5. Preliminary Scoping Memo
It has been nearly 20 years since D.91-09-042 was issued outlining the procedures for the administration of the CHCF-A. The Commission recognizes that competition and technology have evolved over time and has determined that a review of CHCF-A fund is overdue. In this proceeding, the Commission seeks comments as well as updated information to comprehensively reassess the CHCF-A program.
As consumers embrace new services, their need for traditional landline telephone service may diminish. As a result, all telephone companies including the small ILECs, are experiencing a reduction in the number of landline telephone subscriptions, subsidized telephone lines included. However, contrary to expectations, the loss of these subsidized lines has not decreased the size of the CHCF-A and the subsidy per access line continues to rise. CHCF-A subsidized access line costs on average have risen from over two to four and half times as much as comparable CHCF-B lines (see Appendix J). Furthermore, the program has no evaluation or monitoring mechanism in place to verify that subsidy payments are used for intended purposes and whether they lead to prudent investments or operational efficiency.
These changes to the telecommunications landscape as well as D.10-02-016 require that we conduct a fully comprehensive examination of the CHCF-A program. We intend for this review to be forward-looking and adaptable to current and future regulatory and technological changes while still meeting the requirements of universal service and rate disparity minimization. This review should examine historical data with the aim of revising existing implementation rules governing the CHCF-A, assess its relevance in today's telecommunications environment, determine appropriate funding levels, and solicit comments from parties on proposed revisions to the rules governing the granting of support to small rural ILECs.
Interested parties should provide comments and specific proposals as set forth by the schedule below. To guide the parties' work on each topic, we pose several questions. These questions included here should not be interpreted as limitations but rather as starting points. We encourage all proposals to explicitly address consistency with statutory goals, necessity, feasibility, and cost effectiveness. Remedial proposals should also be included when identifying program deficiencies.
In this OIR, as a basis to meet these objectives, we request comment and proposals regarding the following issues.
5.1. CHCF-A Support Evaluation
One of the goals of the CHCF-A program is to maintain a fair and equitable local rate structure to promote universal service in high cost areas of California. Considering the current telecommunications landscape, we must determine if the program continues to be competitively and technologically neutral and whether the rate structure is fair and equitable. We must further evaluate to what extent support levels can be changed while still meeting the goals of this program.
In the past, the small ILEC territories were extremely isolated, and plain old telephone service was the only widely available service residents had for communication. Over the past few decades, population density has increased significantly across the state.48 D.96-10-066 which created the CHCF-B anticipated that the need for subsidies may diminish over time due to competition and technological advancement.49 This conclusion is equally applicable to the CHCF-A. New technologies such as wireless, satellite, and IP telephony have greatly increased consumers' communication options. However, these changes to California's population and telecommunications infrastructure have not resulted in cost savings for ratepayers or a reduction in the total CHCF-A fund draw.
CHCF-A carrier support shows significant increases from one year to the next. For example, the CHCF-A provided $21.9 million in carrier support in 2001. By 2005, the support had grown to $25.4 million, and by 2010, to $38 million (Appendix B).
In 2009, CHCF-A subsidized carriers reported approximately $45 million in local network service revenue and $26 million in long distance service revenue totaling $71 million. 50 Combined with the $37 million in CHCF-A subsidies with revenues from customers, California ratepayers paid over $108 million to CHCF-A carriers. That is almost $150 per month or over $1,700 per year per subsidized access line. To put that in perspective, the Commission could purchase each subsidized customer a satellite phone, pay for their service, and still produce a net savings to customers and ratepayers from $18 to $61 million per year.51
Given the current technological landscape and the abundance of competitive options, we question whether the CHCF-A program is still a necessary means to promote universal service. We seek comments as to whether we should terminate immediately, gradually discontinue, or alter provisions governing the CHCF-A program. Comments should address how such discontinuance or alteration may affect universal service goals.
5.2. Review of Program
Implementation Rule
The CHCF-A program's implementation rules are outlined in the appendix to D.91-09-042. These rules include but are not limited to the filing of Advice Letters by October 1st each year by the eligible small ILECs that submit a rate design and request CHCF-A support to offset the forecasted increase or decrease in revenues resulting from regulatory changes ordered by the Commission and FCC. The rules also establish the means test and the waterfall, which are triggered by an ILEC's submission of a GRC.
We solicit comments on whether the implementation rules adopted in D.91-09-042 are relevant given the current conditions that affect the small ILECs' service areas. Some conditions that are now changed from the time D.91-09-042 was adopted are increases in population, changes in costs triggered by technological developments and competition, as well as changes in small-ILEC company structures.
5.3. Determination of Carrier
CHCF-A Funding Requirements
We ask whether there are ways of more accurately estimating the level of subsidy needed, if any, to promote the goal of universal service. The methodology developed to assess both estimated costs of basic service and subsidy levels needs to be repeatable and account for advances in technology, market developments, and demographic changes. The resulting process should be capable of accommodating modifications and/or policy changes from both the FCC and the California State Legislature which may impact this program. At the same time, any state support mechanism should not be obligated to make a carrier whole for any loss of federal support or any CHCF-A reform will be rendered moot.
We wish to explore whether the current fourteen small ILECs should continue to be classified as rate-of-return carriers and whether the current rate-of-return companies that have elected not to receive CHCF-A nor filed a GRC (per Ordering Paragraph 45 of D.94-09-065) should be required to file under the New Regulatory Framework (NRF) or Uniform Regulatory Framework (URF), thereby removing their eligibility for CHCF-A support.
In this proceeding, we will consider the following options to determine an appropriate carrier subsidy level. We encourage parties to explore these and other alternatives.
In D.96-10-066, the Commission recognized that competition and technology would evolve over time and determined that a review of the CHCF-B should occur on a regular basis. The CHCF-A carriers are not subject to the same competitive pressure as the CHCF-B carriers. However, the Commission recognized in D.95-12-052 that the increase in the rate of productivity for telecommunications carriers should be equal to or greater than the rate of cost-inflation. Therefore, costs are expected to decrease, or at least remain fixed.
We believe that we should investigate why costs are not going down as technology advances and to consider appropriate actions to control the size of the CHCF-A while maintaining program goals. A cap on the CHCF-A subsidy may address this issue without a complex and costly investigation into the cause of the fund's increases. The responsibility for identifying and implementing cost efficiencies would be placed on the carriers. This solution has the advantage of being less intrusive in carrier operations while benefiting ratepayers.
We solicit comments on the implementation of a cap on the CHCF-A subsidy. Parties should comment on an initial cap amount, provide justification for that amount, and describe the expected effects on universal service. Comments should state the basis for the cap, whether it be number of access lines, capitalization, or another factor. If parties do not believe a cap is an appropriate solution then they should describe alternate means of controlling the size of the fund.
Under the CHCF-A implementation rules, the local exchange residential flat rates of the small ILECs should not exceed 150% of California urban rates. The existing residential flat rates in the small ILECs service areas range from $16.05 to $20.25.5253 Appendix G shows the existing rates of the fourteen small ILECs. With the deregulation of urban rates in California, the relationship between these rates and the rates of the small ILECs must be addressed.
Parties should state whether the 150% of urban rates cap is still reasonable in today's environment considering large carriers' urban rates are no longer subject to rate regulation in California. Parties should also comment on the elasticity of demand for telecommunications services in today's environment, and the reasonableness of using CD's affordability study as a proxy for service demand and various rates in the CHCF-A areas.
When CD examined the small ILEC annual reports, it found there to be a wide variance in the reported costs for common elements. Revenues, expenses, and capital expenditures that were expected to be similar for common expense categories such as customer and corporate operations in fact varied widely. These findings call into question the overall efficiency with which the subsidized small ILECs operate when compared to similar carriers.
We wish to investigate the possibility of standardizing acceptable cost levels. If we could establish reasonable cost parameters by expense category, we could dispense with difficult and time consuming GRCs in favor of simple adjustments that could be made to CHCF-A support levels without requiring a full blown rate case.
Costs could be further standardized by administering the CHCF-A in a manner similar to the CHCF-B. The CHCF-B uses a Cost Proxy Model developed as part of the Commission's 1995 Universal Service proceeding I.95-01-021 and finalized in Implementing Rate Design D.96-10-066. This model uses internal and external carrier data to estimate the average cost to serve access lines within a Census Block Group in California.
This model was created for use by large incumbent ILECs, but we believe it is worth exploring the possibility of creating a similar model to suit the current CHCF-A eligible carriers. Use of such a model would partially or possibly fully obviate the need for GRCs.
The costs established by the model could be used in lieu of actual company expenses in order to determine funding for this specific carrier type. This would further incentivize carriers to reduce costs in order to increase profitability.
CHCF-B carriers are paid the difference between established costs and a threshold. Using this method for the CHCF-A would greatly reduce the complexity of administration for carriers and Commission staff. In addition, the protocol for claims submission and payment is already in place further simplifying matters.
Parties should discuss how cost models can be used, as part of an effort to provide an access line subsidy to the CHCF-A eligible carriers. Parties should include a discussion of whether or not the Cost Proxy Model or something similar would be appropriate for the CHCF-A. Comments should state what modifications if any they believe would be necessary. Additionally we request comments on how to transition carriers from the current mechanism to a per access line subsidy. Parties should discuss whether an immediate change is appropriate or if changes should be phased in over time.
5.4. Monitoring Affiliate Transactions
Many of the small ILECs have affiliate companies that provide unregulated services, such as Internet and television, over their CHCF-A subsidized networks. Carriers are required to file affiliate transaction reports along with their annual reports, which document transactions between these entities.54 CD conducted a brief review of affiliate transactions and has determined that the relationships between parent companies and affiliates are very complex, and not sufficiently transparent in the annual reports filed. From this source, it cannot be determined whether affiliates are paying fair market rates for their use of the regulated networks.
We seek comments on the need to more closely monitor small ILEC affiliate transactions in light of the many new uses of their networks including the provision of unregulated services. Parties should state whether they believe closer monitoring is necessary, and if a modification to the annual reporting requirements is warranted. If parties believe that the small ILECs are not receiving fair market rates for use of their networks, they should provide potential solutions to remedy the situation.
5.5. Opening Small ILEC
Territories to Competition
Decades ago, small ILECs were granted exclusive rights to do business in their franchised service territory. In 1995, competitors were granted full access to the four large ILECs' territory, and the right to apply to provide service in the small ILECs' territories.5556 However, the Commission has not yet authorized any wireline competition in small ILEC territories.
The Commission encourages competition wherever possible to reduce prices and foster innovation. At one time, economies of scale were such that competition in small ILEC territories was deemed unsustainable. However, given the current telecommunications landscape, we must revisit the Commission's policies on competition in small ILEC territories.
We solicit comments from parties on the effects of opening the small ILEC territories to wireline competition and consequences for universal service. We request comments from potential competitors identifying any barriers to entry into those markets, and what they believe the Commission could do to eliminate them.
48 U.S. Census Bureau, Population Division
49 D.96-10-066 at 215.
50 Communications Division Study of Small Rural Telephone Companies.
51 Figure based on Globalstar, Inc. GSP-1700 all you can talk voice plan, one year of unlimited service for $750 per line, totaling $47 million (as of 12/10). Ongoing cost figure based on Globstar, Inc. Liberty 6000 plan offering 12 months with 500 monthly minutes for $1,440 per line totaling $90 million.
52 Carriers who receive CHCF-A support have rates set at $20.25 per month for basic telephone service. Carriers who do not receive CHCF-A support have rates from $16.05 to $16.85.
53 D.0-02-016 Ordering paragraph 3: The use of the Pacific Bell Telephone Company dba AT&T California, Inc.'s basic rate as the required proxy for urban rates in applying the 150% guideline set forth in D.1-09-042 is hereby continued subject to the following restriction: The basic residential flat rate that a Small Local Exchange Carrier must charge to qualify for California High-Cost Fund A funding shall be fixed at the current level of $20.25 per month. This interim requirement shall continue in effect until the Commission adopts a decision in the California High-Cost Fund A rulemaking resolving pertinent reform issues, or otherwise modifies the restriction.
54 GO 66-C, Pub. Util. Code § 583.
55 The four large ILECs are AT&T, Verizon, SureWest, and Frontier.
56 D.95-07-054 opened California up to telecommunications competition.
