2. Procedural Background
On June 29, 2006, we opened this rulemaking regarding the B-Fund, setting forth the issues to be addressed and providing opportunity to file comments. Prior to this proceeding, no formal review of the B-Fund program had been undertaken since its inception in 1996. We opened this proceeding to (1) satisfy the requirements for review of the B-Fund program; (2) institute urgently-needed reforms; and (3) respond to concerns of the Legislature, consumer groups, and DRA as to the size of the B-Fund. The review of the
B-Fund, as initiated by this proceeding, is required by legislative mandate as well as Commission directives. The California Legislature enacted SB 1276 (Chapter 847, Statutes of 2004),9 requiring Commission review of the CHCF-B program, with a report due to the legislature by January 1, 2006. This review was to (a) consider adjusting CHCF-B support levels to reflect updated operating costs, and (b) evaluate whether universal service support levels could be reduced while still meeting the goals of the program. D.96-10-066 also determined that the B-Fund should be reviewed once every three years.10
This review is further prompted by the pending expiration of provisions of Pub. Util. Code § 739.3 which mandated the establishment of a high cost support fund. The statutory provisions of § 739.3 are scheduled to sunset effective January 1, 2009.11 Moreover, § 739.3(e) expressly requires the Commission to consider eliminating explicit support funding "in service areas with demonstrated competition."
As identified in the Order Instituting Rulemaking (OIR), the scope of this proceeding includes the following issues: (1) adjusting universal service rate support payments to reflect updated operating costs, (2) evaluating whether
B-Fund support levels can be reduced and made more predictable while meeting the goals of the program, (3) ensuring it is competitively neutral, (4) reducing rate disparity in residential basic service between urban and rural areas in the state, and (5) making the current administration of the program more efficient.
Parties filed opening comments on September 1, 2006, and reply comments on October 16, 2006. A Supplemental Ruling, dated February 23, 2007, solicited additional information on selected issues. Parties filed responsive comments on April 27, 2007, on issues identified in the Ruling. No party has requested evidentiary hearings, and we conclude that no hearings are necessary to resolve issues identified in this order. The record of written comments provides a sufficient basis for the reforms that we adopt. This proceeding has been categorized as quasi-legislative.
Comments were filed by the incumbent LECs: Pacific Bell Telephone Company d/b/a AT&T California (AT&T), Verizon California Inc. (Verizon), SureWest Telephone (SureWest), and Citizens Telecommunications Company of California Inc, d/b/a Frontier Communications Company of California (Frontier). Comments were also filed by Sprint Nextel (Sprint), Time Warner Telecom of California, L.P (Time Warner), the California Cable and Telecommunications Association (CCTA), Cox California Telecom LLC (Cox), Omnipoint Communications, Inc. (dba T-Mobile), The Division of Ratepayer Advocates (DRA), and The Utility Reform Network (TURN).
Given the complexity and extent of the issues in the OIR, and the need to begin to institute reform expeditiously, we shall address the relevant issues in sequential phases. In this manner, we can begin implementing needed reforms to the B-Fund without waiting until all issues in the proceeding have been decided. The instant decision addresses issues resolved in the first phase of this proceeding, in which we adopt measures to:
· Raise the threshold benchmark to qualify for B-Fund support;
· Reduce B-Fund surcharges from 1.3% to 0.5% to reflect the revised benchmark effective January 1, 2008;
· Adopt a cost model to update the high cost proxy;
· Lift the basic rate freeze on all lines for AT&T and Verizon, effective January 1, 2008, and increase the rate cap by 2.36%; and
· Determine that any subsequent rate cap increases for basic residential service should be phased in over a prescribed period to transition to full rate flexibility for the URF ILECs.
The remaining issues identified in the OIR which are not resolved in this decision shall be addressed in a second phase of the proceeding in which, among other things, we shall conduct cost studies to update the applicable high cost proxies utilized for subsidy draws. We shall also pursue measures to implement a reverse auction as a longer term solution whereby competitive market forces can be relied upon to a greater degree to set any necessary support levels to keep basic rates affordable.
9 See 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, and (b) evaluate whether universal service rate support levels can be reduced while still meeting the goals of this program.
10 D.96-10-066, Appendix B, Rule 6.C.4.
11 See Pub. Util. Code § 739.3 (f).
