3. Preliminary Scoping Memo

The scope of this new rulemaking will address unresolved issues, as previously identified in R.06-06-028, necessary to reform the B-Fund program. In particular, an updated process is needed to select COLRs and adjust support payments to reflect current market conditions, ensuring the program is competitively neutral. We also intend to implement reform measures to make the current administration of the B-Fund program more efficient.

3.1. Implementing a Reverse Auction Process

As noted in D.07-09-020, the cost proxy data utilized to determine B-Fund support is extremely outdated. In D.96-10-066, we defined high costs on a "Census Block Group" (CBG) basis where the cost of basic telephone service exceeded the system average in the territories of the state's large and mid-sized LECs. Since the adoption of cost proxies over a decade ago, the state's population demographics, technology and costs of providing service have changed considerably. As a result, the applicable cost proxies used in the B-Fund support calculations have grown increasingly outdated.

As a basis for continuing to provide support in high cost areas going forward, we recognized in D.07-09-020 that a new approach is needed to determine what constitutes "high cost" for purposes of supporting the provision of basic service as a COLR.

In D.07-09-020, we recognized that relying on updated cost modeling to serve as the basis for B-Fund support levels has significant limitations and caveats. Not only is cost modeling time consuming and resource intensive, but it also requires the selection of a particular technology to be modeled. In the last decade, advances in communications technology have brought consumers many choices of voice providers using different technologies. Rather than relying on one technology-specific cost proxy as a basis to determine high cost funding levels, we concluded in D.07-09-020 that the superior solution is to move toward market-based approaches that are not biased toward a particular carrier or technology. We expressed our intent in R.06-06-028 to implement a new process to determine high-cost COLR support through a reverse auction.

Providing for competitive bids through a reverse auction will offer greater assurance that support is limited to reasonable levels needed to meet the goal of universal service. Accordingly, we expressed our intention to pursue a reverse auction as a means of selecting COLRs and determining the amount of high cost support to meet universal service goals. A reverse auction will solicit bids for the minimum level of subsidy required as condition of offering residential basic service as a COLR within a designated high-cost region.

Pursuant to D.08-09-042, as modified by D.08-10-040, full ILEC pricing flexibility will take effect for stand-alone basic service within regions not subject to the B-Fund support after January 1, 2011. The ILECs will be free thereafter to adjust residential basic rates in areas not subject to Lifeline subsidy or B-fund, based on competitive market forces. Remaining work needs to be done, however, to determine what sorts of conditions on basic rates should apply to prospective COLRs bidding for B-Fund support in a reverse auction.

Although we began considering the design of a reverse auction in R.06-06-028, additional important work remains to be done. We find it appropriate to address this issue within the new rulemaking instituted today as a successor to R.06-06-028. We take official notice of the record developed in R.06-06-028 regarding the design and implementation of a reverse auction. We shall utilize this record as a starting point in this new rulemaking for making further progress. Initial comments on reverse auction design issues were filed in R.06-06-028 on November 9, 2007, with reply comments on November 28, 2007. By ruling dated December 13, 2007, Working Groups were established to formulate recommendations on the design and implementation of a reverse auction process.² The Working Groups issued progress reports on February 21, 2008, and May 1, 2008.

The Working Groups reached limited consensus on certain issues, but remained in dispute on other issues. The Working Groups requested Commission guidance on certain threshold issues relating to reverse auction design before attempting further discussions on secondary issues. Opening and reply comments on the threshold issues were filed on June 24, 2008, and July 15, 2008, respectively. We hereby incorporate the progress reports and comments on reverse auction threshold issues into the record of this proceeding.

As the basis for further work on the design of reverse auction protocols, the assigned Commissioner will issue a Proposed Decision providing guidance on the threshold issues involved in the design of a reverse auction process. The assigned Commissioner will also by separate ruling establish a schedule for the remainder of the proceeding. The Working Groups will then be directed to resume discussions to address the remaining auction design issues in accordance with the guidance provided on the threshold issues. We expect that this rulemaking proceeding will conclude within 18 months of the effective date of this order.

3.2. Program Administration Issues

In 1999, the Legislature created the CHCF-B Administrative Committee Fund within the State Treasury.³ This legislation provided that the funding would be in rates, while the funds collection would be submitted first to the Commission, and then deposited with the Controller for deposit in the California High Cost Fund-B Administrative Committee Fund.⁴ The COLR's claims are paid after being reviewed by Commission staff.

In 2001, the Legislature allowed funds to be transferred between various telephone funds in the annual budget act.⁵ The Legislature also expressed its concern with stale data underlying the B-Fund. Section 270(b) restricted the transfer of funds until the service costs from the Commission's 1996 decision were recalculated.⁶ Subsequently, the Budget Act of 2002 transferred nearly $251 million of High Cost Fund-B money to the state general fund.⁷

In 2004, Pub. Util. Code § 739.3 was further amended to: (a) provide that money in Commission-regulated telecommunications related funds are the proceeds of rates, and therefore, are held in trust for the benefit of ratepayers and to compensate telephone corporations for their costs of providing universal service; (b) extend funding for the various universal service programs including the B-Fund program until January 1, 2009;⁸ and (c) further require the Commission to conduct by January 1, 2006, a review of the B-Fund.⁹ The purpose of the review was "to accomplish an adjustment of subsidy payments to reflect updated operating costs and an evaluation of whether subsidy levels can be reduced while maintaining the goals of the program."¹⁰

We solicited comments in R.06-06-028 on B-Fund program implementation issues associated with an automated claims process.¹¹ Two parties presented proposals regarding program processing issues. Cox suggested an automated claims review that would include electronic submission of monthly claims via secured connection, standardization of a monthly claims format for all carriers, electronic notification with a date that the monthly claim was submitted, and the opportunity for all carriers to elect to receive payments via an automatic clearinghouse.¹² AT&T recommended that the Commission employ a Third-Party Administrator that would be responsible for processing new participant applications, processing claims for compensation from the fund, distributing subsidies from the fund, and provide staff support to the CHCF-B Administrative Committee, including preparation of financial statements and management reports. If such a Third-Party Administrator were employed, the Commission's role would be reduced to drafting the annual budget, overseeing audits of program, and periodically setting the level of the CHCF-B surcharge.¹³

DRA expressed concerned that these proposals lack specificity, and provide no supporting data as to the likely cost of such programs. AT&T provided no basis - such as an undue burden on the Commission - for the management of the fund to be outsourced to a Third-Party Administrator. DRA argues that Third-Party Administrators can add an unnecessary layer of expense and administrative complexity for programs such as the CHCF-B. DRA recommends that, if the Commission elects not to eliminate the B fund, workshops should be held to determine the need for and cost of program implementation changes, with evidence (including evidence of anticipated costs) provided by those claiming needed changes.

We shall consider within this new proceeding how B-Fund program administration can be improved, automated, and streamlined. The assigned Commissioner will issue a subsequent ruling to set a schedule for addressing this issue.

² One Working Group focused on design issues relating to carrier eligibility for participation and selection as a Carrier of Last Resort, while a second Working Group focused on design issues relating to bidding protocols.

³ Government Code Section 270(a)(2), pursuant to SB 669.

⁴ Government Code Section 276(b).

⁵ Pub. Util. Code § 276, pursuant to Section 20 of SB 742 (2001), as amended by Stats. 2001, Ch. 903 § 5.

⁶ Pub. Util. Code § 270(b)(2), pursuant to AB 140 (Statutes of 2001). The Legislature restricted fund transfers from the B-Fund to the other high cost fund until statewide data was recalculated.

⁷ AB 425 Provision 8660-011-047.0 (Stats. 2002, Ch. 379).

⁸ Pub. Util. Code § 739.3, pursuant to SB 1276 (Stats. 2004, Ch. 847, enrolled September 28, 2004).