2. Background

The CHCF-A is a subsidy program based on the principle of universal service. Universal service as it applies to telecommunications services is the concept that consumers should have access to basic telephone service in their homes that is both affordable and ubiquitously available. Legislatures have codified this policy, finding that as more citizens are connected to the telecommunications network, the value of the network grows. Thus, it has been a longstanding commitment of federal and state governments to promote policies that encourage universal telecommunications service.⁸

With this in mind, a review of the CHCF-A should first begin with a review of the original purposes and goals of the program, as articulated in statutes and in our decisions adopting the program. We will briefly review the federal and state legislative history of universal service to provide a background for this review.

2.1. Federal Legislative History

The United States Congress made universal service a basic goal of telecommunications regulation with the passage of the Communications Act of 1934. Section 1 of this act created the Federal Communications Commission (FCC):

[f] or the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all the people of the United States, without discrimination on the basis of race, color, religion, national origin, or sex, a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges . . . .⁹

In 1996, Congress passed the Telecommunications Act of 1996 (1996 Act). This was the first major overhaul of telecommunications policy in nearly 62 years and it modified earlier telecommunications legislation, primarily the Communications Act of 1934. The 1996 Act codified the FCC's longstanding practice of providing universal service support for "telecommunications services" in high cost and low income areas. The 1996 Act also defined the nature of "universal service" as "an evolving level of telecommunications services" that takes into account telecommunications service advancements. Additionally, it established that consumers in rural, insular, and high cost areas should have access to telecommunications services at rates that are "reasonably comparable to rates charged for similar services in urban areas."¹⁰ Further, this Act provided a list of principles upon which the FCC must base policies for the preservation and advancement of universal service.¹¹

With respect to the states' authority to regulate universal service, the 1996 Act maintained and confirmed state regulatory authority to impose, on a competitively neutral basis, requirements necessary to preserve and advance universal service, protect the public safety and welfare, ensure the continued quality of telecommunications services, and safeguard the rights of consumers.¹²

2.2. California Legislative History

In 1987, the California legislature enacted Pub. Util. Code § 739.3 requiring the Commission to develop, implement, and maintain a suitable program to establish a fair and equitable local rate structure aided by transfer payments to small independent telephone companies serving rural and small metropolitan areas.¹³ The purpose of the program is to, "promote the goals of universal telephone service and to reduce any disparity in the rates charged by those companies" in comparison to the lower rates charged to customers in larger metropolitan areas.¹⁴

In response to the Legislature's mandate, the Commission established the original High Cost Fund to provide a source of supplemental revenues to small and mid-size ILECs whose basic exchange access line service rates would otherwise be increased to levels that would threaten universal service.¹⁵ The original program was funded by an increment in Pacific Bell's intrastate carrier common line charge and was administered by Pacific Bell. In 1994, the Commission changed the funding source from an increment in the carrier common line charge to a surcharge paid by all end-users, and reaffirmed Pacific Bell as the administrator of the fund.¹⁶

Addressing the emergence of competition for local exchange services, in 1996, the Commission decided that in addition to support for small and medium sized carriers, mechanisms needed to be established that would support universal service in high-cost areas served by the large ILECs. Recognizing that small ILECs should not be subject to the same rules applicable to the larger ILECs,¹⁷ in 1996 as the Commission changed the name of the original High Cost fund to CHCF-A, it created the California High Cost Fund B (CHCF-B) to provide high cost support for the large carriers; i.e. Pacific Bell (now dba AT&T of California), GTE California and GTE Contel (now Verizon California¹⁸), Roseville Telephone Company (now SureWest), and Citizens Telecommunications Company of California (now Frontier Communications of California¹⁹).²⁰ The Commission began administering the CHCF-A program for eligible small ILECs,²¹ relieving Pacific Bell of the responsibility.

In 2008, the Legislature further added Pub. Util. Code § 275.6(d) and amended Pub. Util. Code § 739.3(h) The legislation required the Commission to prepare and submit to the Legislature a report on the affordability of basic telephone service in areas funded by the CHCF-B.²² The sunset of CHCF-A and CHCF-B programs is now extended to January 1, 2015.²³

2.3. Current Status of the CHCF-A

The CHCF-A is funded by an all-end-user surcharge, assessed as a percentage of all customers' intrastate service charges (other than LifeLine services). The surcharge is revised as needed to ensure adequate funding. The surcharge rate is based on the program's total funding requirement (i.e., sum of all participating carrier's funding requirements) divided by the total projected intrastate revenue subject to surcharge.

Initially, 17 carriers were eligible to apply for the CHCF-A funding. Subsequently, D.08-10-010 authorized Citizens Telecommunications Company of California, Inc. to consolidate with three CHCF-A eligible small ILECs: Citizens Telecommunications Company of Tuolumne, Citizens Telecommunications Company of the Golden State and Global Valley Networks, Inc. This consolidation resulted in a reduction in the total number of small ILECs eligible for CHCF-A support from 17 to 14. This reduction did not impact the CHCF-A as these carriers were not drawing from the fund at the time.

Carriers' funding requirements for the CHCF-A are determined through General Rate Cases (GRCs). Carriers have the option to take the informal path of filing an advice letter or go through a formal application process. The informal GRC advice letter filings for small ILECs are typically reviewed by the Communication Division (CD). The process requires CD to review the filing company's estimated revenues, expenses, rate base and rate of return in order to arrive at an appropriate revenue level necessary for operation. Subsequently, CD prepares a resolution for the Commission to authorize the ongoing funding level in response to annual carrier funding request advice letters.

In the formal application process however, the application is assigned to an Administrative Law Judge (ALJ) with the carrier and the Division of Ratepayers Advocates (DRA) identified as parties to the proceeding. In the application process, DRA reviews the carrier filings as CD does in the informal process and testifies on its findings. The ALJ can use CD's resources to review application details independent of the parties. Subsequently, the ALJ drafts a decision for the Commission to vote on and to authorize the recommended funding level.²⁴

The Commission uses the revenue requirement derived from GRCs to determine appropriate rates for telecommunications services, up to 150%²⁵ of the rates of comparable services in urban areas.²⁶ If carriers cannot meet their revenue requirement with these maximally allowed rates, they are granted the CHCF-A subsidy to cover the shortfall. The CHCF-A funding level for each carrier is the difference between the revenue requirement and the carrier's actual revenue. The CHCF-A support is then distributed to carriers directly on a monthly basis.

Appendix B shows the Commission-approved CHCF-A support to the small ILECs. Appendix C shows the intrastate revenue requirement amounts these carriers requested from the CHCF-A for the years 1998 through 2010. The difference between a small ILEC's revenue requirement request (Appendix C) and the Commission-approved CHCF-A support (Appendix B) is caused by the application of the means test and the applicable "waterfall" decrement if any, for each small ILEC.^{27 28} Appendix D shows the number of access lines by each small ILEC as of 2010. The current surcharge for the CHCF-A is 0 percent as of December 2010. The history of the CHCF-A surcharge is shown in Appendix E. The fiscal year 2012-2013 budget is $$49.77 million.²⁹

⁸ See Pub. Util. Code § 709; 47 U.S.C. §§ 151, 254.

⁹ 47 U.S.C. § 151 (as amended).

¹⁰ 47 U.S.C. § 254(b) (3).

¹¹ 47 U.S.C. § 254(b) (1)-(7). The principles are (1) Quality services should be available at just, reasonable, and affordable rates; (2) Access to advanced telecommunications and information services should be provided in all regions of the nation; (3) Consumers in all regions of the state should have access to telecommunications and information services, including advanced telecommunications and information services, that are reasonably comparable to those services provided in urban areas and reasonably comparable to rates charged for similar services in urban areas; (4) All providers of telecommunications services should contribute in an equitable and nondiscriminatory manner; (5) Federal and State support mechanisms must be specific, predictable and sufficient to preserve and advance universal service; (6) Schools, libraries, and rural health care providers should have discounted access to advanced telecommunication services; and (7) Any other principles as the Joint Board and the FCC determine are necessary and appropriate - which the FCC used to add a competitive neutrality requirement.

¹² 47 U.S.C. § 253 (b).

¹³ Pub. Util. Code § 739.3(a); Assembly Bill 1466 (Chapter 755, Statutes of 1987).

¹⁴ D.85-06-115 as modified by D.88-07-022, D.88-12-044 and D.91-09-042. The California High Cost Fund (i.e. the current CHCF-A) was implemented by D.88-07-022 as modified by D.91-05-016 and D.91-09-042 to provide a source of supplemental revenues to three mid-size and seventeen small Local Exchange Carriers whose basic exchange access line service rates would otherwise be increased to levels that would threaten universal service. D.96-10-066 changed the name of the High Cost Fund to CHCF-A and created the California High Cost Fund-B (B-Fund). This decision included the three mid-size LECs in the B-Fund program for the purpose of determining universal service subsidy support and maintained the CHCF-A for the 17 small Local Exchange Carriers. CHCF-A is funded by a surcharge assessed on consumers' intrastate telecommunications services.

¹⁵ D.88-07-022 (as modified by D.91-05-016 and the Appendix in D.91-09-042) provides the implementation guidelines for the California Intrastate High Cost Fund.

¹⁶ D.94-09-065, Re: Alternative Regulatory Frameworks for Local Exchange Carriers, Section XIII.D.1.c and OP 71.

¹⁷ D.96-10-066, Order Instituting Rulemaking (OIR or R.) 95-01-020, Investigation on the Commission's Own Motion into Universal Service and to Comply with the Mandates of Assembly Bill 3643, Ordering Paragraphs 8 and 9.

¹⁸ Referred to in this document as "Verizon."

¹⁹ Referred to in this document as "Frontier."

²⁰ MCI and Cox Communications have subsequently been added as CHCF-B carriers.

²¹ D.96-10-066, Attachment A to Appendix B. At the time, there were seventeen small LECs as follows: Calaveras Telephone Company, California-Oregon Telephone Company, Citizens Telecommunications Company of the Golden State, Citizens Telecommunications Company of Tuolumne , Ducor Telephone Company, Evans Telephone Company, Foresthill Telephone Company, GTE West Coast Incorporated, Happy Valley Telephone Company, Hornitos Telephone Company, Kerman Telephone Company, Pinnacles Telephone Company, The Ponderosa Telephone Company, Sierra Telephone Company, Siskiyou Telephone Company, Volcano Telephone Company, and Winterhaven Telephone Company.

²² Senate Bill (SB) 780, Chapter 342, approved September 26, 2008.

²³ SB 3, Chapter 695, approved October, 9, 2011.

²⁴ http://docs.cpuc.ca.gov/word_pdf/RULES_PRAC_PROC/105138.pdf.

²⁵ D.91-09-042 limited High Cost Fund subsidy to only those services above 150% of urban rates.

²⁶ D.10-02-016 set AT&T's basic rate as the proxy for urban rates.

²⁷ For means testing Small LECs' CHCF-A support is limited to forecasted intrastate results of operations not to exceed the small LEC's authorized rate of return. The forecasted earnings are based on at least seven months of recorded financial data.

²⁸ The waterfall provision refers to the 6-year phase down of CHCF-A funding level beginning in the year after the completion of a GRC. The funding levels are 100% of the CHCF-A amount for the first three years, 80% the fourth year, 50% the fifth year, and 0% thereafter.

²⁹ The Resolution T-17331.