II. Federal and State Legislative History

Universal service ensures that consumers have access to basic telephone service in their homes that is both affordable and ubiquitously available. Legislatures have codified this policy, finding that as more citizens are connected to the network, the value of the network grows. Thus, it has been a longstanding commitment of federal and state governments to promote universal service.³

A review of the B-Fund must begin with the original purposes and goals of the program, as articulated in statutes and in our decisions adopting the program. We review the federal and state legislative directives to help provide background for comment on whether the programs are meeting their respective statutory purposes and requirements.

A. Federal History

The United States Congress, as early as 1934, made universal service a basic goal of telecommunications regulation with the passage of the Communications Act of 1934 ("1934 Act"). Section 1 of the 1934 Act indicates that the Federal Communications Commission (FCC) was created:

[f]or the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all the people of the United States, without discrimination on the basis of race, color, religion, national origin, or sex, a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges . . . .⁴

In 1996, Congress passed the Telecommunications Act of 1996 ("1996 Act"). This was the first major overhaul of United States telecommunications policy in nearly 62 years and it modified earlier telecommunications legislation, primarily the 1934 Act. The 1996 Act codified (in section 254 of the 1996 Act) the FCC's longstanding practice of providing universal service support for "telecommunications services" in high cost and low income areas. Section 254 of the 1996 Act also defines the nature of "universal service" as "an evolving level of telecommunications services" that takes into account telecommunications service advancements. The FCC and a working group of State Public Utility Commission officials (Federal-State Joint Board on Universal Service) were charged with establishing specific, predictable, and sufficient support mechanisms to preserve and advance universal service.⁵ In addition, in section 254(b), Congress provided a list of principles upon which the FCC must base policies for the preservation and advancement of universal service.⁶ Additionally, section 254(b) provides that consumers in rural, insular, and high cost areas should have access to telecommunications services at rates that are "reasonably comparable to rates charged for similar services in urban areas."⁷ Furthermore, section 254(e) provides that the federal universal service support "should be explicit and sufficient to achieve the purposes of this section."⁸ Finally, the 1996 Act also includes a provision that directs the FCC to create discounted telecommunications and certain advanced services for schools, libraries, and rural health care providers.⁹

With respect to the state's authority to regulate universal service, the 1996 Act maintained the longstanding federal-state compact, stating:

(b) State Regulatory Authority.-Nothing in this section shall affect the ability of a State to impose, on a competitively neutral basis and consistent with Section 254, requirements necessary to preserve and advance universal service, protect the public safety and welfare, ensure the continued quality of telecommunications services, and safeguard the rights of consumers.¹⁰

B. California Legislative History

In 1987, the California legislature enacted Public Utilities (PU) Code Section 739.3 requiring the Commission to develop, implement, and maintain a suitable program to establish a fair and equitable local rate structure aided by transfer payments to small independent companies serving rural and small metropolitan areas.¹¹ For these smaller companies, the Commission had already established the California High Cost Fund-A in 1985 for the purpose of allowing these small companies to receive universal service support.¹²

In 1994, the Commission began developing a procedural plan to facilitate opening local exchange telephone markets to competition by January 1, 1997. While the Commission was developing its plan for local competition, the Legislature acknowledged increasing competition in telecommunications markets and required the Commission to examine the current and future definitions of universal service, including how universal service should work in the new and expected increasingly competitive markets¹³ consistent with PU Code § 709.¹⁴ Then, in September 1996, the Legislature amended PU Code Section 739.3 to:

[D]evelop, implement, and maintain suitable, competitively neutral, and broad-based program to establish a fair and equitable local rate support structure aided by universal service rate support to telephone corporations serving areas where the cost of providing service exceeds rates charged by providers, as determined by the Commission.¹⁵

In other words, the purpose of the program was to promote the goals of universal telephone service and to reduce any disparity in the rates charged rural and urban customers.

In 1999, the Legislature created the California High Cost Fund-B (CHCF) Administrative Committee Fund within the State Treasury.¹⁶ This legislation further 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.¹⁷ This same legislation also required periodic audits of the B-Fund, on at least a three-year basis.

In 2001, the Legislature allowed funds to be transferred between various telephone funds in the annual budget act.¹⁸ The Legislature also demonstrated 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.¹⁹ Subsequently, the Budget Act of 2002 transferred nearly $251 million of High Cost Fund-B money to the state general fund.²⁰

In 2004, PU 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;²¹ and (c) further require the Commission to conduct by January 1, 2006, a review of the B-Fund.²² 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."²³

C. Current Statutory Provisions Governing the B Fund

The statutory provisions governing the B-Fund now read as follows:

§ 739.3 (c) The commission shall develop, implement, and maintain a suitable, competitively neutral, and broad based program to establish a fair and equitable local rate support structure aided by universal service rate support to telephone corporations serving areas where the cost of providing services exceeds rates charged by providers, as determined by the commission. The commission shall develop and implement the program on or before October 1, 1996. The purpose of the program shall be to promote the goals of universal telephone service and to reduce any disparity in the rates charged by those companies. Except as otherwise explicitly provided, this subdivision does not limit the manner in which the commission collects and disburses funds, and does not limit the manner in which it may include or exclude the revenue of contributing entities in structuring the program.

(d) The commission shall structure the programs required by this section so that any charge imposed to promote the goals of universal service reasonably equals the value of the benefits of universal service to contributing entities and their subscribers.

(e) The commission shall investigate reducing the level of universal service rate support, or elimination of universal service rate support in service areas with demonstrated competition.

(f) This section shall remain in effect until January 1, 2009, and as of that date is repealed, unless a later enacted statute that becomes effective on or before January 1, 2009, deletes or extends that date.²⁴

We seek comment, as prescribed in further detail below, on whether the programs are meeting their respective statutory purposes and requirements. To the extent deficiencies are identified, constructive remedial proposals should be provided, with supporting rationale.

D. Regulatory Background Impacting the B-Fund

In December 1994, the Commission adopted its "Road Map Decision," which laid out a multi-proceeding plan facilitating local competition.²⁵ The plan identified completing its Open Access and Network Architecture Development (OANAD) proceeding,²⁶ and considering intraLATA presubscription during the next review of Pacific Bell's and Verizon's "New Regulatory Framework" (NRF) Reviews as necessary parts of the road map. The Commission also ordered new proceedings to establish rules for local exchange competition,²⁷ and to examine universal service issues as required by the Legislature.²⁸

The universal service proceeding began in January 1995 to develop rules to further the goals of universal service in a competitive telecommunications environment.²⁹ The Legislature provided guidance as to the types of issues the Commission should address in its rulemaking and investigation proceeding:

(1) Define the goals of universal service given the new technologies and increasingly competitive markets, with emphasis on the role of basic service in education, health care, and the workplace.

(2) Delineate the subsidy support needed to maintain universal service in the new competitive market.

(3) Design and recommend equitable and broad based subsidy support for universal service in freely competitive markets.

(4) Develop a process to periodically review and revise the definition of universal service to reflect new technology and markets.

(5) Address the issues of `carrier of last resort' and `franchise obligations.'³⁰

As a result, in July 1995 the Commission set forth proposed rules for further comments pertaining to universal service responsibilities in a competitive environment.³¹ In December 1995, the Commission allowed for evidentiary hearings and workshops to facilitate the development of the Cost Proxy Model (Model) to be used to measure costs of providing basic telephone service within California.³²

In October 1996, the Commission established the B-Fund program for the largest NRF ILECs³³ to promote the goal of universal telephone service while attracting competition to high cost areas.³⁴ Additionally, the program was to provide explicit universal service fund subsidies to Carriers of Last Resort providing basic residential telephone service in high cost areas of California's four largest Incumbent Local Exchange Carriers (ILECs) under NRF.³⁵ Subsequent to this Decision, Carrier of Last Resort status was also granted to three competitive local exchange carriers (CLECs).³⁶ Recently, two of the CLECs merged with the ILECs leaving just one non-ILEC Carrier of Last Resort.³⁷ A Carrier of Last Resort must serve all residential and business customers who request service in its service territory.³⁸ To keep the size of the fund at a reasonable level, the Commission limited the availability of B-Fund to only one residential line (Primary Line) per household.³⁹

The goals of the B-Fund program are to promote the universal telephone service and reduce rate disparity in residential basic service telephone rates between urban and rural areas, while encouraging competition. To maintain competitive neutrality, the Commission ordered reductions in certain ILEC rates (excluding rates for residential basic service) by the amount of B-Fund subsidy received by the Carriers of Last Resort instead of through rates. Through this action, the B-Fund subsidies would replace the implicit subsidies that were built into rates for services priced above cost to help offset the cost of providing universal service. By making what had been implicit subsidies explicit, the program was intended to provide a competitively neutral funding mechanism that applied to all service providers in the NRF ILECs' service territories. This mechanism was expected to remove previous barriers to local competition and to reduce rate disparity within each company's service territory.⁴⁰

The B-Fund program is funded by an all-end-user surcharge⁴¹ that is billed and collected by telecommunications carriers from their customers.⁴² Designated Carriers of Last Resort submit claims for one primary line served in each household.⁴³ The Carriers of Last Resort are paid by the State Controller after their legitimately submitted claims have been reviewed by the Telecommunications Division (TD).⁴⁴

³ See PU Code Section 709; 47 U.S.C. §§ 151, 254.

⁴ 47 U.S.C. § 151 (as amended).

⁵ 47 U.S.C. § 254.

⁶ 47 U.S.C. § 254(b)(1)-(7). The principles are (1) Quality services should be available at just, reasonable, and affordable rates; (2) Access to advanced telecommunications and information services should be provided in all regions of the nation; (3) Consumers in all regions of the should have access to telecommunications and information services, including advanced telecommunications and information services, that are reasonably comparable to those services provided in urban areas and reasonably comparable to rates charged for similar services in urban areas; (4) All providers of telecommunications services should contribute in an equitable and nondiscriminatory manner; (5) Federal and State support mechanisms must be specific, predictable and sufficient to preserve and advance universal service; (6) Schools, libraries, and rural health care providers should have discounted access to advanced telecommunication services; and (7) Any other principles as the Joint Board and the FCC determine are necessary and appropriate - which the FCC used to add a competitive neutrality requirement.

⁷ 47 U.S.C. § 254(b)(3).

⁸ 47 U.S.C. § 254(e).

⁹ 47 U.S.C. § 254(h).

¹⁰ 47 U.S.C. § 253 (b).

¹¹ PU Code Section 739.3(a), (b).

¹² D.85-06-115 as modified by D.88-07-022, D.88-12-044 and D.91-09-042. The California High Cost Fund (i.e. the current CHCF-A) was implemented by D.88-07-022 as modified by D.91-05-016 and D.91-09-042 to provide a source of supplemental revenues to three mid-size and seventeen small LECs whose basic exchange access line service rates would otherwise be increased to levels that would threaten universal service. D.96-10-066 changed the name of the High Cost Fund to CHCF-A and created the California High Cost Fund-B (B-Fund). This decision included the three mid-size LECs in the B-Fund program for the purpose of determining universal service subsidy support and maintained the CHCF-A for the 17 small LECs. CHCF-A is funded by a surcharge assessed on consumers' intrastate telecommunications services.

¹³ AB 3643 (Stats. 1994, Ch. 278).

¹⁴ Ibid. PU Code § 709 states as follows:

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.

¹⁵ PU Code Section 739.3(c), pursuant to SB 207 (Stats. 1996, Ch. 750).

¹⁶ Government Code Section 270(a)(2), pursuant to SB 669.

¹⁷ Government Code Section 276(b).

¹⁸ PU Code Section 276, pursuant to Section 20 of SB 742 (2001), as amended by Stats. 2001, Ch. 903 §5.

¹⁹ PU Code Section 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.

²⁰ AB 425 Provision 8660-011-047.0 (Stats. 2002, Ch. 379).

²¹ PU Code Section 739.3, pursuant to SB 1276 (Stats. 2004, Ch. 847, enrolled September 28, 2004).

²² SB 1276 §4 (Stats. 2004, Ch. 847).

²³ Ibid.

²⁴ Ibid.

²⁵ D.94-12-053.

²⁶ R.93-04-003/I.93-04-002.

²⁷ R.95-04-043/I.95-04-044.

²⁸ AB 3643 (Statutes 1994 Chapter 278). R.95-01-020/I.95-01-021.

²⁹ Ibid. at 1-2.

³⁰ AB 3643 (Statutes 1994 Chapter 278) at §2(a).

³¹ D.95-07-050.

³² D.95-12-021.

³³ D.96-10-066.

³⁴ Ibid. at p. 168.

³⁵ Pacific Telephone Company (SBC/AT&T), GTE and Contel of California (Verizon California), Roseville Telephone Company (Surewest), and Citizens Telephone Company of California (Frontier Communications) service territories were used for purpose of determining universal service support in their service areas (D.96-10-066, p. 102).

³⁶ Cox was granted COLR status in 1999, MCI in 2003 and AT&T in 2004.

³⁷ AT&T was merged into SBC and MCI Metro was merged into Verizon California in January 2006.

³⁸ D.96-10-066, p. 301.

³⁹ Ibid. at p. 195.

⁴⁰ Ibid. at pp. 317-318.

⁴¹ Ibid. at p. 185.

⁴² Customers who are exempt from paying into the B-Fund are: Universal Lifeline Telephone Service (ULTS), coin sent paid calls, debit cards messages, one-way radio paging, customer-owned pay telephone (COPT) usage charges, directory advertising and pre-existing customer contracts executed on or before September 15, 1994. D.96-10-066, p. 191.

⁴³ Offsets to estimated CBG costs include revenue from the incumbent carrier's flat rate service, the end user common line charge (EUCL), and revenues per subsidized line from the carrier common line charge (CCLC) and the federal universal service fund (USF). D.96-10-066, Appendix B, Rule 6.C.2.

⁴⁴ D.98-09-039, Ordering Paragraph 7 states: "The CHCF-B Administrative Committee shall review each monthly claim submitted by the large LECs. Upon completion of each monthly claim, the Committee shall provide written notice to the large LEC submitting the claim regarding the amount of the claim that the LEC is authorized to draw from its accumulated CHCF-B surcharge revenues."