III. Discussion

We adopt eligibility criteria for community-based groups to qualify for telecommunications rural infrastructure grants. Section 276.5 provides that any community-based group representing a qualifying community may apply for and receive a grant to build an original telecommunications infrastructure that can provide basic telecommunications service.

A. $2.5 Million Cap

Most parties oppose deviating from the statutorily imposed $2.5 million cap. SBC Calfornia states there should be no deviance, and Citizens, Verizon, and the Small LECs state applicants must demonstrate they have secured funding exceeding the cap if proposed projects are in excess of $2.5 million. Both TURN and the Governor's Office suggest the Commission assist applicants in seeking other resources by identifying those resources.

We concur that § 276.5 clearly limits the amounts applicants can receive as provided:

The procedures developed for awarding grants shall ensure that . . . no one applicant receive more than 25 percent of the designated program funds in a single fiscal year. (§ 276.5 (e).)

We lack authority to alter the statutory scheme. However, applicants may propose projects whose costs exceed the $2.5 million cap. In those instances, we must ensure that grant applicants seek to secure federal funding in conjunction with local subsidies, as required under § 276.5(c). Because funding sources can change and it is not clear we have the resources both to update funding sources and to administer the grant program, we will seek the parties' input in initially identifying funding sources. Our staff can provide that information in the application packet and update it as necessary.

TURN also proposes that applicants seek funding in more than one year. We will address that proposal below, in the section on grants in successive years.

B. Funding Allocation Between Large and Small Projects

No party supported allocating funding between large and small projects, although two parties did not oppose that allocation. Citizens, SBC California, Verizon, and the Small LECs oppose any allocation, because it is inconsistent with the legislative mandate to bring service to as many communities as possible. TURN is uncertain about the benefits of an allocation, and the Governor's Office states an allocation might prevent worthy projects from consideration. The Governor's Office supports ensuring that the most worthwhile projects serving schools, hospital, clinics, and the greatest number of households receive funding.

The concerns voiced by the parties about allocating funding between large and small projects have merit. We will not establish a percentage of small or large projects that are eligible to receive funding as a specific criterion for awarding funding. If necessary, we can consider the size of the project in awarding funding to ensure that small projects are represented among the projects chosen for funding.

C. Fixed Application Filing Deadlines

TURN, Verizon, and SBC California support a fixed filing deadline. Citizens and the Small LECs propose a rolling deadline in the initial year of the grant program and in subsequent years a priority deadline. The Governor's Office proposes releasing funds in two fixed-award rounds at six-month intervals.

Efficient administration of the grant program requires some form of fixed deadline. No party objects to a fixed deadline in subsequent project years, and there is no basis for failing to adopt one. Although we agree that some initial flexibility could be warranted as communities attempt to meet the application requirements, we decline to adopt a rolling deadline in the initial project year in the interest of maintaining certainty and administrative efficiency in the application and approval process. The preferable means of establishing flexibility in the first year of the program is to adopt the Governor's Office's proposal for two fixed award rounds in that initial year. Thereafter, we will establish a single annual filing deadline that should permit applicants sufficient opportunity, given the two-phase application process, to meet our deadlines. We direct our staff to establish two application filing deadlines at six-month intervals in the first year grants are awarded and an annual deadline thereafter.

D. Communities in Unfiled Territory

Parties are divided on whether we have the authority to compel carriers to offer service in unfiled territories where there is no service provider. TURN asserts the Commission has the authority to order a carrier to serve, although TURN also states communities might be able to construct on their own. SBC California and Verizon contend we lack jurisdiction to order carriers to serve. Citizens and the Small LECs suggest it is uneconomic to construct in an unserved territory absent an external source of funding. The Governor's Office suggests wireless, small, or out-of-state providers could provide service in those areas.

Verizon, SBC California, and TURN concur that we have some authority under Section 214(e)(3) of the Telecommunications Act of 1996 to order an Eligible Telecommunications Carrier to provide basic service in an unserved territory, but they disagree as to the extent of that authority. TURN references our discussion in Decision (D.) 01-06-007, which approved a transfer of exchanges. SBC California states that authority is limited to when no common carrier will provide services supported by Federal universal service support mechanisms under Section 254(c) of the Act. At this time, we do not have a request before us to require that a carrier serve a community awarded a grant under the grant program. Because a determination as to the extent of our authority may rely on the facts presented and because we contemplate approving grant awards via the resolution process, discussed below, we find it is not necessary to establish the extent of our authority in this interim decision.

E. Applications in Successive Years

TURN is the only party that supports permitting applications for grant awards in successive years. The Governor's Office conditionally supports successive awards should alternatives fail to work out. The Governor's Office's proposed additional restrictions would be a lower cap, completion of the initial phase, and consideration after other awards. SBC California, Verizon, Citizens, and the Small LECs generally agree that the legislation precludes awards in successive years.

Section 276.5(e) provides that not more than one grant can be awarded to a qualifying community. Although the statute limits a community to one grant and to receipt of no more than 25% of the program funds in a single year, it theoretically appears possible to award a grant of greater than $2.5 million in successive years. However, it is unclear whether it would be cost effective to structure awards to receive funding over successive years. In addition, awarding a multi-year grant to a qualifying community in one year's pool might restrict the Commission's ability to award equally qualifying or better qualified communities grants in successive years. The preferable approach is to ensure grant applicants seek to secure additional funding, as required under the statute. For these reasons, we will decline to award projects grants in successive years and instead will review communities' plans to secure other sources of funding to enable this grant program to serve the greatest number of qualifying communities.

F. Two Carriers' Filed Territory

Verizon and SBC California concur that cost effectiveness should determine which carrier should provide service when an unserved territory falls within the filed territory of two carriers. Citizens and the Small LECs believe that this scenario is infrequent and should be addressed on a case-by-case basis, because carriers have experience in adjusting boundaries. The Governor's Office supports a boundary exchange. TURN believes that the best carrier should serve.

We concur with Citizens and the Small LECs that there will not be many cases where unserved communities are contained in two carriers' filed territories. As suggested by Citizens, the Small LECs, and the Governor's Office, carriers can negotiate boundary adjustments, if the need arises. If these negotiations fail, we can examine the circumstances and resolve the issue in the resolution process, discussed below. Thus, we decline to establish a fixed procedure for resolving any potential boundary dispute.

G. Application

Section 276.5 provides that grant proposals shall be submitted in accordance with procedures provided by the Commission. The application form, Attachment A to the OIR, specifies the information needed by the Commission to evaluate grant applications. All parties offered revisions to the application form. Parties suggested requesting additional information in the application including current and proposed telecommunications services, alternatives to the proposed technology, why alternatives are insufficient, support letters from government agencies, details on the population, whether the applicant has sought federal or other funding options, modifying the community and qualifying financial information language, providing more detail in schematic maps, and identifying that construction-cost estimates have been reviewed and approved by the carrier. Our staff has considered these proposals and has revised the application form, as necessary.

Parties also expressed concern that this decision would adopt an application form that could subsequently be modified only by Commission order. In the interest of providing a publicly available form for potential grant program applicants, we will approve the application form attached as Attachment A to this decision. However, we will not require that future changes be made by decision. Instead, we can approve substantive changes to the form submitted to us by our staff in a resolution. We also permit the Director of the Telecommunications Division, or its successor division, to request additional information from applicants in writing.

H. Other Eligibility Criteria

Section 276.5 provides that the Commission shall establish eligibility criteria for community-based groups to qualify to apply for telecommunications infrastructure grants and that communities with schools, hospitals, and health clinics that lack basic telecommunications service will receive consideration for a grant. We will consider schools, hospitals, and health clinics a "community," subject to other eligibility criteria, discussed below. Section 276.5 requires that a local agency or town, as defined by §§ 50001 and 21, respectively, of the Government Code act as the grant recipient's fiscal agent for the receipt and distribution of funds. A local agency means a "county, city or city and county unless the context otherwise requires." Govt. Code § 50001. As the purpose of this legislation was clearly intended to benefit not only cities and counties without basic telecommunications service but also tribal governments and lands without basic telecommunications service, we believe that the context clearly requires that tribal governments be able to act as fiscal agents for the purposes of these grants on the same basis that a city or county may act as a fiscal agent. We will require that each grant applicant have an approved fiscal agent, as defined above.

In addition, qualifying communities shall have a median household income no greater than the income level used in the Universal Lifeline Telephone Service (ULTS) index for a family of four. We will follow the ULTS determination of median income and the ULTS income limitation for the 2003/04 fiscal year of $27,800. For purposes of qualifying for a grant in 2003/04, the community residents' median household income shall be $27,800 or less. All adult household residents' income from all sources will count toward the income limitation. We may verify household income.

Section 276.5 provides the Commission shall require that the telecommunications carrier that provides service has the obligation to serve the community. A carrier has the obligation to serve and to provide feasibility studies and cost estimates if the project is located in its territory. If a portion of the project is outside the carrier's territory, the project must have an interconnection agreement with a local service provider and a maintenance contract. If a portion of the project is within a local service provider's territory, the provider is obligated to prepare a feasibility study for its territory only.

Carriers have commented that the 30-day timeframe for preparing a feasibility study and responding to a request for service is insufficient for some locations. We concur that some feasibility studies will require a more complex analysis. As a result, we will permit a carrier to provide the tariff-required feasibility study to a request for service within 30 days and to provide a full feasibility study within 60 days.

Section 276.5 provides that the Commission shall consider the cost effectiveness of the application, the number of people served, the level of local support, the ability of the community served to pay for the services delivered, and the effect on public health and safety in evaluating grant applications. To this end parties must provide community information and letters of support from the County Board of Supervisors, other affected local governments, affected school districts, emergency service providers, and law enforcement agencies, and a 75% subscribership commitment of the unserved community residents as part of the grant application process.

We will carefully weigh the enumerated criteria in considering grant applications and will place particular emphasis on the number of people served in weighing the cost effectiveness of the application. Similarly, we also shall ensure that the community has the ability to pay recurring service charges and will view favorably a high subscribership commitment level in evaluating applications. Finally, we will give priority to communities that include schools, hospitals, and health clinics, as defined in D.96-01-066 and as required under § 276.5. Carriers have legitimate concerns about costs, and we are charged with ensuring that approved grant applications are cost effective.

I. Other Issues

1. CEQA Review

Verizon proposes that the Commission inform applicants as early as possible if the proposed project will trigger California Environmental Quality Act (CEQA) review and, if so, whether the Commission will serve as the lead agency under CEQA. The OIR noted that Phase 1 eligibility determinations would not trigger CEQA, but that Phase 2 might trigger environmental review. Our CEQA team necessarily is involved in project approval and should be able to alert applicants to potential environmental review early in the Phase 2 application process. We decline to speculate what projects might trigger CEQA review but will address CEQA issues, as necessary, in the resolution approving grant applications.

2. Incumbent Local Exchange Carrier Cost
Recovery

SBC California proposes that incumbent local exchange carriers (ILECs) receive full expense recovery for construction and maintenance costs. Verizon recommends Z-factor recovery under the New Regulatory Framework (NRF) program for feasibility studies and other reasonable infrastructure development costs, if the grant program does not fund them. Citizens and the Small LECs state feasibility study costs exceed the scope of what is required under line extension tariffs and that ILECs should be reimbursed in excess of the tariff-related analysis.

TURN responds that carriers have failed to show how feasibility studies mandated in the proposed application differ from what is required under their tariffs. TURN believes that grant money should be used to cover costs applicants would be required to incur under the line extension rules. TURN notes that concerns about costs for advanced services should not be a major issue, since AB 140 was designed to address basic service.

Carriers' line extension tariffs cover "abnormally long plant extensions to prevent unreasonably burdening the general body of existing customers . . ." (See SBC Pacific Bell's Tariff Schedule 4.3.A.) Charges apply to aerial and underground facilities and all classes, types and grades of service. (Id.) ILECs have noted that those tariffed charges will be insufficient for the costs associated with the rural infrastructure grant program and that it would be inequitable to fully reimburse the costs of providers without those tariffs while providing a lower level of reimbursement to ILECs.

We agree that the program should fund applicant line extension costs and recognize that the line extension revenues will likely fall short of recovering some project costs. Because our program contemplates expanding service to communities, rather than a few individuals, costs associated with large-scale projects will likely exceed what would otherwise be incurred for a few individual line extensions. The line extension tariffs were not designed to address a state-administered program such as this one, where funds, collected through a surcharge on telecommunications customers, are provided to pay for infrastructure costs.

We find that existing line extension tariffs should not apply to this program. Instead, ILECs shall file advice letters setting forth line extension rates, charges, and other terms and conditions applicable to each rural infrastructure grant project. Such charges shall be reasonable and cost-based. Such terms shall be consistent with this decision. These tariffs shall supplement, not replace, existing line extension tariffs. Where we find that a grant application should be approved, we will permit ILECs to recover from the fund infrastructure costs contained in the Commission-approved tariff. In no instance shall total funding per project exceed 25% of total available program funds, or $2.5 million. We deny further recovery beyond the project cap, and explicitly reject the limited exogenous factor recovery proposal under NRF.

3. Membership of Working Group

Two parties, SBC California and Verizon, nominated their companies for inclusion in the membership of the government/industry working group to develop technical criteria to use in evaluating grant awards. TURN nominated two individuals, former assembly member Virginia Strom-Martin and Steve Bowen, and also nominated Regina Costa as an additional member or an assistant to the group. Section 276.5 requires that the working group, charged with adopting technology criteria to be used by the Commission in awarding grants, be composed of representatives from the commission, from ILECs, from competitive local exchange carriers (CLEC), and from the wireless industry. No CLEC or wireless carrier is a party to this proceeding, so we have received no nominations from those groups. Bowen, however, has expertise representing CLECs and as a public interest attorney.

TURN also recommended that the working group include representatives of the rural communities. Verizon disagrees with that proposal, because communities will apply for grants and each community will have its particular issues and needs.

We approve one working group representative each from SBC California, Verizon and our staff and the nominations of Strom-Martin, Bowen, and Costa. We approve membership of one representative each from the wireless and CLEC industries, as mandated by the statute, and direct our staff to find individuals willing and qualified to fill those vacancies.

4. Interim Grant Program Administration Rules

Citizens, the Small LECs, and Verizon recommend the Commission issue draft rules regarding administration of the grant program for comment. Verizon suggests that proposed rules be prepared concerning fund disbursement, accountability, and project implementation. The parties correctly point out that the OIR did not specifically propose a comprehensive set of grant administration rules, although the OIR requested comment on some implementation issues and many grant administration criteria are included in the application guidelines. Although the parties requested the opportunity to comment on such rules, it is more efficient to adopt interim grant program administration rules and separately seek comment on those rules. A subsequent ruling, by the Assigned Commissioner and ALJ, will address the process and schedule for further review of grant administration rules.

We will authorize our staff to initially select qualifying applicants and to propose for our consideration by resolution the applications to which we should award grants. We will award those grants in conformance with the criteria adopted in this decision.

Each grant applicant shall have an approved fiscal agent. We will order that all funds disbursed from the grant program be kept and maintained in a separate and distinct bank account with the approved fiscal agent as the sole trustee of such funds. The fiscal agent shall provide the account information 60 days prior to the first request for disbursement according to the approved payment schedule. Payments will be made after completion of approved milestones and upon request for payment from the fiscal agent according to the approved payment schedule. Payment requests shall include an itemized accounting of reimbursable amounts. The Commission shall disburse the funds within 60 days of receipt of a complete request for payment that conforms to the approved payment schedule or as soon thereafter as is otherwise practicable.³

Section 276.5 also permits reimbursement for preliminary engineering feasibility studies, including but not limited to any approved cost of a local telecommunications carrier that contributes to the studies, to grant applicants whose proposals are rejected. Rejected grant applicants should submit a request for reimbursement and an itemized accounting of reimbursable amounts to the Commission within 90 days of the mailing of the notification rejecting the phase II, feasibility/construction, application. Phase I (qualifying) applicants cannot apply for reimbursement for feasibility costs should their application be rejected at that stage.

We will require that all funds be spent exclusively on telecommunications infrastructure and amounts necessary to comply with Commission grant administration directives. We will require the fiscal agent to provide an accounting, including expenditures and account balances, on a quarterly basis until no funds remain in the account. Upon completion of the infrastructure work, records should be reviewed by an independent Certified Public Accountant and an Attestation Report should be submitted to the Commission to ensure that the work was completed and paid for as represented.

Grant recipients shall complete the infrastructure work according to the approved milestones for project deliverables. Unanticipated construction and implementation delays should be reported to the Commission within 60 days of failure to achieve an approved milestone. Failure to secure funding for project costs exceeding the required project cap also should be reported to the Commission within 60 days of the failure to secure funding.

5. Statewide Public Information Meetings

The OIR proposed extensive statewide information meetings be held after the final decision issues. Citizens suggests it would be preferable to target information to the unserved areas. TURN supports statewide meetings. There is no policy reason to change our earlier recommendation that statewide meetings be held. However, budget constraints may limit our ability to conduct those meetings.