16. Assignment of Proceeding
Rachelle B. Chong is the assigned Commissioner and Thomas R. Pulsifer is the assigned ALJ in this proceeding.
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 environment.
2. The review of the B-Fund, as initiated by this proceeding, is required by legislative mandate as well as Commission directives in D.96-10-066.
3. The Commission adopted a uniform regulatory framework in
D.06-08-030, generally eliminating restrictions on pricing of services, but specifically maintained the rate freeze on basic service until January 1, 2009.
4. After January 1, 2009, as directed in D.06-08-030, the cap on basic residential service rates that are not subsidized by CHCF-B will sunset automatically with no further Commission action required.
5. D.06-08-030 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. The level of basic residential rates did not change when the B-Fund was adopted in 1996, but rate reductions or surcredits were applied to other services to offset the explicit subsidies provided for through the B-Fund.
7. The existing level of the B-Fund benchmark threshold is overly inclusive and results in subsidies to basic lines beyond the level that is required to meet the Commission's universal service goal of a 95% penetration rate for basic service.
8. The current B-Fund benchmark is equal to the higher of system average cost (assumed to be $20.30 per line) or the basic rate plus End-User Common Line Charge.
9. A benchmark threshold based on affordability of basic service by customers provides a more meaningful criterion for setting B-Fund support levels instead of the current benchmark.
10. A test based upon per-capita income is not a practical tool for limiting the size of the B-Fund, and the administrative difficulties of establishing such a screening process would outweigh any benefits.
11. As a benchmark of affordability of basic service in rural high cost areas, Section 254 of the Act requires access in rural and high cost areas based on a "reasonably comparable" standard.
12. The FCC and Census Bureau data sources reveal that the national average household expense for wireline local exchange service remained at about $36 per month between 2000 and 2005.
13. A benchmark set at $36 per line provides a reasonable proxy of customer affordability of local exchange service based on relevant demographic data.
14. Based on current data concerning B-Fund claims, annual claims for B-Fund subsidies total approximately $422 million.
15. A revision in the high cost benchmark to $36 per line would result in a reduction in claims applicable to the four COLRs of approximately 74%.
16. A corresponding reduction in the surcharge will produce a significant consumer benefit as the surcharge on all California consumer bills will be less going forward.
17. A reduction in the B-Fund surcharge from 1.3% to 0.5%, to take effect January 1, 2008, is reasonable in view of the revision in the high cost benchmark to $36 per line.
18. Although an increase in the benchmark threshold to $36 would reduce the level of subsidy available to the COLRs, competitive opportunities exist to offset lost subsidy by adjusting the price of other services, particularly through the marketing of bundles in conjunction with the provision of the basic line.
19. As indicated by the price increases for services other than basic residential rates implemented by the ILECs since September 2006, as illustrated in Appendix Table 2 of this decision, there is evidence that the ILECs have the capability to rebalance their rates in anticipation of possible reduced subsidies.
20. During the era of cost-of-service and NRF price regulation, the Commission applied principles of revenue neutrality by authorizing rate offsets to give the ILEC an opportunity to earn a reasonable return while avoiding windfalls.
21. The Commission is not obligated to ensure revenue neutrality as a result of changes in the threshold benchmark since the ILEC is no longer subject to the pricing constraints that existed during the NRF era.
22. Although the Commission stated that revenue neutrality would continue to apply during the transition until January 1, 2009 for any mandated changes in the basic rate, this requirement applies in a narrow manner only to offsetting rate changes within the elements of basic service that are still subject to price controls. That narrow application of revenue neutrality does not apply to circumstances here where we are authorizing systematic increases in basic service elements to transition toward full rate flexibility.
23. Since there is no obligation to ensure revenue neutrality, there is no reason to delay implementing reductions in subsidy support levels until after the basic rate pricing flexibility takes effect.
24. An implementation schedule for the gradual phase-in of the $36 benchmark revision would provide for a smoother transition and result in the schedule of subsidy revisions shown in Appendix Table 1.
25. There is no basis for the Commission to maintain revenue neutrality or to mandate price adjustments to insulate the ILECs from risks associated with reductions in B-Fund support levels.
26. The existing rate freeze on basic service for URF ILECs is scheduled to remain in place pursuant to legislative direction under the provisions of DIVCA until January 1, 2009, except that rate increases for basic service limited to the rate of price inflation are permissible before that date, as codified in Sec. 5950 of the Pub. Util. Code.
27. It is consistent with the provisions of Sec. 5950 to authorize an increase in the basic primary residential service rate caps for AT&T and Verizon, respectively, effective January 1, 2008 equal to the consumer price index (CPI) rate of inflation, since they each hold video franchises.
28. Since SureWest and Frontier do not currently hold video franchises, the lifting of the rate cap for each of them can only occur beginning January 1, 2009, subject to an earlier increase if either of them obtains a video franchise before that date.
29. The surcredits for SureWest and Verizon should be phased out in tandem with the schedule for progressive increases in the benchmark up to $36.
30. The CPI-U is a reasonable basis for the rate cap increase effective January 1, 2008, pursuant to the applicable provisions of DIVCA. The CPI-U index stood at 203.5 in July 2006 and 208.299 in July 2007, resulting in a rate cap increase for each ILEC effective January 1, 2008 of 2.36%.
31. 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.
32. After pricing flexibility for basic rates takes effect, the B-Fund subsidy program still will be needed, albeit at a reduced level, to support certain high cost lines at affordable levels.
33. Although the basic rate freeze for AT&T and Verizon will be lifted beginning January 1, 2008, it would be premature to authorize full pricing flexibility for basic rates immediately upon expiration of the rate freeze, given the potential for dramatic price increases.
34. A gradual phase-in of increases to move basic rates toward cost-based levels with full pricing flexibility will avoid the risk of dramatic retail rate increases.
35. To the extent that basic service rates change due to the lifting of the freeze, the rates that Small LECs charge would likewise be affected as a result because the average local exchange rates of the Small LECs are not to exceed 150% of comparable California urban rates under current Commission policy.
36. The cost proxy for B-Fund support needs to be updated given the significant passage of time since the costs were previously reviewed in 1996 in order to limit subsidy levels funded by customers only to truly high cost areas to meet universal service goals.
37. While the ideal solution would be to identify costs based on the most competitive technology currently available, the resources are not currently available to identify and model such costs.
38. While the HM 5.3 model is not ideal as a cost estimating tool, it represents the best available overall cost model for updating high cost areas considering the disadvantages of the other possible model choices, and other alternatives.
39. The HM 5.3 model results were sufficiently acceptable to use in the most recent UNE cost proceedings for AT&T and Verizon.
40. Rather than rely on a technology-specific cost proxy to determine high cost funding levels, the superior longer term solution is to move toward more market-based solutions that are not biased toward a particular carrier or technology. A reverse auction mechanism could offer a means of determining the appropriate level of high cost support to meet universal service goals on a technology-neutral basis.
41. A reverse auction is superior to the HM 5.3 Model as a tool for determining an appropriate B-Fund support level in high-cost areas because it is technology neutral and forward looking.
42. Subject to further inquiry in Phase II of this proceeding, the potential exists to allocate B-Fund support in a more competitively neutral manner by considering modifications in current rules that would expand the base of intermodal carriers that may become eligible for B-Fund support.
43. Promoting deployment of additional broadband services within areas of California that are underserved or not served at all is consistent with universal service policies aimed at enhancing deployment of advanced services and bridging the "digital divide" as articulated in Pub. Util. Code § 709(c) and (d).
44. The creation of a California Advanced Services Fund would provide an effective tool to promote additional broadband services in regions that are not served or are underserved consistent with Pub. Util. Code § 709(c) and (d).
45. Redirecting a portion of the B-Fund surcharge contribution may be desirable as a source of funding the CASF.
46. An application process would be an appropriate procedural vehicle for seeking funding support for a proposed area that is currently unserved or underserved by broadband services.
1. The Commission will continue to have an obligation to ensure that universal service goals are met even after § 739.3 expires, as scheduled for January 1, 2009.
2. The Commission's review and reform of the B-Fund in this proceeding is undertaken to comply with applicable legislative and Commission-ordered mandates.
3. Reforms to the B-Fund should account for the changes in the competitiveness of the marketplace that have transpired since 1996, while balancing the goals of the URF with the obligations to preserve universal service.
4. Pub. Util. Code § 739.3(d) requires that the Commission eliminate universal service support wherever the CHCF-B surcharges for such support exceed any value that telecommunications subscribers receive from the program.
5. The reforms adopted in this order conform with Pub. Util. Code § 739.3(d).
6. The raising of the benchmark to $36 per line and related reduction in subsidy support should be implemented as set forth in the ordering paragraphs below in order to target support more effectively to truly high cost lines.
7. The use of the FCC "safe harbor" rate as a basis for indexing the B-Fund benchmark would not produce the best measurement for defining high cost regions to be eligible for B-Fund subsidy support at this time.
8. There is no basis to delay implementation of the revised benchmark threshold until full basic rate price flexibility takes effect, nor is there any basis to ensure revenue neutrality given the pricing flexibility available to the ILEC under the URF.
9. In the environment under URF as adopted in D.06-08-030 where the COLR is subject to competitive market forces, the principles that once justified revenue neutrality are moot.
10. The basic rate freeze should remain in effect until January 1, 2008 for all basic lines, and should correspondingly be lifted for all basic lines for AT&T and Verizon effective thereafter.
11. Upon expiration of the basic rate freeze for each ILEC, a phased-in implementation of rate cap increases should take effect to move from current levels up to the revised level of the benchmark threshold. The specific timing and magnitude of the phase-in for each ILEC should be addressed in the next phase of this proceeding.
12. Upon completion of the phase in of rate caps, up to the level of the revised benchmark, the COLR should thereafter be granted full pricing flexibility for basic rates.
13. Once full pricing flexibility is granted, the COLR should be subject to an annual certification process to qualify for B-Fund support, as prescribed in the order below.
14. Any applicable implications for the CHCF-A as a result of the lifting of the rate freeze, along with more general review of the CHCF-A program, should be addressed in a separate proceeding.
15. The Commission should complete and implement a cost study utilizing the HM 5.3 model to update the applicable high cost proxies for lines served by designated COLRs which exceed $36 per line in basic service costs.
16. For purposes of updating the cost proxy utilizing the HM 5.3 model, the previously adopted cost methodology or sources used to calculate input prices, such as depreciation rates or costs of capital should not be relitigated. Rather, the updating process should focus merely to reflect the cost inputs to that were used in the most recent UNE cost proceedings for AT&T and Verizon.
17. The Commission should undertake a process in the next phase of this proceeding to develop rules for a reverse auction which would be applied to determine the applicable COLR and subsidy level required to support high cost lines in designated areas.
18. Consistent with the universal service goals articulated in Pub. Util. Code § 709 (a) "assuring the continued affordability and widespread availability of high-quality telecommunications services to all Californians," it is appropriate to pursue further inquiry in Phase II to consider encouraging deployment of broadband services by establishment of a California Advanced Services Fund.
19. The next phase of this proceeding should pursue investigation of how appropriate funding levels and sources could be implemented, as well as appropriate rules whereby applicants may seek to qualify for funding, assuming the Commission were to establish a California Advanced Services Fund for purposes of deploying broadband services in regions of California that are not currently being served, or that are underserved. Funding sources should include consideration of whether, or to what degree, existing
B-Fund surcharge contributions should be redirected to the CASF.
20. The Commission should also develop a record on the additional issues in Phase II of this proceeding as set forth in the Order below.
IT IS ORDERED that:
1. The formula for computing the applicable level of B-Fund subsidy support is hereby modified to revise the adopted threshold benchmark to $36 per line, consistent with the transition schedule set forth in Appendix Table 1. The first stage of the transition to the $36 benchmark shall become effective January 1, 2008, with successive adjustments on July 1, 2008 and January 1, 2009, as shown in Appendix Table 1 of this order. The final adjustment to $36 shall take effect on July 1, 2009. Carriers of Last Resort (COLR) shall apply the revised benchmark threshold values in accordance with the schedule set forth in Appendix Table 1 in calculating B-Fund draws to which they are entitled beginning on January 1, 2008.
2. To facilitate Commission staff review and monitoring of the amount of
B-Fund subsidy draws submitted by COLRs for payment under this order, the COLR submitting any subsequent claims for B-Fund support shall clearly identify, for each of the revisions to the threshold amount, as shown in Appendix Table 1, the specific Census Block Groups, and associated proxy costs, that have been eliminated and are no longer eligible for B-Fund support due to revisions in the threshold benchmark.
3. During the transition period as the benchmark is increased from $20.30 up to $36, the existing formula for B-Fund support shall apply, whereby lines with costs above the high-cost benchmark receive support for the difference between the basic rate plus EUCL and the benchmark. This additional subsidy component shall be discontinued, however, once the $36 benchmark is fully phased in. At that point, the per-line support shall be limited only to the applicable costs that exceed the $36 benchmark.
4. The Commission hereby authorizes an inquiry in Phase II as to the establishment of a California Advance Services Fund (either under the B-Fund or as a new fund program) to be implemented for the purpose of promoting the deployment of broadband services in areas that are not served or that are underserved within the service territories of the Incumbent LECs that are currently subject to the B-Fund. The specific measures to fund and implement the California Advanced Services Fund, and to develop rules for eligibility to draw from the CASF shall be addressed in the next phase of this proceeding.
5. Effective January 1, 2008, the B-Fund retail surcharge shall be reduced to 0.5% to reflect the anticipated reduced level of B-Fund support claims resulting from the revised threshold benchmark adopted in this order. Each URF ILEC directed to file an advice letter under Tier 1 to implement the revised 0.5% surcharge, to become effective by January 1, 2008. Since the resolution shall be implemented in compliance with this order, no public comment period is required.
6. The basic rate freeze shall be lifted for AT&T and Verizon on January 1, 2008, and for SureWest and Frontier on January 1, 2009.
7. On those dates, respectively, the basic rate freeze shall be lifted on all remaining basic residential lines, but subsequent increases in ILEC basic rates shall be phased in under a process to be determined in Phase II of this proceeding in order to bring basic rate caps up to the level of the revised benchmark threshold of $36 per line.
8. Upon the conclusion of the phase-in period, COLRs shall be granted full flexibility to adjust basic rates.
9. As a basis to receive B-Fund support after full pricing flexibility takes effect, however, a COLR must certify annually that it is not charging rates for basic service in excess of the benchmark levels that we establish herein. A COLR that does not make the required annual certification must provide detailed a detailed showing as to why they are unable to comply with the Commission's Orders. The Commission will evaluate the evidence and determine what, if any, action is required.
10. As a basis for considering the implemention of the CASF, comments shall be solicited in Phase II on the overall size and funding of the CASF, considering its function as a limited source of matching funds to build advanced infrastructure in California in conjunction with the California Emerging Technology Fund. We shall specifically solicit comments as to the merits of funding and administering the CASF under the CHCF-B versus establishing an entirely independent new funding program. Funding not otherwise directed for use by January 1, 2010, will be used to reduce the B-Fund surcharge in the 2010-2011 funding year.
11. Comments are also solicited as to whether an application should open a sixty day window for other applications for substantially the same geographic area. CASF applicants must meet specific audit, verification, and other requirements with respect to the use of the funds, subject to procedures adopted in the next phase of the proceeding. We will specifically look at whether the use of "telephone corporation" in Pub. Util. Code § 739.3(c) may limit recipients to those entities qualifying under Pub. Util. Code § 234.188
12. In the next phase of this rulemaking, comments shall also be solicited on the merits of the process for candidates to apply for funding the California Advanced Services Fund set forth in Appendix 3.
13. The Commission shall undertake a second phase of this proceeding to resolve the remaining issues in this proceeding. Specifically, the second phase of the proceeding shall address the following issues:
(a) Implement updated cost proxies utilizing the HM 5.3 Model for qualifying High Cost Census Block Groups for each of the COLRs,
(b) Implement a process for the phase-in of increases in the caps on COLR basic rates to transition from the current levels up to the level of the adopted $36 benchmark.
(c) Implement a process whereby the COLR shall certify that its basic rates do not exceed the designated benchmark as a basis to qualify for B-Fund support once full pricing flexibility takes effect;
(d) Consider the possible modification of rules to accommodate a broader base of eligibility for B-Fund support to include wireless and other intermodal carriers. Comments shall be taken as to the merits of such a modification to promote competitive neutrality in the allocation of B-Fund support, consistent with public policy goals.
(e) Develop and implement a reverse auction mechanism to determine B-Fund subsidy support levels and COLR status as a means of funding high cost support in the future;
(f) Solicit comments regarding (1) the appropriate rules and procedures for applicants to apply for funding from the California Advance Services Fund to qualify for deployment of broadband services in areas that are not served (or underserved), consistent with the statutory principles of Pub. Util. Code § 709 and (2) the appropriate funding level, sources, and size of the California Advanced Services Fund.
(g) Develop standards and procedures for future periodic review of the B-Fund program;
(h) Seek consensus on more streamlined administration of the
B-Fund program, as discussed in this order.
14. The assigned Commissioner and Administrative Law Judge shall promptly issue a ruling setting forth a schedule for further proceedings to resolve the issues identified for Phase II of this proceeding, as set forth above.
Dated September 6, 2007, at San Francisco, California.
MICHAEL R. PEEVEY
President
DIAN M. GRUENEICH
JOHN A. BOHN
RACHELLE B. CHONG
TIMOTHY ALAN SIMON
Commissioners
APPENDIX TABLE 1 | |||||
Adopted Revision to the High Cost Threshold | |||||
Effective Date of Revision >> |
(Current) |
01/01/2008 |
07/01/2008 |
01/01/2009 |
07/01/2009 |
Thresholds |
$20.30 |
$24.23 |
$28.15 |
$32.08 |
$36.00 |
Carriers |
|||||
Pacific |
29.008.709 |
17.540.801 |
11.716.649 |
8.489.752 |
6.439.067 |
AT&T - Pac |
289.861 |
289.861 |
145.719 |
66.126 |
42.842 |
AT&T - Ver |
197.427 |
197.427 |
183.230 |
102.601 |
47.313 |
Subtotal AT&T |
$29.495.996 |
$18.028.089 |
$12.045.599 |
$8.658.478 |
$6.529.222 |
|
|||||
Verizon GTE |
2.018.286 |
2.013.400 |
1.456.727 |
1.117.900 |
894.993 |
Verizon Contel |
1.669.707 |
1.663.344 |
1.537.351 |
1.365.072 |
1.236.759 |
MCI |
397.140 |
254.789 |
190.013 |
148.297 |
115.669 |
Subtotal Verizon |
$4.085.133 |
$3.931.533 |
$3.184.091 |
$2.631.269 |
$2.247.421 |
|
|||||
Cox -Pacific |
1.383.074 |
551.811 |
211.380 |
150.053 |
108.288 |
Cox -Verizon |
1.769 |
1.754 |
0 |
0 |
0 |
Subtotal Cox |
$1.384.843 |
$553.564 |
$211.380 |
$150.053 |
$108.288 |
|
|||||
SureWest |
37.729 |
37.729 |
23.206 |
10.912 |
0 |
Frontier |
162.172 |
162.172 |
158.602 |
137.987 |
109.388 |
Grand Total |
$35.165.873 |
$22.713.087 |
$15.622.878 |
$11.588.699 |
$8.994.319 |
Percentage Reduction in Claims | |||||
Thresholds |
$20.30 |
$24.23 |
$28.15 |
$32.08 |
$36.00 |
Carriers |
|||||
Subtotal AT&T |
0% |
39% |
59% |
71% |
78% |
Subtotal Verizon |
0% |
4% |
22% |
36% |
45% |
Subtotal Cox |
0% |
60% |
85% |
89% |
92% |
SureWest |
0% |
0% |
38% |
71% |
100% |
Frontier |
0% |
0% |
2% |
15% |
33% |
|
|||||
Grand Total |
0% |
35% |
56% |
67% |
74% |
188 See, Pub. Util. Code §§ 233 and 234.
