6. Assignment of Proceeding

Rachelle B. Chong is the assigned Commissioner and Thomas R. Pulsifer is the assigned Administrative Law Judge in this proceeding.

Findings of Fact

1. In D.96-10-066, the Commission instituted the B-Fund as an explicit subsidy program to ensure basic universal telephone service in high cost regions served by the major Incumbent Local Exchange Carriers within a competitive market environments.

2. The level of basic residential rates remained fixed when the B-Fund was adopted in 1996, and have not increased above those levels since then, except for limited inflation-related adjustments for 2008 as authorized for AT&T and Verizon in D.07-09-020.

3. The Commission adopted a uniform regulatory framework in D.06-08-030, generally eliminating restrictions on pricing of services, but specifically maintaining the rate freeze on basic service until January 1, 2009.

4. After January 1, 2009, as directed in D.06-08-030, the currently effective caps on basic residential service rates not subsidized by CHCF-B will sunset automatically.

5. D.06-08-030 also directed that basic residential services receiving a CHCF-B subsidy remain frozen at a level equal to the current rate, to be reevaluated as part of the CHCF-B review in R.06-06-028.

6. As noted in D.06-08-030, even in a competitive market, CHCF-B subsidies can distort the market for the provision of basic stand-alone service.

7. In D.07-09-020, the Commission adopted a framework for a period of transition to market-based pricing of basic service once the current rate caps expire on January 1, 2009, so as to avoid consumer rate shock.

8. The plan adopted in this decision provides for a transition to market-based pricing of basic service that is consistent with the framework adopted in D.07-09-020.

9. After the current rate caps expire on January 1, 2009, a period of two years will provide for a reasonable transition to phase-in rate changes prior to allowing full pricing flexibility for basic service, while retaining restrictions on the maximum rates that a COLR may charge in high-cost areas subsidized by the B-Fund.

10. A two-year phase-in period to transition to full pricing flexibility will avoid the effects of consumer rate shock that would result from immediately removing all pricing restrictions, yet will be short enough to provide a timely transition to market-based pricing.

11. During the period that basic service rates remained frozen, the cumulative effects of price inflation resulted in the true economic retail charge for basic service actually declining in terms of real purchasing power.

12. By allowing for a basic rate increase equal to the cumulative effects of inflation-adjusted price level changes since 1995, the price of basic service is merely adjusted to its real inflation-adjusted value in relation to 1995 price levels.

13. The goals of maintaining basic service affordability while transitioning to market-based pricing can be reasonably balanced by allowing AT&T to increase its basic rate over a two-year period by an amount equal to the cumulative inflation-adjusted price changes since the rate freeze was implemented in 1995.

14. The resulting cumulative increase in the basic rate for AT&T as a result of applying inflation-adjusted price changes since 1995, as derived in Appendix 1, would result in an increase of $3.25 on January 1, 2009, and $3.25 on January 1, 2010.

15. The basic rates for Verizon, SureWest and Frontier have also been frozen since the mid-1990s. If their rates were allowed to increase by the cumulative effects of past inflation since 1995, the result would be significantly higher than merely limiting them to the same dollar increase as authorized for AT&T.

16. By allowing the same increase in the basic rate for Verizon, SureWest, and Frontier as calculated for AT&T, the dollar differences among the basic rates of all four ILECs will remain the same, and facilitate a smoother transition to market-based pricing.

17. The resulting basic rate increases of $3.25 per month for Verizon, SureWest, and Frontier, as set forth in Appendix 2 represent the amounts attributable to limiting the rate increases to the amount approved for AT&T for the period beginning January 1, 2009 and 2010, respectively.

18. Since the Commission found in D.06-08-030 that the market for telecommunications services is competitive, the ILECs would not be able to sustain rate increases for basic service above affordable levels after the end of the two-year transition period, under the provisions as adopted in this decision.

19. Once the two-year transition period expires, the forces of competition, together with additional backstop of the 150% basic rate limitation for basic service charges in high-cost areas adopted in this decision, should serve to constrain the COLRs from raising basic service rates above affordable levels in regions not subject to B-Fund subsidy support.

20. The authorization to increase the basic service rate cap means that the ILEC may elect to charge less than or equal to the capped amount, but may not charge more. The Commission is not ordering the ILEC to raise its basic rate but giving it permission to do so if it so desires to meet current market conditions.

21. Although a threshold of $36 per line was adopted in D.07-09-020 as a generalized measure for purposes limiting eligibility for B-Fund subsidy support, the $36 threshold was not intended for use as a stand-alone rate cap for basic service.

22. The $36 threshold adopted in D.07-09-020 was based upon national aggregate data, reflecting revenues from sources other than just basic service.

23. In order to ensure basic service affordability once the two-year transition period expires, it is not necessary to determine a specific maximum affordable rate. Adjustments in basic rates after full pricing flexibility takes effect will be constrained by competitive influences, marketing strategies, as well as changes in costs and technologies over time.

24. The continued affordability of telecommunications services can best be assured through targeted programs and policies such as California Lifeline and the CHCF-B.

25. The Commission may choose to evaluate its existing programs and consider new targeted programs should the CPS penetration rate for telephones available to households fall below 95% for an entire year.

26. The Commission considered the most recent Study on Affordability of Basic Telephone Service conduced by Field Research Corporation in 2004 as part of this proceeding and did not find it useful for establishing new high cost rules or as a basis for establishing basic rates.

27. The Commission has found the Affordability Study useful in the context of evaluating the California Lifeline program.

28. The Commission should undertake such an Affordability Study in the 2009-2010 fiscal period and will request an appropriation from the Legislature to conduct such a study.

29. The Commission shall complete by June 30, 2010 a statewide Affordability Study in order to analyze the impacts of the transition plan and any reforms in the California LifeLine Telephone Program. California Lifeline rates should not increase on the same percentage basis as the basic rate for non-Lifeline customers.

30. A reasonable way to implement this protection is to require that the COLR certify that it does not charge more than 150% of the highest rate for stand-alone basic service within its aggregate California service territory that is not subsidized by the B-Fund or $36 (equal to the high-cost benchmark) minus the EUCL, whichever is lower.

31. Since the basic rate will be subject to pricing flexibility after January 1, 2011, additional reporting requirements will be necessary to provide the requisite data to ascertain the highest basic rate.

32. California Lifeline rates should not increase on the same percentage basis as the basic rate for non-Lifeline customers.

33. Additional comment should be provided in the Universal Service, Public Purpose Programs (PPP) R.06-05-028 by October 1, 2008 to refresh the record in that proceeding.

Conclusions of Law

1. Pursuant to the directives in D.06-08-030 and D.07-09-020, a transition process is required to move to market-based pricing of basic service once the current rate caps expire effective January 1, 2009.

2. The transition process adopted in the ordering paragraphs below is compliant with the goals and framework of D.06-08-030 and D.07-09-020 for the treatment of basic service rates on and after January 1, 2009.

3. The provisions for basic rate adjustments for each of the ILECs, as set forth in Appendix 2 below, effective beginning January 1, 2009, should be adopted.

4. Granting full pricing flexibility after a two-year transition period for basic service in regions not subsidized by the B-Fund would be consistent with the goals of preserving universal service as well as promoting timely implementation of market-based pricing.

5. The Commission can best assure the continued affordability of telecommunications services through targeted programs and policies such as California Lifeline and the CHCF-B.

6. The provisions allowing for adjustments to basic rates applicable to the ILECs, as adopted in this decision, should be incorporated into the design of the reverse auction that is also being considered for implementation in this proceeding. Nothing in the basic rate transition plan adopted in this decision is intended to prejudge the protocols for the reverse auction, including revisions in the basic service definition to make it technology neutral and whether to permit one or multiple COLRs to draw B-Fund support within the same high-cost region.

7. Pub. Util. Code § 874 requires that "the lifeline telephone service rates shall not be more than 50% of the rates for basic flat rate service," and allows for discounts that make the California LifeLine rate less than 50% of the basic flat rate.

ORDER

IT IS ORDERED that:

1. Upon the expiration of currently effective rate caps on January 1, 2009, the following incumbent local exchange carriers (ILECs): Pacific Bell Telephone Company dba AT&T California (AT&T), Verizon California Inc. (Verizon), SureWest Telephone (SureWest), and Citizens Telecommunications Company of California Inc, dba Frontier Communications Company of California (Frontier) shall be permitted to increase their stand-alone residential basic flat rates by up to the amounts set forth in Appendix 2.

2. Each of the ILECs is also concurrently permitted to increase residential basic rates for measured service on the same percentage basis as is permitted for flat rates. The resulting percentage increases for measured service rates are: (a) For AT&T - 30% for 2009 and 23% for 2010; (b) For Verizon- 18% for 2009 and 16% for 2010; for SureWest - 17% for 2009 and 15% for 2010; for Frontier - 18% for 2009 and 15% for 2010.

3. The authorized increases in the basic rate caps for residential flat rate and measured rate service each of the Uniform Regulatory Framework (URF) ILECs shall take effect January 1, 2009 and January 1, 2010, respectively. If an ILEC does increase any basic rates pursuant to the additional rate cap flexibility granted in this decision, the ILEC must first file an advice letter and provide 30-day advance notice of the increase to affected customers pursuant to Decision (D.) 06-08-030 (Ordering Paragraph 9).

4. Effective on and after January 1, 2011, each the named ILECs shall be permitted to adjust stand-alone prices for residential basic service in regions not subsidized by the B-Fund, without regulatory restrictions, subject only to competitive market forces.

5. Each of the ILECs is permitted to increase California LifeLine basic rates for 2009 and 2010 by no more than 25% of the incremental rate cap change ($0.81).

6. Each of the ILECs is also concurrently permitted to increase California LifeLine basic rates for measured service on the same percentage basis as is permitted for California LifeLine basic rates.

7. The Commission will request an appropriation from the Legislature to conduct such an Affordability Study during the 2009-2010 fiscal period as part of its ongoing evaluation of the California Lifeline program in Rulemaking (R.) 06-05-028.

8. The Commission shall complete by June 30, 2010 a statewide Affordability Study in order to analyze the impacts of the transition plan and any reforms in the California LifeLine Telephone Program.

9. Pursuant to D.07-09-020, Verizon and Frontier shall file advice letters implementing the surcredit reduction to match any respective reduction in their CHCF-B support payments in tandem with the schedule for implementing revisions in the high-cost benchmark to be completed as of July 1, 2009.

10. Consistent with General Order 153, LifeLine rates for basic flat rate and measured service may be affected to the extent the ILECs implement increases pursuant to the rate flexibility permitted herein. This decision does not prejudge the merits of any subsequent reforms to LifeLine rates or program features as currently being considered in R.06-05-028.

11. To the extent necessary to effectuate the rates specified in this decision for California LifeLine, we suspend General Order 153, to the extent it limits California LifeLine rate discounts to 50%.

12. On or after January 1, 2011, the URF ILECs may change their rates for basic service by filing a Tier 1 advice letter.

13. We direct parties to file comments in the Universal Service, Public Purpose Programs R.06-05-028 by October 1, 2008 to refresh the record in that proceeding.

This order is effective today.

Dated September 18, 2008, at San Francisco, California.

Commissioners

/s/ JOHN S. BOHN

Commissioner

/s/ TIMOTHY A. SIMON

Commissioner

/s/ DIAN M. GRUENEICH

Commissioner

APPENDIX 1

Derivation of Adjustments to AT&T's Basic Rate for

Cumulative Consumer Price Index (CPI) Changes

(1995 to 2008)

(END OF APPENDIX 1)

Rate Change Date Revised Basic Rate Caps (by carrier)

1/1/2008 AT&T Verizon SureWest Frontier

Basic Rate $10.94 $17.66 $18.90 $17.85

EUCL 4.40 6.50 6.50 6.50

Total $15.34 $24.16 $25.40 $24.35

Rate Increase ($) AT&T Verizon SureWest Frontier

1/1/2009 3.25 3.25 3.25 3.25

1/1/2010 3.25 3.25 3.25 3.25

1/1/2009

Basic Rate 14.19 20.91 22.15 21.10

EUCL 4.40 6.50 6.50 6.50

Total $18.59 27.41 28.65 $27.60

1/1/2010 AT&T Verizon SureWest Frontier

Basic Rate 17.44 24.16 25.40 24.35

EUCL 4.40 6.50 6.50 6.50

Total $21.84 30.66 $31.90 $30.85

(END OF APPENDIX 2)

R.06-06-028

D.08-09-042

Concurrence of Commissioner John A. Bohn to Decision 08-09-042

I offer my support and my vote in favor of this decision to adopt a phased transition plan for pricing basic telephone service.

We are in the process of moving from an administratively-determined price system for telephone service to a market-based price system. We must continually re-evaluate the market to be sure that competition is providing adequate price discipline. In this process, things are changing and the key to a successful change is a transition plan that includes a study of affordability, which we have adopted in this decision. It is important that we refresh our thinking on what affordability means. Does the affordability issue relate to people who fall below the poverty line? Below double the poverty line? Is there a line we can reasonably draw?

There are a number of ways to handle the affordability issue as it relates to telephone service. One way is to set up a discount rates program for certain customers. Another way to deal with this issue is to keep rates artificially low, but if we keep rates too low, we starve our utilities for investment. Yet, looking at the trajectory of our current economic situation, more and more people may find themselves in a position to say that they have affordability issues. Clearly we are seeing a world-wide price increase for services, and it is unlikely to suddenly reverse itself.

Affordability is not only related to telephone service. We see it in the energy area and in water service as well. I intend to invest my time on this issue, not just with respect to basic telephone service, but also with respect to energy and water services as well. I think it is important for us to try to get this right as we move forward.

San Francisco, California

September 23, 2008

R.06-06-028

D.08-09-042

Concurrence of Commissioner Dian M. Grueneich

Today's decision contains four major elements:

1. We allow major rate increases in basic services, up to 30% effective January 1, 2009 and up to 23% effective January 1, 2010;

2. We state an intent that, as of January 1, 2011, all caps will be removed on basic service rates in California;

3. We place a limit on LifeLine price increases for basic service of no greater than 81 cents per year, subject to a further review later this year which may demonstrate that expanded LifeLine services are needed in light of today's decision; and

4. We commit to complete a statewide affordability study by June 30, 2010, in order to inform our decision regarding post-2010 regulatory and rate structure.

I have concluded that the balancing of these four elements warrants my vote in favor of this decision. However, as I explain below, I remain troubled about whether we have sufficient safeguards in place to monitor the level of competition in California and protect our most vulnerable telephone customers.

This decision and others we have issued are premised on an assumption of existing and continuing robust competition in all segments of the communications market. We are at risk that a lack of knowledge - and fall back provisions if competition does not exist as assumed - will result in a failure of the goals we seek - low-cost, universal telephone and other communication services for all residents and businesses in the State.

Currently, most California telephone customers are dealing with a fluctuating economy and its uncertainty. However, those most vulnerable - low income families, seniors living on fixed incomes, and the disabled - are feeling an even greater impact from this worsening economy. As a regulator of California's utilities, I am witnessing California's low and moderate income households spending one-fifth of their annual income on home energy bills and an estimated 1.7 million families in arrears on their energy bills. The record in this proceeding shows that nearly two-thirds of LifeLine customers receive only basic service and will be directly impacted by our actions today.

In making the decision to approve lifting the decade's long freeze on basic telephone rates, we must balance the Commission's policy goal of cost-based rates, as disciplined by competitive market forces,46 with its policy of Universal Telephone Service, whereby all California consumers have access to affordable and reliable telephone service.

Today's decision seeks to reach this balance. While taking a step closer to regulation by market competition, we have simultaneously put in place safeguards to prevent rate shock for the average consumer by setting rate caps on allowable increases. For the more vulnerable consumer, we have ensured them that price increases will be limited to no more than $0.81 a year and we have committed to reviewing the impact of these actions in a separate proceeding, the Universal Service, Public Purpose Programs
Rulemaking 06-05-028. The commitment also includes a review of the LifeLine eligibility requirements. Because the cost of living is comparatively higher in certain California communities, the Commission should be certain that the LifeLine program has appropriate eligibility requirements to balance that higher cost of living. The LifeLine review should consider, if necessary, expanding program coverage. (By comparison, in our energy assistance programs, the eligibility criteria are 200% of federal income poverty levels whereas for LifeLine it is only 150%.)

I remain concerned whether we have adequate safeguards to monitor the level of voice competition and ensure appropriate prices can be determined by competitive market forces. This decision requires a statewide affordability study be completed by June 30, 2010, so it can inform our decision on post-2010 regulatory and rate structure. However, to properly ensure that competition is as vibrant as the Commission declares, we have a duty and responsibility to the consumers of California to monitor the level of competition to assure that prices remain affordable and telephone service remains reliable and accessible to all Californians. The Commission should schedule regular competition surveys to adequately meet this responsibility. This is an issue that I will be pursuing.

San Francisco, California

September 23, 2008

45 The $10.94 rate took effect April 8, 2008.

46 See D.06-08-030 at 132, FOF 77, 86, COL 20, 28, D.07-09-020 OPs 7-8, 13, as modified by D.07-11-039.

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