2. Legal Basis for Adopting the CASF
to Advance Broadband Deployment

A. Parties' Position

Various parties express concerns with respect to creating the CASF for promoting broadband deployment. These concerns were first raised in comments on the Proposed Decision in Phase I of this proceeding.¹⁶ Parties expressed similar concerns in comments filed in response to the ACR dated September 12, 2007.

Parties generally agree that increased deployment of broadband capabilities in unserved and underserved areas is desirable, but question whether the CASF is an appropriate vehicle to achieve that purpose. Various parties also express concern as to the Commission's legal authority to fund the CASF, either within the B-Fund or as an independent program, and recommend obtaining explicit direction from the Legislature in order to most effectively address the Commission's objectives.¹⁷

TURN and T-Mobile directly oppose creation of the CASF as a component of the CHCF-B as unlawful. TURN argues that in all sections of the Pub. Util. Code relating to subsidies for various aspects of universal service, there is a prohibition against use of, appropriation or transfer of the money from one fund to another fund or entity. TURN argues, for example, that money deposited into the B-Fund can only be used to support the provision of "basic service" within "high cost" areas by "telephone corporations."

T-Mobile argues that the CHCF-B was specifically created in D.96-10-066 to support a local rate structure for affordable basic residential service in high cost areas, but does not authorize the use of B-Fund money to help carriers underwrite broadband deployment even if theoretically usable to deliver basic voice communications. T-Mobile argues that because broadband is not currently defined as a component of universal service, the CHCF-B cannot be used to subsidize its deployment.

Under current rules, certain voice communications providers (including wireless carriers) are categorically precluded from providing basic service and thus becoming Carriers of Last Resort (COLRs). T-Mobile believes that providing explicit broadband subsidies only to certain carriers could have the unintended consequence of providing the sorts of subsidies that D.07-09-020 was designed to eliminate. T-Mobile also raises the concern that creation of the CASF could undermine competition and distort market forces by supporting the delivery of voice communications using only one type of technology (i.e, broadband). T-Mobile also argues that broadband technology seems to be growing rapidly without explicit carrier subsides, and that it is not clear that such a subsidy program is an appropriate or necessary means of promoting further deployment.

Sprint states that until more precise Commission guidance is provided concerning exactly what the CASF will fund, in what amounts, and subject to what conditions, there are too many unknowns to comment definitively on the merits of a CASF program. Sprint argues that before embarking on the CASF subsidy program, the Commission needs more reliable data about the availability of broadband, and where and why it is not available.

Sprint argues that private enterprise will prove to be more efficient and effective than government subsidies, such as through the CASF, in delivering the telecommunications services consumers most want and need. Various parties further argue that the Commission should obtain explicit legislative authority before proceeding with implementation of a CASF program.¹⁸

B. Discussion

We conclude that the California Constitution and existing California Public Utilities statutes provide the requisite authority for the Commission to support broadband deployment under the approach we adopt in this order.¹⁹ Accordingly, we establish the CASF as a new and independent universal service program. We consider the CASF to be a complement to the CHCF-B and our other universal service programs, most of which were established by this Commission prior to legislation.²⁰ The CASF will promote universal service goals, but will not be a diversion or transfer of existing funds because we are going to collect it beginning in 2008 and are not using CHCF-B monies as previously proposed. CASF funds will be collected separately than for the CHCF-B, but will utilize similar administrative mechanisms for gathering the CASF as the CHCF-B.

As discussed infra, we conclude that limited funding towards deployment of broadband facilities in unserved and underserved areas of California is necessary. We choose to use our authority under the California Constitution and Pub. Util. Code including § 701 to establish the CASF. We note that funds to be used by the CASF will be collected and appropriated using mechanisms consistent with Legislative direction related to existing universal service

programs.²¹

In order to achieve a more efficient administrative mechanism, we shall have an account set up in the State Treasury for the CASF. This will also ensure appropriate state treasury controls are in place and followed consistent with our Constitutional authority. To establish these controls and administrative efficiencies we shall seek an amendment to the Pub. Util. Code § 270 to add the California Advanced Services Fund to those handled by the State Treasury. We shall also seek to add a new section within Chapter 1.5 to provide specific direction to carriers for remitting CASF collections and use of the funds by the Commission.²² Such legislation is not necessary to begin the collection of funds by carriers nor is it necessary to begin the process within the Commission to receive and evaluate proposed bids for CASF purposes.

All revenues collected by telephone corporations in rates authorized by the Commission to fund the CASF program shall be submitted pursuant to a schedule established by the Commission. All revenues collected prior to the issuance of the schedule by the Commission shall be held by the telephone corporations, and accounted for the in the CASF memorandum account, together with accrued interest. Upon the issuance of the schedule by the Commission, or other Commission directive, all revenues collected and any associated interest shall be transferred to the State Controller for deposit.

Universal service is defined as an "evolving level of telecommunications services ... taking into account advances in telecommunications and information technologies and services."²³ Providing cost reimbursement towards deployment of broadband facilities in unserved and underserved areas of California is necessary to meet the objectives of universal service. It is incontrovertible that the telecommunications market is fundamentally changing in terms of providers and technologies for reasons stated previously in this decision and in our URF decision; it is further incontrovertible that parts of the state are not receiving the benefits of these changes to their detriment due to outdated universal service mechanisms. We believe that our current mechanisms may be contributing to the so called "digital divide" inadvertently by discouraging infrastructure investment in parts of the state (e.g., rural, inner city, low income areas and to people with disabilities) due to reimbursements for operating costs that only may be awarded to one technology due to outdated mechanisms. The funding of broadband infrastructure may be the best way to take into account advances in telecommunications and information technologies and services and ensure the continued effectiveness of the universal service policies set forth by the state Legislature. We believe our action today is bolstered by California's telecommunication principles as set forth by the Legislature in Pub. Util. Code § 709:

The Legislature hereby finds and declares that the policies for telecommunications in California are as follows:

(a) To continue our universal service commitment by assuring the continued affordability and widespread availability of high-quality telecommunications services to all Californians.

(b) To focus efforts on providing educational institutions, health care institutions, community-based organizations, and governmental institutions with access to advanced telecommunications services in recognition of their economic and societal impact.

(c) To encourage the development and deployment of new technologies and the equitable provision of services in a way that efficiently meets consumer need and encourages the ubiquitous availability of a wide choice of state-of-the-art services.

(d) To assist in bridging the "digital divide" by encouraging expanded access to state-of-the-art technologies for rural, inner-city, low-income, and disabled Californians.

(e) To promote economic growth, job creation, and the substantial social benefits that will result from the rapid implementation of advanced information and communications technologies by adequate long-term investment in the necessary infrastructure.

(f) To promote lower prices, broader consumer choice, and avoidance of anticompetitive conduct.

(g) To remove the barriers to open and competitive markets and promote fair product and price competition in a way that encourages greater efficiency, lower prices, and more consumer choice.

(h) To encourage fair treatment of consumers through provision of sufficient information for making informed choices, establishment of reasonable service quality standards, and establishment of processes for equitable resolution of billing and service problems.²⁴

Pub. Util. Code § 709(c) identifies as one of the policies for telecommunications in California, the following: "To encourage the development and deployment of new technologies and the equitable provision of services in a way that efficiently meets consumer need and encourages the ubiquitous availability of a wide choice of state-of-the-art services." Pub. Util. Code § 709 (d) further identifies as a goal: "To assist in bridging the "digital divide" by encouraging expanded access to state-of-the-art technologies for rural, inner-city, low-income, and disabled Californians."

We have previously taken steps to promote the ubiquitous availability of broadband and advanced services in California, and to enhance broadband connectivity, by establishing the California Emerging Technology Fund (CETF) in conjunction with approval of the mergers of SBC/AT&T and Verizon/MCI.²⁵ The implementation of the CASF, as adopted in this order, provides an opportunity to take a further important step toward promoting access to state-of-the-art communications and information technologies. Broadband development generates productivity and growth in numerous Internet-related industries in California including e-learning, telemedicine, e-government, software development, video production, and music entertainment among others. These productivity benefits spill over to the economy at large as well, and will result in significant expansion of employment in California.²⁶ A recent study by the Brookings Institution has quantified just how important broadband deployment is to the people of California, "for every one percentage point increase in broadband penetration in a state, employment is projected to increase by 0.2% to 0.3% per year."²⁷

Governor Schwarzenegger has recognized the need for California to play a leading role in the deployment of broadband. Executive Order S-23-06 issued in November, 2006, established a California Broadband Task Force to "identify opportunities for increased broadband adoption, and enable the creation and deployment of new advanced communication technologies."²⁸

In addition, California is beginning to develop the mechanisms for identifying and gathering certain useful broadband data as the technology and industry continue to evolve. The California Legislature last year enacted the Digital Infrastructure and Video Competition Act (DIVCA) (AB 2987, Ch. 700, Stats 2006) requiring that certain broadband providers - those that obtain a state-issued video franchise from the Commission - submit to the Commission broadband subscribership information and data about homes passed at the census tract level. In this context, the Legislature ordered build-out requirements to ensure service was made available to all Californians, particularly low income and rural citizens.²⁹ Legislative direction appropriately recognizes that development of new technologies high-speed services, and infrastructure deployment should be encouraged.³⁰

In addition to the specific direction enunciated by the California Legislature in the Public Utilities Code,³¹ the federal Telecommunications Act requires:

The Commission and each State commission with regulatory jurisdiction over telecommunications services shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans.³²

Given the comparatively slow historic deployment of broadband services in California during this decade,³³ the importance of broadband to the financial health of the state,³⁴ and the direction of the Legislature "to encourage the development of new technologies,"³⁵ we find that action is warranted to encourage more rapid deployment. For this purpose, we find it is appropriate to dedicate limited funding to the deployment of broadband facilities in unserved and underserved areas of California for the specific purpose of closing the digital divide. We find that market failure has resulted in some portions of the state being unserved or underserved by providers, ³⁶ and this justifies our ground breaking action today. The allocation of money to the CASF program will provide important incentives to advance - from a critical timing point of view - rural areas in California obtaining advanced telecommunications services including voice services. The CASF will accelerate broadband deployment more rapidly than if we simply left market forces to deliver such services. Given the rural and remote nature of some of these areas which result in high costs to install advanced communications systems, we in fact do not have confidence that broadband services will be deployed throughout the state absent this type of infrastructure program. Further, we emphasize that voice services ride on broadband infrastructure as an application, thus provisioning broadband in all areas of the state does tie in directly to our universal goals relating to voice service.³⁷ Trends do show voice services are migrating to new technologies, as discussed infra.

An important goal of universal service policy is to ensure that all citizens have access to critical communications technologies. A suitable, competitively neutral, and broad-based program targeted toward broadband infrastructure is critical to ensuring a fair and equitable local rate support structure in all areas of the state. The CASF will "promote the goals of universal telephone service and ... reduce any disparity in the rates charged by those companies." Accordingly, consistent with our goal of promoting universal service, we shall require that voice service is available as one of the components of any broadband service funded through the CASF program. Accordingly, any recipient of CASF funds shall be required to ensure voice service is available in the service area(s) covered by the broadband deployment.³⁸

The Legislature and Governor have both clearly proclaimed the importance of high-quality telecommunications and advanced information and communication technologies. Thus, in order to effectuate our universal service obligations under Pub. Util. Code §§ 709 and 739.3, and §§ 254 and 706 of the Telecommunications Act, we find it appropriate to offer incentives for broadband infrastructure in unserved and underserved areas of the state on a going forward basis. Accordingly, we hereby implement funding of broadband infrastructure in unserved and underserved areas through the CASF, as prescribed below.³⁹

¹⁶ AT&T Comments on the Proposed Decision at 23, Sprint Nextel Comments on the Proposed Decision at 9, SureWest Comments on the Proposed Decision at 6-7, TWTC Comments on the Proposed Decision at 4, Verizon Comments on the Proposed Decision at 18.

¹⁷ DRA Comments at 1-2; Small LEC Comments at 2-3; CCTA/Time Warner Comments at 1, 3 -4, SureWest Comments at 2, Verizon Comments at 3; T-Mobile Comments at 11; TURN Comments at 3 Sprint Comments at 2 and 13, Verizon Comments at 1.

¹⁸ CCTA and TWCT Opening Comments on the CASF ACR at 3, TURN Opening Comments on the CASF ACR at 8, Sprint Nextel Opening Comments on the CASF ACR at 5, SureWest Reply Comments at 1.

¹⁹ Cal. Const. Article XII, Pub. Util. Code including § 701.

²⁰ See Pacific Tel. & Tel. Co. (1968), D.74917, 69 CPUC 53, Gen. Tel. Co. of Cal. (1969), D.75873, 69 CPUC 601 (creation of Lifeline service), codified in The Moore Universal Telephone Service Act (1984), Article 8 of the Pub. Util. Code commencing with § 871; See Resolution T-9865 (1978), Decision 90642 (1979), (first steps toward formally establishing a program to provide specialized, supplemental equipment to hearing-impaired customers at subsidized rates), codified in Pub. Util. Code § 2831 (SB 597 chaptered in 1979), as amended to Pub. Util. Code § 2881; See Investigation into Implementation of the Recommendations of the Commission's Telecommunications Infrastructure Report (1994), I.94-02-001, 1994 Cal. PUC LEXIS 3 (initiating proceeding based on Commission's report to the Governor, Enhancing California's Competitive Strength: A Strategy for Telecommunications Infrastructure (Nov. 1993), that would lead to creation of California Teleconnect Fund based on AB 3643 (Stats. 1994, Chapter 278)); See Investigation into the operations, practices and regulation of coin and coinless customer-owned pay telephone service (1990), D.90-06-018, 36 CPUC2d 446.

²¹ While we do not find this issue applicable to the creation of the CASF pursuant to this decision, we strongly disagree with parties that would limit our ability to update existing universal service programs. We specifically disagree with AT&T and Verizon arguments that Pub. Util. Code §§ 270(b) and 270(c) prohibit the expansion of existing programs. AT&T Comments on the Proposed Decision at 23, Verizon Comments on the Proposed Decision at 18. Such a reading of the statute would lead to absurd results. The programs covered by Section 270 cover a myriad of topics and issues. Advances in technology and other factors have led to changes, including expansions of the programs since they were created. The Commission has taken both formal and informal actions to adapt the programs to changed circumstances. See, e.g., D.05-04-026 (expanding Lifeline eligibility criteria), CPUC Report to the Legislature on the California Teleconnect Fund, May 2005 (outlining numerous improvements to Teleconnect implemented by the Commission); see also Pub. Util. Code § 276.5. AT&T and Verizon are incorrect that the Commission may not institute any improvements or changes to the existing programs.

²² As with other universal service programs within California, the CASF will operate as a cost reimbursement program.

²³ 47 U.S.C. § 254(c)(1). In using this definition of universal service for California, we do not seek to redefine nor do we intend the same meaning as our reference to basic service. Cf., D.95-07-050, mimeo. at p. 15.

²⁴ Pub. Util. Code § 709.

²⁵ See D.05-11-028, mimeo. at 76-80, 106-107, OP 1; D.05-11-029, mimeo. at 95-99, 125-126, OP 3. In conjunction with the California Broadband Task Force established by the Governor, CETF is a non profit organization that is engaging in an important broadband mapping project to help governmental agencies including the CPUC determine where the broadband gaps are located. Further, CETF is in the process of making significant grants of approximately $20 million to various non profit organizations who will be working to make broadband available, affordable and relevant in terms of applications in the rural, low income, and disadvantaged areas, and to people with disabilities. This work by the CETF goes hand in glove with the work of this Commission, in that the PUC's efforts go towards providing all Californians with access to broadband, while CETF's efforts encompass broader work, including affordability (e.g., placing donated, refurbished personal computers in underserved communities through community centers or placing them in affordable housing), applications (e.g., training new users on computers and assisting them in finding content that is useful and relevant to their lives), and accessibility (ensuring persons with disabilities have access to technology).

²⁶ Academic research has established significant and substantial benefits of increased broadband deployment. See infra.

²⁷ The Effects of Broadband Deployment on Output and Employment: A Cross-sectional Analysis of U.S. Data, by Robert Crandall, William Lehr and Robert Litan, The Brookings Institution, Issues in Economic Policy, July 2007. See also, The Economic Effects of Increased Broadband Use in California, by Kristin Van Gaasbeck, Stephen Perez, Ryan Sharp, Helen Schaubmayer, Angela Owens, Lindsay Cox, Sacramento Regional Research Institute, November 2007 (with a 3.8 annual percentage point increase in the proportion of the adult population using broadband, California could see a net cumulative gain of 1.8 million jobs and $132 billion of payroll over the next 10 years), available at http://www.srri.net/.

²⁸ Executive Order S-23-06 of Governor Arnold Schwarzenegger.

²⁹ Pub. Util. Code § 5890.

³⁰ Pub. Util. Code § 709.6(c) ("Encourages the provision of advanced, high-speed digital telecommunications services to the public."), Pub. Util. Code § 709.7 (California High Speed Internet Access Act of 1999), Pub. Util. Code § 5810(a)(2)(E) ("DIVCA legislation should [c]omplement efforts to increase investment in broadband infrastructure and close the digital divide."), see also, Pub. Util. Code §§ 709(c) ("encourage the development and deployment of new technologies and ... the ubiquitous availability of a wide choice of state-of-the-art services."), 709(e) ("rapid implementation of advanced information and communications technologies by adequate long-term investment in the necessary infrastructure."), Pub. Util. Code §5810(a)(1) ("increasing competition for video and broadband services is a matter of statewide concern").

³¹ Id.

³² Telecommunications Act of 1996, Pub. L. 104-104, Feb. 8, 1996, 110 Stat. 56, at § 706. See also 47 U.S.C. § 157 ("It shall be the policy of the United States to encourage the provision of new technologies and services to the public.").

³³ Connecting California, California Public Utilities Commission Telecommunication Division Broadband Report Update, September 20, 2006 (broadband connections have increased at an average rate of 49% for the U.S. and 40% for California for the same time period).

³⁴ Executive Order S-23-06 of Governor Arnold Schwarzenegger.

³⁵ Pub. Util. Code § 709(c).

³⁶ These areas are primarily rural and remote areas but also in some low income and disadvantaged communities.

³⁷ The Commission notes that the federal universal service mechanisms are also moving toward supporting broadband services. See Federal-State Joint Board on Universal Service Statement on Long Term, Comprehensive High-Cost Universal Service Reform, WC Docket No. 05-337, CC Docket No. 96-45, FCC 07J-3, rel. September 6, 2007 (proposing new broadband and mobility funds for unserved areas of the nation, separate from the legacy high cost fund).

³⁸ This requirement may be met through the availability of third-party voice applications.

³⁹ Pursuant to our authority under Article XII of the California Constitution and Pub. Util. Code § 701. We note that almost all of the existing universal service programs in California began in a similar manner where the Commission initiated the program under its plenary authority and the Legislature often, but not always, has later provided the statutory parameters of the program. See Pub. Util. Code §§ 270-280, 739.3, 2881-2881.2.