ALJ/TRP/niz Mailed 6/30/2006

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Order Instituting Rulemaking into the Review of the California High Cost Fund B Program.

FILED PUBLIC UTILITIES COMMISSION JUNE 29, 2006 SAN FRANCISCO, CALIFORNIA RULEMAKING 06-06-028

ORDER INSTITUTING RULEMAKING REGARDING
CALIFORNIA HIGH COST FUND-B PROGRAM

TABLE OF CONTENTS

Title Page

ORDER INSTITUTING RULEMAKING REGARDING
CALIFORNIA HIGH COST FUND-B PROGRAM 22

I. Introduction 22

II. Federal and State Legislative History 33

A. Federal History 44

B. California Legislative History 66

C. Current Statutory Provisions Governing the B Fund 99

D. Regulatory Background Impacting the B-Fund 1010

III. Developments That May Impact the B-Fund 1414

A. Developments at the FCC 1414

1. Reforms to Federal Universal Service 1515

2. Inter-Carrier Compensation 1717

B. Related Universal Service Activity in Other States 1919

C. Other CPUC Proceedings Affecting the B-Fund 2222

IV. Preliminary Scoping Memo 2323

A. Updating Program Costs 2525

1. Modify High Cost Areas Based on Population Density 2626

2. Use De-averaged Costs and Commission-Adopted UNE-P Based Costs for SBC and Verizon 2727

3. Modify CBG Costs for Frontier Communications
and SureWest 2929

B. Evaluate Whether Universal Service Rate Support Levels
Can Be Reduced While Still Meeting the Goals of This
Program 3030

1. Modify the B-Fund Threshold Level 3232

2. Cap B-Fund Subsidies 3434

3. Apply a "Means Test" for Subsidies in High Income
Areas 3636

C. Should "Extended Area Service" Payments from the
B-Fund to SureWest Be Discontinued? 3737

D. Revenue Neutrality and Utility Reimbursement 3737

E. Auction Universal Service Support by Disaggregated Area 4141

F. Program Administration Implementation Issues 4242

TABLE OF CONTENTS

(Cont'd)

Title Page

V. Solicitation of Comments 4343

A. Updating Program Costs 4343

B. Modifying the Size of the B-Fund 4444

C. Discontinue Extended Area Service Payments for
Non-B-Fund Program Events 4545

D. Revenue Neutrality and Utility Reimbursement 4646

E. Auction Mechanism 4646

F. Program Implementation Issues 4646

G. General Issues 4747

VI. Category of Proceeding 4747

VII. Schedule 4848

VIII. Parties and Service List 4949

IX. Ex Parte Communications 4949

Appendix A

Appendix B

ORDER INSTITUTING RULEMAKING REGARDING
CALIFORNIA HIGH COST FUND-B PROGRAM

I. Introduction

Pursuant to SB 1276 (Chapter 847, Statutes of 2004)¹ the Commission by this Order Instituting a Rulemaking (OIR) is commencing a review of the state's California High Cost Fund B (B-Fund) program. The goals of this review include, but are not limited to, adjusting universal service rate support payments to reflect updated operating costs, evaluating whether B-Fund support levels can be reduced and made more predictable while still meeting the goals of the program, ensuring it is competitively neutral, reducing rate disparity in residential basic service between urban and rural areas in the state, and finally, making the current administration of the program more efficient.

Any review of the B-Fund program must begin with the original purposes and goals of the program, as articulated by the Legislature in statutes and in our decisions adopting the program. We seek comment on whether the program is meeting its respective statutory purposes and requirements. To the extent deficiencies are identified, constructive remedial proposals should be provided.

When the program was created, landline telephone service provided by monopoly service providers was the only widely-available form of affordable telecommunications service. Since then, new technologies, such as wireless telephones and Internet-based communications (such as Voice over Internet Protocol) have greatly expanded the range of telecommunications services that are available and affordable. In this context, the statutory goals and specifications of the B-Fund program may require modernization. The first inquiry is whether the program remains necessary to achieve the fundamental statutory goal of enhancing universal service and, if so, whether changes are necessary to further this goal in today's competitive and technologically varied telecommunications environment.

At the core of our review of these programs is our duty to be accountable to the people of California. This program is funded by surcharges on the telephone bills of Californians. We have an obligation to ensure that the funds obtained from the surcharges are being wisely spent to provide the most advanced telecommunications services to all Californians.²

¹ SB 1276 (Chapter 847, Statutes of 2004) states:

SEC. 4. The Public Utilities Commission shall by January 1, 2006, conduct a review of the program established pursuant to subdivision (c) of Section 739.3 of the Public Utilities Code and of the California High-Cost Fund-B Administrative Committee Fund, to accomplish both of the following: (a) Adjust universal service rate support payments to reflect updated operating costs, (b) Evaluate whether universal service rate support levels can be reduced while still meeting the goals of this program.

² PU Code Section 709.