The Commission determined in D.00-10-028 that the circumstances of residential use were substantially different from what they were in 1996 and that "residential use" could include wireless services.²⁰⁰ Given the more dramatic shifts to wireless-only households over the last decade, with more than one million homes in California relying on wireless as their only communication service, California²⁰¹ LifeLine should subsidize wireless telephone service when consumers choose that service as their residential service. In addition, there is no limitation on any type of technology or service provider to offer LifeLine service as long the basic service elements are part of the service delivered to the low-income customer.²⁰² Therefore, all carriers that are able to comply with the requirements of GO 153 may participate in the California LifeLine Program, including wireless and VoIP carriers.

D.00-10-028 eliminated Conclusion of Law 157 in D.96-10-066,²⁰³ and that conclusion has not limited participation by wireless providers in the LifeLine program.²⁰⁴ Thus, D.00-10-028 clearly enunciated that wireless carriers could participate in California LifeLine.²⁰⁵ Similarly, other services that include the basic service elements (as defined in Appendix B of D.96-10-066) are eligible for LifeLine benefits and providers of those services may seek reimbursement from California LifeLine. We will not change the determination in that decision that wireless carriers can participate in LifeLine. In fact, it is clear that this option is more relevant than ever as 40% of consumers rely primarily on wireless as their residential phone, completely eschewing the landline.²⁰⁶ This is especially true for low-income residential users. ²⁰⁷ We agree with Greenlining that it is imperative that LifeLine will "ensure access to current technology for low-income consumers."²⁰⁸

We recognize that, because of the current structure of the program, no wireless or other non-traditional carrier has chosen to participate in California LifeLine. While we do not propose any immediate changes to California LifeLine to accommodate voluntary participation by wireless, VoIP and other non-traditional providers, we will have a Phase II in this proceeding to consider issues regarding implementation of LifeLine for wireless and other non-traditional carriers to offer guidance for their participation in the LifeLine Program. Some parties have raised vague concerns that the definition of basic service will remain an impediment to non-traditional carrier participation in California LifeLine.²⁰⁹ We disagree. It is clear to us that the basic service elements in place today can be provided by non-traditional carriers. To the extent the basic service definition changes, it would change as part of the proceeding in R.09-06-019. Our decision to have a Phase II to provide guidance how non-traditional carriers would participate in LifeLine simply recognizes that our processes should be reviewed and may need clarification in some areas. However, we fail to see a reason to limit any non-traditional provider that seeks to provide service to LifeLine consumers just as ILECs and CLECs are required to do today.²¹⁰

The Commission has adequate controls to ensure that the size of the fund is not adversely affected by the voluntary participation of wireless, VoIP and other non-traditional carriers.²¹¹ In addition, the Commission can put in place additional controls if they are necessary to ensure only one LifeLine service is provided to a subscriber's principal place of residence. We note that all carriers participating in the California LifeLine Program, including VoIP providers, must pay public purpose program surcharges.

There is nothing unique or different about the technology used or voluntary participation that changes this directive to prevent waste, fraud, and abuse, and the Commission will remain vigilant in this area. The goals of the Legislature are clearly laid out in the Moore Act.²¹² While not mandating a change, the Legislative directive reinforces the evolving level of communication services that this Commission has adopted as its evaluative measure for considering universal service within California.²¹³

We are mindful of the requirement in GO 153 Rule 3.3 that telecommunications carriers offering LifeLine must file "ULTS" tariffs. In order to clearly effectuate D.00-10-028, it is our intention to modify GO 153 consistent with the LifeLine reforms contained in this order. We anticipate modifying the General Order prior to full implementation of the changes set forth herein.

Consistent with the voluntary nature of how LifeLine is applicable to some wireless carriers, we do not find any conflict between a filing of a LifeLine schedule of rates and charges for wireless carriers that voluntarily subscribe to the California LifeLine Program and 47 U.S.C. Sec. 332(c)(3)(A).²¹⁴ In this regard, we note that "[w]ireless service is a substitute for wireline service."²¹⁵ We also note that "California regulatory policy should reflect the fact that wireless telecommunications services compete with wireline services."²¹⁶ Given this finding and conclusion, we find that requiring wireless carriers that voluntarily offer California LifeLine to potential customers to file a schedule of rates and charges for services offered to LifeLine potential customers to be consistent with the language in 47 U.S.C. Sec. 332(c)(3)(A).²¹⁷ Moreover, since we are not requiring wireless carriers to participate in the LifeLine Program, we need not reach the question of whether this specific provision of the California LifeLine Program conflicts with the Communications Act of 1934, as amended.

We recognize that voluntary providers such as wireless carriers may not have the same geographic coverage as the incumbent telephone companies in the state. We do not place any geographic restrictions on such voluntary providers in order for wireless carriers to participate in California LifeLine. There is already significant wireless carrier overlap with many of the rate-of-return carriers and we can foresee no circumstance under which our universal service goals or objectives would be furthered by eliminating the ability of some consumers to choose alternative LifeLine providers. Further, the rate-of-return carriers' overall financial results will not differ if wireless carriers receive LifeLine support for customers living in the rate-of-return carriers' service territory.

We are committed to being frugal stewards of the LifeLine fund and do not embark on a new program that has the potential to harm the currently successful California LifeLine Program. We have adequate controls in place today,²¹⁸ and can put in place additional controls if they are necessary to ensure only one LifeLine service is provided to an eligible subscriber's principal place of residence. In addition, Commission staff has the authority to revise administrative procedures, consistent with this decision, to help ensure the efficient operation of the California LifeLine Program and address any irregularities or other issues. Staff authority includes determining the type and frequency of information provided by carriers and consumers to enroll and participate in the program. In addition, Staff has the authority to initiate carrier program compliance audits, and adjust the percentage of program participants audited.²¹⁹ There is nothing unique or different about wireless service that changes this directive to prevent waste, fraud, and abuse, and the Commission will remain vigilant in this area.

5.2.1. AB 2213

In February of this year Assemblymember Felipe Fuentes introduced AB 2213 to amend Sections 871.5, 872, 873 and 878 of the Public Utilities Code. The purpose of the bill was to replace the term "residential" with the term "households" in order to require that a lifeline telephone service subscriber be provided with one LifeLine subscription, as defined by the Commission, at his or her principal place of residence. The Governor signed AB 2213 into law on September 25, 2010. While we continue to maintain that we have legal authority to allow wireless and non-traditional carriers to participate in LifeLine and that we exercised this power a decade ago, this legislation removes any alleged ambiguity in our ability to allow such participation in California LifeLine going forward. The amendments to the Moore Act do not make dramatic changes to the statutory scheme, but they are helpful adjustments in maintaining California's leadership in narrowing the digital divide.

5.3. California LifeLine Discounts for Data Services for DDTP Equipment Recipients

In the public participation hearings, we heard testimony that persons with disabilities have acute needs for various types of wireless services, depending on the person's specific and unique disability.²²⁰ Some of the required services are expensive, and particularly difficult for disabled, low-income persons to afford.

Testimony from the public pointed out that people with disabilities have a higher chance of being low-income.²²¹ Testimony also focused on how the availability of a wireless service is essential for security, safety and access to services for people with disabilities.²²² The most informative testimony addressed the specific need for affordable text messaging plans and equipment for deaf and hard of hearing individuals so they can be "unshackled" from the teletypewriter (TTY) systems and get out of the house to work and be more self sufficient.²²³

Ms. Nora Sinclair put it best during the Workshop on the Staff Report in April of 2006 when she explained her circumstances as a newly deafened adult living on a fixed income:

I currently don't have a Sidekick or any PDA service, and if I were going to buy one, which I do need to become employed, it's about a third of my one month's salary. And that's just the purchase of the unit. In terms of monthly service, then, it would be about 30 to $40 a month. So you can do the math on that.²²⁴

The opportunity and need for synergy between DDTP and California LifeLine became clear through the input received in the Workshops and Public Participation Hearings.²²⁵ We addressed part of this problem through the initiation of the wireless equipment pilot project where we sought to provide wireless equipment to individuals certified as having difficulty using the telephone through the DDTP program.²²⁶ We knew that in many respects, the requirements of the DDTP Wireless Pilot differed from the standard operating procedures of a typical wireless carrier. For instance, given its statutory authority, the DDTP/CTAP can only offset the equipment component costs. Since the equipment and service are usually marketed and sold as one, this aspect presented a hurdle in terms of paying the monthly service cost for participants, which was critical considering that the Pilot was directed specifically low-income users. We discovered in the pilot project that consumers who were eligible for both DDTP and LifeLine were reluctant to sign-up to receive the wireless device as the monthly recurring costs were a disproportionately high percentage of their low incomes.

In response to this concern, Staff recommended expanding the California LifeLine Program to provide a discount on the communication service that is essential to the low-income individuals who receive wireless equipment through the DDTP program.²²⁷ By expanding the California LifeLine Program to participants of the DDTP program, the Commission can ensure that the equipment purchased by the DDTP program will be effective in meeting the communications needs of eligible low-income users. In addition, staff noted that there is no way to provide the extension of the LifeLine benefit to allow it to be used for wireless data services needed by someone who is deaf or hard of hearing without first addressing participation by wireless carriers in LifeLine.

We determine that customers who meet the eligibility requirements for both the DDTP program and the California LifeLine Program have particular needs that justify a targeted subsidy. We conclude that California LifeLine support should be provided for a communications service purchased by participants in the DDTP equipment program. Certified participants in the DDTP equipment program who also qualify under LifeLine requirements will be eligible for two LifeLine access lines, similar to the rules for TTY users.

A voice communications service is not useful in most situations for someone who is deaf or hard of hearing. The primary reason the Commission created the equipment program was to provide TTY devices for deaf and hard of hearing individuals so that they could communicate using wireline telephone facilities. Technology has advanced significantly over the past thirty years since TTY devices were first provided through the DDTP. Data-only services that include text messaging are readily available from most wireless providers and even some wireline providers. As text messaging is a highly effective means of communication for the deaf and hard of hearing communities, it is reasonable, pursuant to the goals of the Moore Act, to provide a similar discount on data services for eligible members of those same communities. The California LifeLine Program will provide the same monthly discount for data-only services now available to individuals who qualify for both LifeLine and the DDTP programs. In this way, we will permit California LifeLine eligible DDTP participants to purchase just data plans that allow them to communicate by text message.

The DDTP wireless equipment pilot program was limited to a few hundred participants, and one of the barriers identified by Staff in implementing the program was finding individuals who were eligible for both DDTP and LifeLine. As there are only a few hundred participants at this time, the cost impact of expanding the California LifeLine Program in this manner will be relatively minimal and could not exceed $34,500 in the first year.²²⁸ Although we see merit in AT&T's proposal to continue the trial program, we also believe that these benefits are critical to its success and that eligible customers should not have to put off receiving the benefit while we conduct further analysis. The trial numbers also show us that, while the number of customers participating may not be large, this program is decisive in connecting them to the communications network. Thus, we do not believe additional tests or trials are necessary. Accordingly, given the impact of the pilot program and the addition of the LifeLine discount, we remove the pilot status from the program and make the wireless equipment program a permanent part of the Deaf and Disabled Telecommunications Program/California Telephone Access Program.

Commission staff is directed to take the steps necessary to make the wireless equipment program a permanent part of the DDTP/CTAP and to conduct additional outreach to remaining wireless carriers to encourage them to participate in the program. In addition, we clarify that the dual eligibility requirement for purposes of the equipment program was a requirement of the pilot. The DDTP equipment program should use the results of the pilot in acquiring and distributing wireless equipment as part of the normal operation of the program. Commission staff should establish parameters consistent with current DDTP/CTAP requirements for the provision of wireless equipment based on the experience gleaned from the pilot program.

We believe that staff will be able to work out the nuances of state contract requirements and provider equipment plans, and that providers will appropriately apply the LifeLine discount to eligible customers. We agree with TADDAC that other assistance devices have always been eligible within the DDTP Equipment Program, but we do not agree that the two-line limit should be extended to other forms of disability at this time. We clarify that the LifeLine DDTP discount applies only to LifeLine customers who receive their equipment from the DDTP Equipment Program and applies only for non-voice services (as those DDTP customers already are eligible for two LifeLine discounts, one may be used for data). DDTP Equipment LifeLine support is also limited to no more than the Specific Support Amount, initially $11.50, unlike a second basic service line that is used for a TTY where California LifeLine also provides additional support to reimburse carriers for funds that would have been paid by the Federal Lifeline program.

We believe that by expanding the California LifeLine Program in this manner, we are fulfilling the statutory goals of the Moore Act²²⁹ and addressing a significant barrier identified in the DDTP wireless pilot program.

5.4. Expanded Discount - Matching California Alternate Rates for Energy's (CARE) 200% Federal Poverty Guideline

In comments submitted in response to the September 2008 ACR, AT&T proposed changing the 150% guideline to provide LifeLine benefits to a greater number of the "near poor."²³⁰ At the end of 2007, 2.7 million households subscribed to California LifeLine and almost 3.7 million were enrolled in CARE. If we assume that after increasing eligibility, we end up at the same number of subscribers as CARE, and the average discount provided to companies in 2007 ($8.39) would result in an additional $95.4 million in California LifeLine costs each year (increasing the size of the program by almost 30%).²³¹

This may be a conservative estimate.²³² DRA recently estimated that 75% of eligible households enrolled in California LifeLine and 70% of eligible households enrolled in CARE. This means the number of households enrolled in CARE is about equal to the current number of households eligible for California LifeLine. If California LifeLine maintains the 75% subscriber to eligible household ratio an additional $34 million in California LifeLine costs would be incurred above the $95 million calculated above.²³³ This would increase the size of the California LifeLine program to close to $500 million per year. This cost increase presumes that all the eligible households that would be added by expanding the income-based criteria are not already eligible and participating in California LifeLine. The impact of increasing the eligibility guidelines for the LifeLine Program is uncertain.

One of the primary arguments in support of adjusting the income-based criteria is that it will allow the Commission to standardize outreach and marketing efforts with the low-income energy programs by using the same income-based criteria for all programs. However, to do this on a permanent basis would ignore the fact that the low-income energy programs expanded eligibility to 200% of the federal poverty guideline in 2005 as a temporary measure.²³⁴ The Commission has yet to finish its review of the "costs and the benefits of this CARE program expansion, to help us determine whether the expansion of CARE should remain in effect."²³⁵

The remaining reason to adjust the income-based criteria for California LifeLine is to align it with other Commission programs targeted to low-income households is at best temporary given the operation of both programs. Further, the LifeLine income-based criteria are no longer directly tied to the 150% of the poverty guidelines as CD is required to adjust the Household Income Limitation requirement for California LifeLine every April 15 based on the change in the Federal Consumer Price Index - Urban Area (CPI-U). Accordingly, any adjustment to the LifeLine income-based criteria would also be an interim measure and would be explicitly tied to the outcome of the review the Commission is conducting of the interim CARE income-based criteria.

We will not modify the California LifeLine income-based criteria to match the CARE income-based criteria on an interim basis pending the outcome of the review the Commission is conducting of the interim CARE income-based criteria. We encourage Energy Division and Communications Division staff to continue to work on a comprehensive approach to align the qualification and participation processes for both programs.

5.5. Reimbursement of Administrative
Costs and Bad Debt Losses

One of the primary objectives of this proceeding is to "seek ways to streamline program administration and increase efficiency."²³⁶ In the process of this review, we have examined the share of program costs that are attributable to administrative costs. These costs are incurred by the carriers and reimbursed through the claims process. These costs are in addition to the overhead or administrative costs incurred by the Commission. Such costs had gotten so far out of control that in 2003 the Commission capped the administrative fee for Competitive Local Exchange Carriers (CLECs).²³⁷ The capped amount was $1.79 per customer per month for Fiscal Year 2008-2009. The weighted average for 2009 (that would have been used from July 2010 to June 2011 had the limitation been in effect) was $0.44 and was calculated by summing all of the recurring administrative costs (this excludes one-time administrative costs and bad debt expenses) for the year and dividing by the total number of customers served during the year. As carriers will continue to report administrative expenses with their claim submission, staff should not require any additional data to update the per customer maximum administrative reimbursement allowed. The lowest per customer administrative expense reported by a carrier was $.03 and the lowest per customer expense reported will be viewed as the most efficient provider. If a carrier is not able to adequately justify claimed administrative expenses but still seeks reimbursement for some of those expenses, it will only be compensated at the rate of the most efficient provider. Carriers must claim their administrative costs in their claim filing at least every three months, or they will not receive any reimbursement.

Reimbursing administrative costs is a vestige of cost of service ratemaking, or at best a throw back to "Z Factor Treatment" of the New Regulatory Framework era. ²³⁸ Under cost-of-service regulation, utilities recover their reasonable costs from ratepayers and changes in a utility's costs would directly result in changes in its rates. Under the New Regulatory Framework, in contrast, the primary factors considered in adjusting rates were not changes in the utility's costs, but rather, inflation and productivity factors, with one exception.²³⁹ Cost increases for "exogenous factors" were allowed to be reflected in rates through "Z factor adjustments" in the price cap index.²⁴⁰ The Commission ultimately adopted nine criteria to evaluate whether costs met the requirement for Z factor treatment. ²⁴¹ Administrative costs associated with the LifeLine program are not likely to have met those requirements.²⁴² However, when the ULTS program was instituted by the Commission, it adopted GO 153 to govern the administration of the ULTS program and provided that carriers could "seek reimbursement of expenses incurred and revenues lost as a result of providing ULTS."²⁴³

The Commission chose not to change the framework associated with reimbursement of California LifeLine administrative costs after it adopted the New Regulatory Framework. As California has moved beyond the New Regulatory Framework to the Uniform Regulatory Framework, the arguments for retaining this reimbursement under the California LifeLine Program are not persuasive. The Commission could eliminate reimbursement of administrative costs in their entirety and such costs could be recovered like any other cost of the carrier.

Recent program changes and the modifications we adopt today for the California LifeLine Program significantly decrease the administrative burden of the program. More importantly, the market based ratemaking we have adopted for AT&T, Verizon, SureWest and Frontier, the four largest local exchange carriers, who are also among the largest California LifeLine service providers, put these carriers on equal footing with their competitors by allowing them to set their prices without regard to cost for most products and services with full pricing freedom commencing on January 1, 2011. After the recent reforms to California LifeLine and the pricing flexibility available to most carriers, there is no longer a distinguishable difference between carrier costs associated with California LifeLine and normal costs of operations. While there is no requirement to have a separate California LifeLine recovery for carrier administrative functions, we have determined that maintaining a limited administrative reimbursement will benefit consumers.

5.5.1. Calculating Allowing Administrative Costs

Currently, carriers are required to track and report by month a number of factors, including weighted average number of LifeLine customers, administrative costs, number of minutes their employees spend discussing LifeLine with customers, balancing accounts for pass-through costs (federal excise taxes), etc., and to report the data into a 28-line claim form and attach supporting documentation. Competitive Local Carriers can opt out from filing carrier specific cost data and receive a higher ILEC carrier averaged amount designed to compensate smaller, less efficient carriers.

Continuing the current process is problematic. First, as noted previously, there is little, if any, additional cost associated with signing up a California LifeLine customer compared to a non-LifeLine customer, and, in fact, there are additional revenue opportunities that the carrier would not have otherwise realized without the California LifeLine Program. We agree with DRA that the costs of acquiring new customers is a normal cost of doing business, and that the California LifeLine subsidy enables these customers to afford service that they might not otherwise have been able to afford. California LifeLine also makes it possible for carriers to acquire and serve revenue generating customers that would otherwise disdain service.²⁴⁴

Second, the reasons that were initially proffered to pay the administrative costs do not make much sense in a competitive communications market. A goal of the California LifeLine Program is to ensure the full cost of serving LifeLine customers is paid to the carrier providing service. Just as the cost of serving non-LifeLine customers is recovered through the prices of the services offered by the carrier, the cost of serving California LifeLine customers should be recovered through the prices of the services purchased by the customer plus the California LifeLine subsidy. The administrative burden of the process is not clear in a competitive environment. Further, the additional benefit of the process to obtaining additional subscriber revenue outweighs any additional burden.²⁴⁵ We are persuaded that the Commission will enhance carrier incentives to provide efficient service by adopting a "reasonable fixed amount per customer."²⁴⁶

Third, we have been concerned by the considerable amount of Commission resources necessary to review and audit administrative cost reimbursement claims.²⁴⁷ Over the years, Commission staff has had concerns about the apparent misuse of this component of the LifeLine claim program and denied numerous claims for reimbursement submitted by carriers. Thus, while we have removed many of the administrative burdens from carriers, we have simply shifted those costs to California LifeLine as the Commission has taken on more administrative burden. Simplifying the separate tracking of administrative costs by carriers and the associated cost to the program of Commission review and audit of those costs will result in tangible benefits to consumers. We believe that the costs associated with administering the carrier administrative cost reimbursement outweigh the benefits such reimbursement provides to California LifeLine and consumers.

The provision of California LifeLine is not voluntary for certain carriers, but rather, those carriers assume the universal service responsibilities upon being certificated or licensed by the Commission to operate within California.²⁴⁸ The regulatory framework provides great flexibility to carriers to determine the best means of operation and how to recover their costs of operation, but it does not alleviate the decade's old obligation that all carriers are responsible for ensuring universal service throughout California. The provision of California LifeLine service is an integral part of the regulatory framework.

Thus, while the Commission has significantly adjusted the administrative costs associated with California LifeLine over the years, it has not considered the reasonableness of continuing to pay carrier administrative costs nor comprehensively delineated what constitutes reasonable administrative costs.²⁴⁹

Although we determine that costs associated with administration of LifeLine service are a carrier obligation of providing service in California and, therefore, we could conclude that they are not separately recoverable from the program, we will continue to reimburse carriers for some of their administrative costs as discussed below. We have considered alternatives such as a simplified process that would use a per customer recurring cost factor and per customer non-recurring cost factor.

5.5.2. Reimbursement of Administrative Costs
and Bad Debt Losses

Carriers will be reimbursed for administrative costs related to implementation of program changes and other one-time activities. Further, carriers will be reimbursed for ongoing costs based on the weighted average per customer per month of the reported costs or their actual expenses, whichever is lower. Carriers will have to report their administrative costs with their monthly LifeLine claims. Carriers that do not wish to separately track and report their costs can continue to receive reimbursement at the current lowest reported rate of $0.03 per customer per month. Staff shall update the reporting process so that carriers can separately report one-time and ongoing costs.

We select the weighted average limit based on the monthly weighted average of the annual claims on a per customer basis. As many carriers have actual costs on a per customer basis that are lower than the weighted average, we limit their reimbursement to their actual reported costs. On an annual basis, effective each July 1, staff will update the allowable administrative claim amount based on the previous calendar year's weighted average. Any increase from the previous calendar year's weighted average will be limited by the CPI-U, rate of inflation.²⁵⁰

Carrier reimbursement for the purposes of the Specific Support Amount and administrative costs will be made using a weighted average figure provided by the California LifeLine Administrator. The California LifeLine Administrator will compute a per-carrier customer count on a daily basis, and provide the figures at the end of the month to both Communications Division staff and the carriers. Carriers will input their weighted average customer count into their claim form, and multiply that figure by their Specific Support Amount (up to $11.50) and administrative cost (initially $0.50).²⁵¹

In addition, carriers will be provided an end of month figure of "inward" or new customers for the month. One half of this figure can also be claimed and multiplied by the Specific Support Amount to capture those customers who are eligible for back-credits for having certified in the current month (and were eligible in the prior month).

We take this action as we are persuaded that some level of reimbursement of administrative costs is a further incentive to carrier participation.²⁵² We limit the reimbursement for the reasons previously explained and to ensure no one carrier improperly shifts administrative costs to the program. We expect staff to continue to closely monitor carrier administrative claims and perform audits as necessary.

Rate-of-return LECs must continue to report their LifeLine administrative costs and will obtain reimbursement based on the methodology above. For any costs reported above the allowable LifeLine administrative claim, such carriers are permitted to include those costs in their general administrative costs. Until their next rate case, such carriers are permitted to claim reimbursement for any difference from the CHCF-A.²⁵³ We are particularly concerned about the costs of these companies as many are disproportionately high. Historically, staff has not performed the same level of review of these costs as we have with the costs included in a general rate case. Thus, while we recognize the need to ensure that these carriers can recover these costs, we continue to believe it is more appropriate to include the majority of these costs in the general costs of the company. We agree with the arguments of the small LECs that "carriers are entitled to claim LifeLine-related costs from the CHCF-A, and the Commission should explicitly state that these costs may be recovered ... outside of the normal annual CHCF-A process."²⁵⁴ For carriers that have gone through the rate case process in the past five years, this process will continue until their next rate case at which time no further recovery outside of the normal annual CHCF-A process will continue. For carriers that have not gone through the rate case process in the past five years, they may recover such funds for twelve months after the implementation of this decision.

5.5.3. Discontinuing the Payment of
Bad Debt Losses

Currently, carriers have the option of claiming that portion of LifeLine rates that are not recovered as bad debt from the fund. While large carriers such as AT&T and Verizon do not claim bad debt against the fund, a small group of carriers have very high bad debt claims. The disparity in claims between carriers is troubling.

Most businesses experience bad debt losses, which are certainly not unique to LifeLine customers. Full reimbursement of all these types of costs²⁵⁵ is not consistent with our goal to ensure funds obtained from the surcharges are being wisely spent with efficient administration. We note as well that recording, tabulating, and submitting these costs for reimbursement places additional administrative costs on the carriers.

We believe it would be more equitable to all customers if we eliminate bad debt as a recoverable from the fund, thereby treating bad debt as a business expense. Additionally, we are concerned that under the current system some carriers do not make adjustments to bad debt claims due to subsequent recovery of money from the customer.

5.5.4. Administrative Costs and Bad Debt Losses

The "blank check" approach to administrative costs bad debt losses, at a minimum, provides no incentive for efficiency and, at the extreme, is a means for unscrupulous carriers to allocate unjustified costs to the fund. The FCC does not include these costs in its LifeLine program and we are aware of no other state that does. However, we recognize that there is value in continuing to have the LifeLine program pay for taxes and fees of general applicability because the Affordability Study indicated that taxes and fees were the central cost that made phone service unaffordable.

We will, therefore, modify GO 153 related to separate reimbursement for administrative costs and eliminate separate reimbursement for bad debt losses. The current separate reimbursement for administrative costs from the California LifeLine Program shall change on June 30, 2011. Consistent with the findings of the Affordability Study, the LifeLine Program will continue to pay the taxes for low-income consumers. Moreover, LifeLine customers will continue to be exempt from paying into the public purpose program funds and from paying CPUC user fees.

Carriers will have until September 30, 2011, to submit all claims for reimbursement of administrative costs as defined above incurred before July 1, 2011. No claims shall be accepted after September 30, 2011, and any claim for reimbursement not timely submitted is deemed void and denied. Further, after September 30, 2011, carriers with more than 100 LifeLine subscribers shall submit initial claims for LifeLine reimbursement no later than 60 days after the conclusion of the month during which service was provided. Carriers with fewer than 100 LifeLine subscribers should submit initial claims at least every six months. No initial claims shall be accepted after the end of that 60-day period, and any initial claim for LifeLine reimbursement not timely submitted is deemed void and denied. To aid administration of California LifeLine, the Commission should limit the period carriers may file adjusted claims for LifeLine reimbursement. Carriers will have up to one year to submit adjustments to timely filed initial claims consistent with GO 153 Rule 9.10.2. Phase II of this proceeding will consider whether the time allowed for adjustments will be shortened.

5.6. Pre-Qualification

In its comments, SureWest raised the issue of changing Commission policy to require that prospective LifeLine customers complete the certification process prior to receiving discounted service. SureWest contended that the current policy confuses customers who incorrectly conclude that no further action is required for certification once they begin receiving the discount, and can lead to back-billings of $100 or more where the customer fails to successfully complete the certification process.²⁵⁶ SureWest and the small LECs recommended that the Commission adopt a process whereby a prospective LifeLine customer would be charged full tariffed rates at initiation of service, but then credited for a LifeLine discount if the customer is deemed eligible.

On November 14, 2007, the Assigned Commissioner issued her scoping memo for Phase II of Rulemaking 04-12-001 and included pre-qualification of LifeLine customers as an issue for comment by the parties.²⁵⁷ Such a requirement was adopted in D.08-08-029 making further consideration of this issue in this docket moot.

However, we do recognize the need to reimburse carriers for implementation costs related to the recent Decision requiring changes to implement pre-qualification for customers beginning July 1, 2009. At this point all claims for pre-qualification expenses have been filed, though the two year amendment window is still open. Subsequent costs must be born out in rates as discussed above.²⁵⁸

Pre-qualification requirement was successfully implemented on July 1, 2009.

5.7. Non-ETC Make-Up

Pursuant to section 254(e) of the Communications Act,²⁵⁹ only eligible telecommunication carriers (ETCs) designated pursuant to section 214(e)²⁶⁰ are eligible to receive Federal Lifeline and Link-Up support. The Federal Lifeline program provides low-income consumers with discounts of up to $10.00 ($6.50 for EUCL, $3.50 for basic service) off of the monthly cost of telephone service for a single telephone line in their principal residence.²⁶¹ Federal Link-Up provides low-income consumers with discounts of up to $30.00 off of the initial costs of installing telephone service.²⁶² Enhanced Lifeline and Link-Up may provide qualifying low-income individuals living on tribal lands with additional support.²⁶³

In opening this review of the Telecommunications Public Policy Programs, we explained our interest in carefully managing our programs to capture the maximum federal funding. The April 2006 staff report contained a table depicting the 2004 differences between ETC qualified carries and non-ETC qualified carriers.²⁶⁴ Our staff has updated the tables²⁶⁵ showing the amounts:

		2006 Annual Support
	End of Year Number of LifeLine Customers	Federal	California
			LifeLine	Non-ETC Make-up	California Cost per customer/month
ETCs	2,980,109	$294,699,335	$197,482,845	$0	$5.52
Non-ETCs	240,004	$0	$15,448,921	$24,125,634	$13.74

		2007 Annual Support
	End of Year Number of LifeLine Customers	Federal	California
			LifeLine	Non-ETC Make-up	California Cost per customer/month
ETCs	2,473,019	$271,406,206	$171,406,059	$0	$5.78
Non-ETCs	273,839	$0	$70,173,693	$34,894,380	$31.97

		2008 Annual Support
	End of Year Number of	Federal	California
	LifeLine
	Customers		LifeLine	Non-ETC Make-up	California Cost per customer/month
ETCs	1,927,200	$224,711,454	$155,823,832	$0	$6.74
Non-ETCs	173,357	$0	$46,716,681	$6,331,149	$22.46

		2009 Annual Support
	End of Year Number of	Federal	California
	LifeLine
	Customers		LifeLine	Non-ETC Make-up	California Cost per customer/month
ETCs	1,775,808	$194,731,835	$166,571,440	$0	$7.82
Non-ETCs	147,151	$0	$36,904,478	$2,943,562	$20.90

These tables show that making up the "lost" federal support due to lack of ETC status for some carriers has fallen to almost $3 million from a high of $35 million in 2007 as we have considered this issue. On a per customer basis, the federal program provides up to $30 in one time connection fees and $7.73 per month for recurring costs. This "lost" amount could be obtained from the Federal Lifeline program provided that these carriers obtain ETC status. The federal requirements are already being met by most if not all carriers so those service requirements do not prevent carriers from obtaining ETC status.²⁶⁶

Initially the amounts paid to non-ETCs by the California LifeLine Program to make up for the "lost" federal support was small. Such a policy made some sense in the 1980s and most of the 1990s when competitive options were not as widely available as they are today. In providing extra California LifeLine support in place of federal support, the Commission could foster additional competitive options for low-income consumers while those carriers move toward becoming ETCs. However, instead of being a transitional mechanism toward carriers applying for and receiving ETC status, the Commission has allowed these carriers to significantly increase their draw from California LifeLine without limitation or control.

There are substantial benefits to California consumers in requiring ETC designation. Section 214(e) of the Communications Act prevents eligible carriers from attracting only the most desirable customers by limiting eligibility to common carriers²⁶⁷ and by requiring eligible carriers to offer supported services and advertise the availability of these services throughout the service area. We believe that policies designed to encourage ETC designation will allow for a more predictable level of service to consumers and assist the Commission improve the long-term sustainability of California LifeLine, as only fully qualified carriers that are capable of, and committed to, providing universal service would be able to receive both state and federal support. In addition, ETC designation allows the Commission to more closely evaluate whether the carrier has the financial resources and ability to provide quality services throughout the designated service area. We believe that it would neither be prudent nor serve the public interest to permit a financially unsound carrier to receive universal service support but not be able to achieve long-term viability that is sufficient to sustain its operations. We believe ETC designations provide greater opportunity for the Commission to ensure multiple service providers maintain the capability and commitment to provide service throughout the designated service area. As ETCs have demonstrated the ability to remain functional in emergency situations, we believe the security of a carrier's network and the ability to protect critical telecommunications infrastructure is an important public interest. Finally, the ETC designation process adds to our ability to ensure consumer protection requirements, consistent with the public interest, convenience and necessity and will help ensure consumers are able to receive an evolving level of universal service.

When we opened this docket, we indicated that maximizing federal support would be one of our goals. The best course for maximizing federal support for the LifeLine program is to discontinue making up the federal amounts paid to non-ETCs. Such an approach allows carriers the freedom to make their own business decisions regarding ETC certification but not burden California consumers with insulating these carriers from the consequences of those decisions.

This decision modifies the subsidies non-ETCs may recover from the California Lifeline fund. This is a logical outcome of the goals of the proceeding and was explicitly delineated in the OIR.²⁶⁸ We do not completely eliminate the California LifeLine support available to non-ETCs, but we adopt a policy that encourages non-ETCs to become ETCs so as to obtain more federal funding and reduce their draw on the California Lifeline fund. Further, we will maintain the non-ETC make-up payments during the transition period of 2011 and 2012 up to the full Specific Support Amount. Finally, we note that as the implementation date for the changes made herein is July 1, 2011, there is ample time for any non-ETC California LifeLine participant to become an ETC prior to the implementation of these changes. Further, as we have included an additional transition period by capping the maximum amount LifeLine consumers pay until 2013, we will continue to pay the federal make-up charge for non-ETCs between July 1, 2011 and December 31, 2012, to the extent it is necessary.

We, therefore, direct that GO 153 be modified to exclude all costs that could have been reimbursed pursuant to the Federal Lifeline program, regardless of whether the costs are actually reimbursed to the carrier.

5.8. Consumer Education Plan

We will seek further input on a consumer education plan to inform California LifeLine consumers about the changes adopted herein. Staff should continue to work with all interested parties to establish a robust and thorough consumer education plan at least three months prior to the effective date of the changes adopted herein. We direct CD staff to convene one or more workshops within 75 days of the effective date of this decision to develop a consumer education plan and prepare and serve on all the parties to this proceeding within 60 days of the last workshop a report to conform our existing outreach and education plans to today's decision (including in-language training, access to emergency services, and the ability to reach emergency services from inactive wireline or wireless phones). We encourage everyone interested in this topic to participate in developing the marketing and education plans.

¹⁴¹ Pub. Util. Code § 709(a).

¹⁴² See, e.g., DRA Reply Comments to the Commission's May 26, 2006 OIR at 24 ("DRA generally supports the idea of de-linking the ULTS rate (given that AT&T's residential rates will not be subject to rate caps after the next two years), but observes that any change to the ULTS rate could potentially have a huge impact on California LifeLine customers and lifeline penetration rates, which would be contrary to statutory goals.")

¹⁴³ Pub. Util. Code § 874 requires carriers to charge no more than half their basic rate to California LifeLine customers. If we do not de-link the California LifeLine Rate from AT&T's basic rate, the Commission can only ensure statutory compliance as long as AT&T's basic rate is the lowest in the state.

¹⁴⁴ DRA Comments at 24-30 (Nov. 9, 2007), DRA Comments at 5-6 (Oct. 3, 2008), cf. Cox Comments at 9 (Oct. 3, 2008) (affordability study by June 30, 2010...should provide the Commission with insight into affordability issues...)

¹⁴⁵ Stats. 2008 Chapter 342.

¹⁴⁶ Survey results show that the relative median monthly bill for phone service has actually decreased between 2004 and 2010. The 2004 median of $46, which when adjusted for inflation is $52.90, 5.8% greater the 2010 median bill of $50. Affordability of Telephone Service 2010, Statewide Survey of California Households, rel. September 2010 (Affordability Study of 2010).

¹⁴⁷ See, Affordability Study of 2010, Volume 1, Table 4.2, and Appendix B, Page 91, Q.10 Frequency Table.

¹⁴⁸ See, Affordability Study of 2004, Volume 1, Table 5.8c. The change between 2004 and 2010 is not statistically significant given the magnitude of the change and the sizes of the samples used.

¹⁴⁹ See, Universal Residential Service Telephone Report to the Legislature, 2009, Chart 9, AT&T and Verizon California Wireline Basic and LifeLine Rates, 1984-2010.

¹⁵⁰ Id. See also, FCC Trends in Telephone Service at Table 3.3 Personal Consumption Expenditures (August 2008) (Telephone service as a percentage of all goods and services has gone down from 1.7% in 1984 to 1.5% in 2007 and wireline as a percent of all telephone service has gone down from 100% to 49%).

¹⁵¹ See, Affordability Study of 2010, Volume 1, Table 2.7, Qualified and Subscribed compared to Qualified and Not-Subscribed.

¹⁵² For example, the difference between AT&T's basic service rate of $16.45 and $6.84.

¹⁵³ See, Universal Residential Service Telephone Report to the Legislature, 2009, Chart 5, California Telephone Penetration by Income.

¹⁵⁴ See, Affordability Study of 2010, Volume 1, 1.4b. The California wireless substitution rate is consistent with national figures where 24.5% of U.S. households had only wireless telephones at the end of 2009. See, Wireless Substitution: Early Release of Estimates from the National Health Interview Survey, July-December 2009, U.S. Center for Disease Controls, available at http://www.cdc.gov/nchs/data/nhis/earlyrelease/wireless201005.pdf. See also, Wireless substitution: State-level estimates from the National Health Interview Survey, January-December 2007, U.S. Center for Disease Control, available at http://www.cdc.gov/nchs/data/nhsr/nhsr014.pdf. (In 2007, 9% of California households were wireless only compared to 13.6% of U.S. households.)

¹⁵⁵ See, Affordability Study of 2010, Volume 1, Table 1.16, and Volume 2, 6.1 through 6.5.

¹⁵⁶ Telephone subscribership is at 96.7%, surpassing our 95% subscribership goal. See CPUC Report to the California Legislature, Residential Telephone Subscribership and Universal Services (June 2008).

¹⁵⁷ Id.

¹⁵⁸ Pub. Util. Code §§ 709(a), (c)-(g), 709.5(a). 47 U.S.C. § 254.

¹⁵⁹ AT&T Reply Comments on the Proposed Decision at 1-4 (April 13, 2009), Cox Opening Comments on the Proposed Decision at 3 (April 8, 2009), Frontier Opening Comments on the Proposed Decision at 2 (April 8, 2009), Greenlining Opening Comments on the Proposed Decision at 1 (April 8, 2009), Sprint Nextel Opening Comments on the Proposed Decision at 10 (April 8, 2009), T-Mobile Opening Comments on the Proposed Decision at 2 (April 8, 2009).

¹⁶⁰ See, e.g., DRA Comments at 8 (April 8, 2010).

¹⁶¹ The Commission receives a 30-day notice of rate changes from landline carriers but does not receive any notice from wireless or other non-traditional carriers.

¹⁶² We note that wireless and other non-traditional carriers' participation in the California LifeLine program is voluntary. However, in order to participate in the California LifeLine program, wireless, VoIP and other non-traditional carriers, must abide by the rules of the program. Imposing a requirement in this order that carriers must comply with our rules in order to provide LifeLine service does not constitute traditional "regulation" of those carriers.

¹⁶³ California Public Utilities Code § 873(a) (emphasis added).

¹⁶⁴ This Consistent with the URF decision, which did not resolve any issues related to LifeLine: " . . . we find that continued pricing regulation is warranted in a few specific circumstances relating to public policy programs. Some restrictions are appropriate when a service receives a social program subsidy, such as California LifeLine program (LifeLine) residential service . . . Thus, we cap the price of basic residential service until January 1, 2009 in order to address the statutorily-mandated link between the LifeLine rate and basic residential service rates." (D.06-08-030 at 2.) As previously discussed, we extended the rate cap on basic service until January 1, 2011 in D.08-09-042.

¹⁶⁵ This illustration is solely for the purpose of showing that the size of the fund is not a dispositive factor in choosing between options, and cannot be used for any other purpose.

¹⁶⁶ The Commission would have to allow sufficient time for billing system changes to properly reflect this change so as to be transparent to customers. It would be reasonable to allow carriers to continue their current billing format for a reasonable period after enacting a new support methodology. As long as the end result reflects the correct amount the customer has to pay each month for service, a reasonable transition would be at least 12 months and could be as long as 24 months from the effective date of the new methodology.

¹⁶⁷ See Pub. Util. Code § 871.5(d) ("[T]he commission, in administering the lifeline telephone service program, should implement the program in a way that is equitable, nondiscriminatory, and without competitive consequences for the telecommunications industry in California.").

¹⁶⁸ 47 C.F.R. § 54.403(a)(3).

¹⁶⁹ Pub. Util. Code §§ 871.5-880. Setting the Specific Support Amount this way may slightly increase its costs compared to the other options, but it also increases the benefit available to low income consumers. In Section 5.2 we discuss how, on balance, the increased benefit is more desirable at this point given the economic conditions in California and how the extra cost is reasonable as the alternative would actually reduce the per subscriber California LifeLine payment and the overall cost to consumers is roughly equivalent for all of the options considered.

¹⁷⁰ 47 C.F.R. § 54.403(a)(2) - (3).

¹⁷¹ There is still a $5.00 floor for the LifeLine rate.

¹⁷² For example, today basic service customers in some EAS areas have a $20.53 rate and LifeLine customers in that area have a rate of $10.36. That $10.36 LifeLine rate may not be exceeded in 2011 and 2012 for those customers in EAS areas, and additional support may be provided if the Specific Support Amount and federal support do not result in a rate that is less than that $10.36 cap.

¹⁷³ See Pub. Util. Code § 277.

¹⁷⁴ We will round down to the nearest five cent increment if the number is not a full cent above a five cent increment and round up to the nearest five cent increment if it is full cent above a five cent increment.

¹⁷⁵ This calculation satisfies the requirement for an annual review of the basic rates of the URF COLRs to ensure eligible California LifeLine customers are paying no more than 50% of the applicable basic service rate satisfies the requirements of the Moore Act. Cal. Pub. Util. Code § 874(a). Future calculations should all round up to the closest five cent increment so that the actual support amount may be slightly higher than 55% of the highest basic rate of the COLRs.

¹⁷⁶ See, Cal. Pub. Util. Code § 874(b)(1).

¹⁷⁷ Based on initial calculations, California LifeLine will be reduced to any carrier that has a basic rate less than $21.34 so that the rate charged to most LifeLine subscribers will be $5.00. We select $5.00 as the lowest price as the lowest reported basic rate of the past few years was $10.00 and half of that amount will ensure compliance with Pub. Util. Code § 874.

¹⁷⁸ The Commission will similarly adjust the resulting LifeLine rate amount to the lesser of $5.00 or the half the lowest reported basic rate on an annual basis. Pub. Util. Code § 874.

¹⁷⁹ In order to allow sufficient time for the Commission to consider applications for LifeLine-only ETC certification, non-ETCs will continue to be able to claim an additional $3.50 in matching support, if needed, during the transition period, in addition to the $11.50 Specific Support Amount.

¹⁸⁰ We do not alter the GO 153 provisions at sections 7.7 and 8.1.8 that prevent carriers from completely disconnecting customers for failure to pay non-LifeLine-related charges. See October 18, 2010 Comments of DisabRA/NCLC at 22-23.

¹⁸¹ See Pub. Util. Code § 871.5(d) ("[T]he commission, in administering the lifeline telephone service program, should implement the program in a way that is equitable, nondiscriminatory, and without competitive consequences for the telecommunications industry in California.").

¹⁸² Non-traditional carriers such as wireless and VoIP providers will receive the same Specific Support Amount as all other carriers.

¹⁸³ See e.g., AT&T Response to Scoping Memo at 2 (August 24, 2007).

¹⁸⁴ See Fitch: U.S. Telecom and Cable Credit Profiles to Weaken in 2009, December 3, 2008, available at http://www.fitchratings.com/corporate/events/press_releases_detail.cfm?pr_id=451798, as reported at Fitch: Poor Economy May Boost Pace Of Switch To Wireless, By Kathy Shwiff, Dow Jones Newswires, December 8, 2008, available at http://money.cnn.com/news/newsfeeds/articles/djf500/200812081426DOWJONESDJONLINE000520_FORTUNE5.htm.

¹⁸⁵ Competitive Local Carriers can opt out from filing carrier specific cost data and receive an average amount designed to compensate smaller, less efficient carriers.

¹⁸⁶ See infra Section 5.7. The current California LifeLine program provides additional compensation equal to the support that a carrier could have received from the Federal Lifeline program if the carrier is not an ETC. This federal "makeup" reimbursement will end with at the end of the phase-in period at the end of 2012 to provide those carriers sufficient time to obtain a Lifeline-only ETC designation.

¹⁸⁷ See General Order 153 § 8.1.1, cf. 47 C.F.R. § 54.411(c).

¹⁸⁸ Carriers have flexibility in formatting their bills to provide LifeLine consumers this information.

¹⁸⁹ See URF Decision, D.06-08-030 mimeo. at 183, 201-202, FoF 78, Ordering Paragraph 9.

¹⁹⁰ See e.g., Pub. Util. Code §§ 709, 871, 872. For example, a migrant farm worker may desire a wireless phone in order to follow fruit and produce picking work at different locations. Or, a deaf person may desire a wireless texting device in order to communicate at a job outside of his or her home.

¹⁹¹ D.06-08-030, mimeo. at 152.

¹⁹² Id.

¹⁹³ The Commission will similarly adjust the resulting LifeLine rate amount to the lesser of $5.00 or the half the lowest reported basic rate on an annual basis. Pub. Util. Code § 874.

¹⁹⁴ Rulemaking on the Commission's Own Motion to Review the Telecommunications Public Policy Programs 06-05-028 at 2 (R.06-05-028).

¹⁹⁵ See, R.06-05-028 Public Participation Hearings Volumes 1-3 (Sept. 25, 2006, Oct. 26, 2006, and Nov. 3, 2006).

¹⁹⁶ Scoping Memo and Ruling of Assigned Commissioner and Administrative Law Judge Determining the Scope, Schedule, and Need for Hearing in this Proceeding at 7 (July 13, 2007).

¹⁹⁷ See, e.g., Cox Opening ACR Comments at 2-5 (October 3, 2008), AT&T Opening ACR Comments at 2 (October 3, 2008) ("This proceeding's record also contains overwhelming evidence supporting the expansion of Lifeline to alternative technologies, such as wireless telephones"), T-Mobile Opening ACR Comments at 4-5 (October 3, 2008).

¹⁹⁸ D.00-10-028, 8 CPUC3d at 641.

¹⁹⁹ Pub. Util. Code §§ 871.5(b), 872, 878.

²⁰⁰ D.00-10-028, 8 CPUC3d at 642.

²⁰¹ Wireless substitution: State-level estimates from the National Health Interview Survey, January-December 2007, U.S. Center for Disease Control, available at http://www.cdc.gov/nchs/data/nhsr/nhsr014.pdf (9% of California households were wireless only in 2007); Enhanced Data Collection Could Help FCC Better Monitor Competition in the Wireless Industry, United States Government Accountability Office Report 10-779, at 1 (rel. July 2010).

²⁰² Verizon is correct that the Commission cannot compel wireless participation in California LifeLine, but there is also nothing prohibiting their participation in the program. See Verizon Initial Comments at 11-12 (Aug. 24, 2007), Sprint Comments at 11-12 (Oct. 3, 2008).

²⁰³ See DRA Comments at 24 (July 28, 2006) ("There is no need for statutory changes to include wireless services in the ULTS program.").

²⁰⁴ We have determined that any remaining issues identified in D.00-10-028 have been resolved through the record developed in this proceeding such that we can adopt revisions to prior Commission orders, the ULTS program, and General Order 153, as necessary, to permit wireless providers to participate in California LifeLine. See D.00-10-028, 8 CPUC3d at 641-643.

²⁰⁵ D.00-10-028, 8 CPUC3d at 641 provides: "The outline of our proposal is simple: CMRS carriers should be allowed to provide ULTS if they comply with all ULTS program rules. Under our proposal, CMRS carriers would have to provide ULTS to low-income households at the same rates and under the same terms and conditions as landline utilities. Similarly, CMRS carriers could seek reimbursement from the ULTS Fund for their costs to provide ULTS under the same terms and conditions as landline utilities."

²⁰⁶ Enhanced Data Collection Could Help FCC Better Monitor Competition in the Wireless Industry, United States Government Accountability Office Report 10-779, at 1 (rel. July 2010).

²⁰⁷ Id. (Approximately 40% of all wireless-only adults are living in households with income below 200% of the Federal Poverty Level.). See also, Opinion Research Corporation, Prepaid Phones In The U.S.: Myths, Lack of Consumer Knowledge Blocking Wider Use, prepared for the New Millennium Research Council (December 4, 2008); Low-income users latch on to iPhone, comScore, Inc., October 27, 2008 (iPhone sale data indicates an early signal that wireless smartphone service is moving from luxury to necessity).

²⁰⁸ Greenlining Reply Comments at 6 (September 14, 2006).

²⁰⁹ See, e.g., October 18, 2010 Comments of DisabRA/NCLC at 11, October 18, 2010 Comments of TURN at 20. We are skeptical of the doubts raised by these parties that non-traditional carriers can successfully provide LifeLine service. See, Federal-State Joint Board on Universal Service, Lifeline and Link Up Referral Order (rel. May 4, 2010) at ¶ 11, discussing how the Federal Lifeline program might double since the FCC allowed wireless-Lifeline only ETCs six years ago.

²¹⁰ See AB 2213 (Fuentes) Chapter 381, Statutes of 2010, clarifying the Legislative intent to allow wireless participation in California LifeLine.

²¹¹ See Pub. Util. Code § 878; see e.g., D.08-08-029 ("Adopting a pre-qualification requirement for California LifeLine").

²¹² See, e.g., Pub. Util. Code §§ 709, 709.5(a), 871.5(d).

²¹³ See D.07-09-020, mimeo. at 63.

²¹⁴ 47 U.S.C. § 332(c)(3)(A).

²¹⁵ D.06-08-030, FoF 39.

²¹⁶ Id. at CoL 13.

²¹⁷ We note that the Communications Act of 1934, as amended, states, "Notwithstanding sections 152(b) and 221(b) of this title, no State or local government shall have any authority to regulate the entry of or the rates charged by any commercial mobile service or any private mobile service, except that this paragraph shall not prohibit a State from regulating the other terms and conditions of commercial mobile service. Nothing in this subparagraph shall exempt providers of commercial mobile services (where such services are a substitute for land line telephone exchange service for a substantial portion of the communications within such state) from requirements imposed by a State commission on all providers of telecommunications services necessary to ensure the universal availability of telecommunications service at affordable rates. . ." (42 U.S.C. § 332(c)(3) (emphasis added).)

²¹⁸ See Pub. Util. Code § 878; see e.g., D.08-08-029 ("Adopting a pre-qualification requirement for California LifeLine").

²¹⁹ Staff has the authority to audit all carriers that participate in the LifeLine program.

²²⁰ See, R.06-05-028 Public Participation Hearings Volume 1 at 8-11, 28-31, 35-37, 48-49, 62-65 (Sept. 25, 2006), R.06-05-028 Public Participation Hearings Volume 2 at 83, 88-89, 101-102, 108-109 (Oct. 26, 2006), R.06-05-028 Public Participation Hearings Volume 3 at 193-203, 214-222 (Nov. 3, 2006).

²²¹ Among people between the ages of 25 and 64 with a severe disability, 27 percent were in poverty, compared with 12 percent for people with a nonsevere disability and 9 percent for those without a disability. Matthew W. Brault, Americans with Disabilities: 2005, Current Population Reports, P70-117, U.S. Census Bureau (rel. December 2008), available at http://www.census.gov/prod/2008pubs/p70-117.pdf. See also, Statement of Mr. Glenn, R.06-05-028 Public Participation Hearings Volume 2 at 101-102.

²²² Comments of the California Coalition of Agencies Serving the Deaf and Hard of Hearing at 7-8 (July 28, 2006). Statement of Ms. Pagano, R.06-05-028 Public Participation Hearings Volume 1 at 8-11 ("I am a physically disabled mother and wife and student, and I live with my cell phone about 2 feet away from me at all times. The landline, we've abandoned it. You know, the world has go[ne] wireless."). Statement of Mr. Kristen, R.06-05-028 Public Participation Hearings Volume 1 at  35-37. Statement of Ms. Murtti, R.06-05-028 Public Participation Hearings Volume 3 at 197-203 ("act swiftly now to both the national technology and improvement in 911 emergency services for people who are deaf and hard of hearing").

²²³ Statement of Ms. Sinclair, R.06-05-028 Workshop on Universal Service Public Purpose Programs, April 26, 2006 ("So if I had a Sidekick or PDA of some sort and access to wireless service for free or at least a discounted price, I could communicate with the hearing world and the deaf world both."). Statement of Mr. Obrey. R.06-05-028 Public Participation Hearings Volume 3 at 193-195. Statement of Mr. Singleton, R.06-05-028 Public Participation Hearings Volume 3 at 196.

²²⁴ Statement of Ms. Sinclair, R.06-05-028 Workshop on Universal Service Public Purpose Programs, April 26, 2006.

²²⁵ See also Statement of Mr. Obrey. R.06-05-028 Public Participation Hearings Volume 3 at 193-195. Statement of Mr. Singleton, R.06-05-028 Public Participation Hearings Volume 3 at 196.

²²⁶ Resolution T-17089 (May 2007) directed Communication Division staff to implement a multi-phase Pilot program whereby eligible participants would be issued a credit which would be applied to the equipment component of a wireless communications device; the monies for the credit would come from the DDTP fund. Further, the Pilot would not exceed two years total, with a cap of 500 Pilot participants in aggregate. Communication Division was directed to monitor the progress of the Pilot and has provided detailed reports to the Commission and Executive Director.

²²⁷ CPUC Communications Division DDTP Wireless Pilot 2^nd Report at 3 (Nov. 2008).

²²⁸ Based on the initial contract of 250 units (half the total authorized) multiplied by $11.50 for 12 months.

²²⁹ Pub. Util. Code §§ 871.5-880.

²³⁰ AT&T October 3, 2008 Comments at 10.

²³¹ The average discount provided by California LifeLine was $8.39 per month per customer in 2007. The average discount grew to $9.71 for the first part of 2008. If we were to apply the first half of 2008 amount against the nearly one million subscriber difference between LifeLine and CARE, the additional amount would exceed $110 million.

²³² See generally Final Report on Phase 2 Low Income Needs Assessment prepared by KEMA, Inc., September 7, 2007, prepared for the Commission to assess the energy related needs of California's low-income population, available at http://docs.cpuc.ca.gov/published/GRAPHICS/73106.PDF.

²³³ An amount that could be as high as nearly $40 million if the $9.71 average for the first part of 2008 is used.

²³⁴ Interim Opinion Approving Various Emergency Program Changes in Light of Anticipated High Natural Gas Prices in the Winter of 2005-2006, D.05-10-044, mimeo. at 18 ("While a strict benefit-cost analysis is not always controlling in the context of the low-income programs, when considering a temporary program change, it is instructive to consider the change's economic effect.").

²³⁵ Id. at OP 20.

²³⁶ PPP OIR at 2.

²³⁷ See D.03-01-035 OPs 3-6.

²³⁸ See e.g., Alternative Regulatory Frameworks for Local Exchange Carriers, D.89-10-002, 33 CPUC2d at 161-162 (D.89-10-002).

²³⁹ See, Investigation on the Commission's own motion into the matter of post-retirement benefits other than pensions; Application of Pacific Gas and Electric Company for authority among other things, to increase its rates and charges for electric and gas service; And related matters, 56 CPUC2d 613, 615 note 1 (D. 94-10-037) citing Alternative Regulatory Frameworks for Local Exchange Carriers, 33 CPUC2d at 159-162, 228 (D.89-10-002).

²⁴⁰ RE Alternative Regulatory Frameworks for Local Exchange Carriers, D.89-10-002, 33 CPUC2d at 161-162 (D.89-10-002).

²⁴¹ Investigation on the Commission's own motion into the matter of post-retirement benefits other than pensions; Application of Pacific Gas and Electric Company for authority among other things, to increase its rates and charges for electric and gas service, D.97-04-043, 71 CPUC2d 653 (April 9, 1997). These criteria are: (1) an exogenous event; (2) after implementation of NRF; (3) clearly beyond management's control; (4) not a normal cost of doing business; (5) disproportionately impacts telephone utilities; (6) not reflected in the economy wide inflation factor; (7) timing has a major impact on the utility's costs; (8) actual costs can be used to measure the impact of the change, or the impact can be measured with reasonable certainty and minimal controversy; and (9) the costs proposed for z-factor treatment are reasonable.

²⁴² As LifeLine requirements were implemented prior to establishment of the New Regulatory Framework (NRF), they would fail the second criterion. In addition, most components of the administrative costs, such as bad debt expenses, would clearly have had a difficult time passing the "not a normal cost of doing business" criterion.

²⁴³ D.96-10-066, 68 CPUC2d at 639 quoting subdivision 5 of GO 153 citing former Revenue and Taxation Code sections 44181, 44182, and 44184 that indicated that the telephone corporations were to be reimbursed for providing universal telephone. (See Stats. 1983, Ch. 1143, sec. 3; Stats. 1987, Ch. 163.)

²⁴⁴ DRA Opening Comments at 7 (August 24, 2007). DRA also observes that the carrier benefits when the LifeLine customer purchases additional, non-LifeLine services. Id. We disagree with carrier claims that the expenses associated with explaining available rate schedules to prospective customers is anything other than a normal cost of doing business in California. In fact, carrier disclosures to customers is well embedded in existing California policy. See, e.g., Consumer Protection Initiative Decision Issuing Revised General Order 168, Market Rules to Empower Telecommunications Consumers and to Prevent Fraud, D.06-03-013 at FoF 7.

²⁴⁵ DRA Opening Comments at 7 (August 24, 2007). There are numerous examples of the additional benefits realized by carriers some of which have already been enumerated, such as the addition of subscribers that would otherwise not subscribe without LifeLine. As the societal benefits also enumerated above dovetail with the economic benefits to carriers, the California LifeLine program is an instance of a "win-win" for the industry and society at large.

²⁴⁶ Sprint Nextel Opening Comments at 6, note 7 (August 24, 2007).

²⁴⁷ See generally D.03-01-035, D.00-10-028, 8 CPUC3d at 654, 672, FoFs 180-184, OPs 48-49.

²⁴⁸ While wireline carriers are required to, wireless carriers are not required, but encouraged to participate in the California LifeLine program.

²⁴⁹ D.00-10-028 outlined the administrative expenses that carriers can recover from California LifeLine, but did not provide guidelines to aid in making the determination that a particular carrier's costs were reasonable. D.03-01-035 adopted a cap for CLEC costs.

²⁵⁰ See D.07-90-20 at FoF 30.

²⁵¹ The weighted average cost calculation was provided by staff. The final 2010 calculation that will be in effect for the July 1, 2011 implementation date may be different.

²⁵² AT&T Opening Comments on the Proposed Decision at 13 (April 8, 2009), Frontier Opening Comments on the Proposed Decision at 3 (April 8, 2009), Small LECs Opening Comments on the Proposed Decision at 18 (April 8, 2009), SureWest Opening Comments on the Proposed Decision at 16 (April 8, 2009), Verizon Opening Comments on the Proposed Decision at 22 (April 8, 2009).

²⁵³ Small LECs Opening Comments on the Proposed Decision at 20 (April 8, 2009).

²⁵⁴ Id.

²⁵⁵ The specific costs are: bad debt expense, admin-data processing, admin-notification, admin-accounting, admin-legal, admin-service rep, and admin-other.

²⁵⁶ Opening Comments of SureWest at 5 (August 24, 2007).

²⁵⁷ Assigned Commissioner Ruling Setting Scope of Phase II, R.04-12-001 at 5 (November 14, 2007).

²⁵⁸ All carriers are permitted to claim reimbursement for one-time costs such as those incurred implanting D.08-08-029.

²⁵⁹ 47 U.S.C. § 254(e).

²⁶⁰ 47 U.S.C. § 214(e) (setting forth the requirements for ETC designation).

²⁶¹ See 47 C.F.R. § 54.401(a)(2); Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Report and Order, 12 FCC Rcd 8776, 8957 (1997) (1997 Universal Service Order).

²⁶² See 47 C.F.R. § 54.411(a)(1).

²⁶³ See 47 C.F.R. §§ 54.405(a)(4), 54.411(a)(3).

²⁶⁴ Staff Report on Public Policy Programs, Staff of Telecommunications, Strategic Planning, and Legal Divisions at 9 (April 14, 2006).

²⁶⁵ Federal amounts come from USAC Federal Universal Service Support Mechanisms Fund Size Projections for the Third Quarter 2008, Appendix LI05 - Annual Low Income Support Amounts by State and Company through 4Q2007.

²⁶⁶ See 47 C.F.R. § 54.101, which includes e.g., voice grade access to the public switched network, single party service, access to emergency and operator services, and toll limitation for low-income customers.

²⁶⁷ The Communications Act requires common carriers to furnish "communications service upon reasonable request therefore," 47 U.S.C. § 201(a), and states that "[i]t shall be unlawful for any common carrier to make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services . . . ." 47 U.S.C. § 202(a).

^{268 78 "[O]nly 11% of California's customers are not served by registered carriers, but the absence of federal fund contributions is made up with California LifeLine revenue. Consequently, these carriers cost the California LifeLine program approximately twice as much to serve a LifeLine customer as a federally registered carrier." (R.6-05-028 at 3.)}