III. Developments That May Impact the B-Fund
There are a number of current developments that could have a significant impact on the B-Fund program. These include: developments at the FCC, developments in other States, and outcome of other Commission pending proceedings.
A. Developments at the FCC
There are two developments that could have a significant impact on the B-Fund. These are potential reforms to the Federal Universal Service45 and Inter-carrier Compensation programs.46 The reforms and revisions adopted by the FCC may have an impact on how we determine the funding levels of the B-Fund program in coming years as well as impact the collection of funds. Therefore, we will require the Telecommunications Division to monitor these developments and suggest further modifications for our consideration.
In February of 2005, the United States Court of Appeals for the Tenth Circuit decision in Qwest Corp v. FCC (Qwest II) remanded the FCC's latest attempt to justify the creation of a federal high-cost mechanism for non-rural carriers47 and ordered the FCC to develop a new method by which it may determine support for non-rural carriers, or find a way to defend the current forward-looking approach. Qwest II directed the FCC to re-define a definition of "sufficient" and "reasonably comparable" in respect to their application in section 254 of the Communications Act of 1934, as amended.48 Because the non-rural, high-cost support mechanism rests on the application of the definition of "reasonably comparable" rates that was invalidated by the court, the court also deemed the support mechanism invalid.49 The court also noted that the Commission based the two standard deviations cost benchmark on a finding that rates were reasonably comparable, without empirically demonstrating a relationship between the costs and the rates in the record.50 The FCC issued a Notice of Proposed Rulemaking in CC Docket No. 96-45 and WC Docket No. 05-337 on December 9, 2005.51 The Notice of Proposed Rulemaking sought comments on the remand decision.52 This FCC rulemaking will address several issues:
(1) How to reasonably define the statutory term "sufficient," consistent with all the principles enumerated in section 254(b) of the Telecommunications Act of 1996, including affordability;
(2) How to reasonably define the statutory term "reasonably comparable;"
(3) How to modify the high-cost funding mechanism for non-rural carriers in response to the Qwest II court decision; and
(4) Whether the Commission should adopt an interim non-rural insular mechanism proposed by Puerto Rico Telephone Company.53
Comments in the FCC Docket were filed on March 27, 2006 and reply comments were filed on May 26, 2006.
California currently utilizes a cost-based model for the B-Fund. We request comment on how these potential approaches and structures might impact California's programs in light of the Qwest II court's decision and the FCC's current deliberations.
Interconnection arrangements between carriers are currently governed by a complex system of inter-carrier compensation mechanisms that distinguish between different types of carriers and different types of services based on regulatory classifications. Federal and state access charge rules govern the payments that providers (such as inter-exchange carriers, commercial mobile radio service, or other local exchange carriers) make to LECs that originate and terminate long-distance calls.54 Such access charges are intended to compensate LECs for use of the local plant to begin or complete a long-distance call. Reciprocal compensation established under Section 251(b)(5) of the 1996 Act generally governs the compensation between telecommunications carriers for the transport and termination of calls not subject to access charges.55 These rules apply different cost methodologies to similar services based on traditional regulatory distinctions that historically had little or no bearing on the cost of providing service and many of which may be increasingly difficult to sustain in the current evolving telecommunications marketplace.
The FCC is seeking comments on inter-carrier compensation with an aim of replacing the myriad of existing inter-carrier compensation regimes with a unified regime designed for a market characterized by increasing competition and new technologies.56 The FCC acknowledged that a number of problems exist with the current inter-carrier compensation regimes (access charges and reciprocal compensation) and expressed interest in identifying a unified approach to inter-carrier compensation.57 The FCC solicited comments on a bill-and-keep approach to reciprocal compensation payments governed by section 251(b)(5) of the 1996 Act. The FCC also sought comments on alternative reform measures that would build upon current requirements for cost-based inter-carrier payments.58
In response to the FCC's NPRM, a number of parties developed proposals for comprehensive reform of existing inter-carrier compensation regimes and submitted those proposals for FCC review. The FCC is seeking comments on each of these proposals including the economic and legal basis of the proposals, as well as the end-user effects and universal service issues implicated by the proposals.59 We are monitoring this federal activity because what the FCC decides to do in its Intercarrier Compensation proceeding may impact the size of the federal universal service funds available to California, which in turn may have an impact on the California state universal service programs.
B. Related Universal Service Activity in Other States
Currently, there are nineteen states (including California) that maintain a functioning high-cost fund.60 Of these, fourteen states (including California) operate programs similar to the B-Fund (i.e., large ILECs are allowed to participate).61 These states utilize a variety of models and methods to determine eligibility and carrier reimbursement. Appendix B contains program information for these other states.
One state that has a program similar to California, the State of Colorado, is undergoing a review of its High Cost fund program. Colorado is evaluating issues such as the need for and the size of its High Cost Support Mechanism (Colorado High Cost Fund), appropriate modeling that reflects high-cost areas, accountability for the use of funds, whether the Commission should target funding to certain areas, and the impact of advanced technologies over which state maintains no jurisdiction.62 While California operates two separate high cost funds (the A- Fund and the B-Fund) and is the only state to do so, the Colorado High Cost Fund is similar to the B-Fund in that the large incumbent provider, Qwest, receives nearly all of the funding (96% in 2005). In total, Qwest received $58,386,874 during the 2005 calendar year. This money supported 2.2 million access lines.63
In addition to the non-rural incumbent telecommunication provider, Qwest, and the rural incumbent telecommunications providers, one competitive local exchange carrier and one wireless provider are also eligible to receive support from the Colorado High Cost Fund. The wireless provider received $1,983,091 in 2005 (3% of the fund).64 The Colorado High Cost Fund supports all eligible residential and business lines, not simply a single primary line. 65
For the 2005 calendar year, Colorado utilized HAI 5.2 to determine the level of high-cost support provided to Qwest. HAI 5.2 is a forward-looking, cost-proxy model, which relies, in part, on data from Census Block Groups, to determine the cost of universal service. The Colorado Commission updated data in the HAI model utilizing the Automated Reporting Management Information System (ARMIS), a system used by the FCC to collect statistics from carriers regarding finances, service quality, and physical infrastructure.66 Colorado has not, however, updated its model to reflect changed customer location data. Qwest receives support based on average revenues for an individual wire center, subtracted from the average cost determined by the forward-looking, least-cost model (HAI 5.2, with modifications). After subtracting certain revenues and investments, the amount left is compared with the average per line cost and the corporation is reimbursed for costs over that average.
In Colorado, Qwest received about $20 million in federal interstate access support in 2005.67 This represents about a quarter of Qwest's total high cost support in Colorado. Because a Competitive Local Exchange Carrier is now eligible for support in some of Qwest's service territory, the amount of high cost funding is now based on "the actual supported residential and business access line counts multiplied by the applicable support per access line."68
Colorado High Cost Fund support is collected through an end-user surcharge of 2.9%. This level allows the fund to maintain a reserve of $9- $10 million annually, approximately 16% of the 2005 disbursements.69
We recount Colorado's experience to show how other states may provide some ideas for reform and revisions of our program. This proceeding is designed to address many of the same questions asked by Colorado. Therefore, we solicit comments concerning forward looking and innovative developments in other state jurisdictions that may offer useful insights as we revise our B-Fund program. We also seek input on comparisons with California of the effectiveness, operation, and benefits of funds in other state jurisdiction.
C. Other CPUC Proceedings Affecting the B-Fund
Rulemaking 05-04-005 (the "Uniform Regulatory Framework" or "URF" proceeding) was opened to assess and revise telecommunications regulation in California with the primary goal of developing a uniform regulatory framework for all telecommunications utilities, except small incumbent local exchange carriers, to the extent that it is feasible and in the public interest to do so.70
The scope of R.05-04-005 identified elements of one possible framework that would, among other things, provide pricing flexibility for all services except basic local exchange service, over a transition period. However, the Rulemaking did not limit its consideration to a single proposal, and respondent parties suggested that B-Fund subsidies raise significant issues in the context of full pricing flexibility for basic telephone service, and recommended that issue be considered in a separate phase of R.05-04-005 or in a separate proceeding.71
The Commission agrees with this viewpoint and intends for this proceeding, as it is generally available to resolve matters associated with the B-Fund, to constitute such a separate proceeding. Parties are on notice that the scope of this proceeding may be amended based on a determination of R.05-04-005 that a particular policy issue would be best resolved in this proceeding. Notice of a revision of scope, if any, will be provided via a ruling to the service list established in this proceeding.
45 Federal-State Board on Universal Service, CC Docket No. 96-45, and, High-Cost Universal Service Support, WC Docket No. 05-337 Notice of Proposed Rulemaking. (Qwest II Remand NPRM) Adopted: 9 Dec 2005. Available: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-05-205A1.pdf [27 Feb 2006].
46 Developing a Unified Intercarrier Compensation Regime, CC Docket No. 01-92, Notice of Proposed Rulemaking, 16 FCC Rcd 9610 (2001) (Intercarrier Compensation NPRM). Developing a Unified Intercarrier Compensation Regime, CC Docket No. 01-92 Further Notice of Proposed Rulemaking (Intercarrier Compensation Further NPRM) Adopted: 10 Feb. 2005. Available: http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-05-33A1.pdf [27 Feb 2006].
47 Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Ninth Report and Order and Eighteenth Order on Reconsideration, 14 FCC Rcd 20432 (1999) (Ninth Report and Order), remanded, Qwest Corp. v. FCC, 258 F.3d 1191 (10th Cir. 2003) (Qwest I), Order on Remand, 18 FCC Rcd 22559 (2003), remanded, Qwest II, 398 F.3d 1222.
48 Qwest Corp. v. FCC, 398 F.3d 1222 (10th Cir. 2005).
49 Id. at 1237.
50 Id.
51 Qwest II Remand NPRM.
52 Qwest II Remand NPRM at p. 13-15. Specifically it seeks input on:
The implications, structure, and design of a rate-based approach;
The viability of the current cost-based approach given the "rate-related goals" of the 1996 Act;
Other proposals, outside of rate-based or cost-based mechanisms, that address the 1996 Act's goals, and;
The National Association of Regulatory Utility Commissioners' proposal that the FCC set guidelines for the use of high-cost funds, but within that framework, allow each state to distribute their allocation of the high-cost funds. See National Association of Regulatory Utility Commissioners. Intercarrier Compensation Proposal Version 7. ONLINE. 2005. Available: http://www.neca.org/media/NARUCICfiling5_19_05.pdf [28 Mar 2006] p. 12.
53 National Regulatory Research Institute. Abstract, FCC 05-205, Notice of Proposed Rulemaking in the Matter of Federal-State Joint Board on Universal Service and High-Cost Universal Service Support, ONLINE. 2005. Available: http://www.nrri.ohio-state.edu/dspace/handle/2068/884 [06 Mar 2006].
54 See generally, PU Code Sections 489, 490, 495.7, 709, and 728.7.
55 47 U.S.C. § 251(b)(5). Intrastate access charges, and intrastate calling generally, are governed by state public utility commissions. Thus, different inter-carrier compensation regimes apply to a call originating in Sacramento depending on, for example, whether it terminates in Sacramento, elsewhere in the state of California, or in another state. Different rules also apply depending on whether the calling and the called parties are using wireline or wireless services.
56 Intercarrier Compensation Further NPRM.
57 The existing inter-carrier compensation rules may be categorized as follows: access charge rules, which govern payments that IXCs and CMRS providers make to LECs to originate and terminate long-distance calls; and reciprocal compensation rules, which, generally speaking, govern the compensation between telecommunications carriers for the transport and termination of "local" traffic. However, both sets of rules are subject to various exceptions, such as enhanced service provider (ESP) exemption from the payment of access charges (allowing exemptions for internet service providers). Intercarrier Compensation NPRM.
58 Ibid.
59 Intercarrier Compensation Further NPRM.
60 AK, AR, AZ, CA, CO, ID, IL, KS, ME, NE, NV, OR, PA, SC, TX, UT, WA, WI, and WY. In addition, three states have approved, but not functioning, High Cost Fund (Fl, IN, VT). Ed Rosenberg and Jing Liu. State Universal Funding Mechanisms: Results of the NRRI's 2005-2006 Survey. Columbus, Ohio: National Regulatory Research Institute [Draft: April 2006]. Additional information was garnered through CPUC interviews with state regulatory commissions during February 2006.
61 AK, AZ, CA, CO, ID, KS, ME, NE, NV, OR, SC, TX, WI, and WY.
62 Colorado Public Utilities Commission. Docket No. 05I-431T, Proceeding in the Matter of the Investigation of the Colorado High Cost Support Mechanism, ONLINE. Effective: 14 Oct 2005. Available: http://www.dora.state.co.us/puc/docket_activity/HighprofileDockets/05I-431T.htm [28 Mar 2006].
63 Colorado Public Utilities Commission. Annual Report of the Colorado High Cost Support Mechanism. ONLINE. 2005. Available: http://www.dora.state.co.us/puc/telecom/hcsm/hcsm2005AnnualReport.pdf [28 Mar 2006]. pp. 11, 13.
64 Ibid, 9 and 11.
65 The B-Fund provides support for only one primary line per household.
66 Ibid, 6. See also: Federal Communications Commission. ARMIS Data Descriptions. ONLINE. Available: http://www.fcc.gov/wcb/armis/descriptions.html [07 June 2006].
67 Universal Service Administrative Company. Fourth Quarter Appendices - 2005, High Cost Support Projected by State by Study Area, HC01. ONLINE. 2005. Available: http://www.universalservice.org/about/governance/fcc-filings/2005/quarter4/default.aspx [07 Jun 2006].
68 Colorado Public Utilities Commission. Annual Report of the Colorado High Cost Support Mechanism. ONLINE. 2005. Available: http://www.dora.state.co.us/puc/telecom/hcsm/hcsm2005AnnualReport.pdf [28 Mar 2006]. at p. 12.
69 Ibid, 3.
70 R.05-04-005, Ordering Paragraph 1.
71 We do not prejudge the resolution of matters in the R.05-04-005.
