3. Overview of the B-Fund Mechanism: Its Function and Current Status
As a framework for the reforms in the B-Fund program adopted in this order, we affirm the long-standing public policy goals of universal service, as articulated by statute and implemented in previous Commission decisions. In this respect, D.96-10-066 states:
Universal service has over the years developed a twofold meaning with respect to telecommunications services. The first is that a certain minimum level of telecommunications services must be made available to virtually everywhere in the state. The second meaning of universal service is that the rates for such services remain affordable. By making affordable telephone service ubiquitous in California, all Californians can share in the social and business benefits of the telephone network.12
Prior to the opening of telecommunications markets to competition, universal service goals were met through regulation of rates charged by an incumbent monopoly provider of telephone service. In the interests of promoting universal service, rates for basic services were kept at a uniform level throughout the ILEC service territory. To the extent that rates for basic service did not recover the actual cost of service, the rates were cross-subsidized by other services priced above cost. In this manner, the regulated utility was able to earn a reasonable return while keeping basic service affordable in order to meet universal service goals.
This traditional approach to meeting universal service goals became increasingly anachronistic as telecommunications markets opened to competition beginning in the 1980s, with the break up of AT&T into eight regional Bell Operating Companies and a long-distance entity. The introduction of competition for long-distance calling led to the entry of new competitors such as MCI and Sprint. In 1996, Congress enacted the landmark Telecommunications Act of 1996 (the Act) which introduced local exchange competition. With the advent of competition for local service from multiple providers, the traditional ILEC pricing mechanisms for preserving universal service needed reform.
While instituting competition, the Act also codified the Federal Communications Commission's (FCC) longstanding policy of providing universal service support for "telecommunications services" in high cost and low income areas. Section 254 of the Act identified various principles underlying the preservation and advancement of universal service, of which we are mindful.13
With respect to the state's authority to regulate the provision of universal service, the 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.14
The Act expanded upon the long-standing state and federal roles in ensuring communication services were available and affordable.15 Specifically, Section 254(b)(3) requires "sufficient Federal and State mechanisms to preserve and advance universal service,"16 while Section 254(f) requires state policies to be consistent with those of the Federal Communications Commission and delineates state authority to preserve and advance universal service.17 While California does have an intrastate high cost fund, as part of its universal service program, 26 states do not. Of course, California's universal service policies predate the Telecommunications Act of 1996. Section 709 of the Public Utilities Code "declares that the policies for telecommunications in California" include a continuation of "our universal service commitment by assuring continued affordability and widespread availability of high-quality telecommunications services to all Californians."18 Further, Section 709.5 of the Public Utilities Code reiterates that even in opening "all telecommunications markets" to competition, the Commission must ensure that "the state's universal service policy is observed."19
In December 1994, the Commission instituted a multi-proceeding "roadmap" for facilitating local competition,20 including proceedings to address universal service goals within a competitive environment.21 We developed a preliminary framework for keeping basic service affordable in high cost areas in D.95-07-050 and D.95-12-021.
After the Commission established its universal service framework, the California Legislature codified it in Pub. Util. Code § 739.3 to require a "competitively neutral" program to meet universal service goals as local markets began to be opened to competition by new competitors. Pub Util. Code § 739.3 subsections (c) through (f) are of primary relevance to the CHCF-B.22 Under § 739.3(c), the Commission must maintain a program "to promote the goals of universal telephone service and to reduce any disparity in the rates charged by" providers offering service in high cost areas except (per subsection (e)) in areas with demonstrated competition.
In D.96-10-066, we finalized the CHCF-B program to meet legislative mandates for universal service as competitive market structures evolved. The CHCF-B Program applied within the service territories of the four largest California ILECs.23 The CHCF-B program recognized the change to a competitive market structure by designating a COLR in each ILEC service territory. The four largest California ILECs currently serve as COLRs.24 In addition, Cox, a cable provider, serves as COLR in certain portions of the AT&T and Verizon service territory.
The regulatory concept of a COLR is rooted in the idea that by accepting the franchise obligation from the state to serve a designated area, the COLR is obligated to serve all customers in the area that request service. By contrast, though multiple providers compete for customers, competitors may target specific market niches that are profitable. Consequently, the requirement for a COLR helps achieve universal service goals, ensuring that customers in high cost areas have access to basic telecommunications services at rates that are reasonably comparable to rates for similar services in urban areas, supported by B-Fund subsidy draws.
As prescribed in D.96-10-066, the following steps are performed in determining the B-Fund requirements:
1. Define what constitutes "basic service" subject to cost support under the B-Fund subsidy;
2. Calculate the costs by designated high cost areas applicable to the residential basic service elements identified in Step 1. The geographic area is delineated by "Census Block Groups;"
3. Determine a benchmark threshold as a cut off point for access lines considered to be "high cost" eligible for subsidy support;
4. Determine whether other sources of funding should be considered as offsets to the subsidy calculation;
5. Determine the type of funding mechanism to use. The current mechanism is an all-end-user surcharge assessed on retail customers of telecommunications carriers;25
6. Decide whether specific services or entities should be excluded from having to pay into the fund; and
7. Determine what rates should be reduced in light of implicit subsidies being made explicit.
The explicit subsidy provided by the B-Fund applies only to the cost of the first (or primary) residential line that the COLR provides to each household in designated "high cost" areas.
The subsidy is intended to compensate the COLR for costs related to eligible high cost lines in excess of the amount recovered in rates, thereby keeping rates affordable. The underlying principle of universal service is that a certain minimum level of "basic service" should be available to everyone,26 providing a gateway or connection to the telephone network.27 Without such connection, a person has limited ability to participate in society.28
As a measure of universal service, we have applied the longstanding goal of a 95% penetration rate for phone service among low-income, nonwhite, and non-English-speaking households.29 We specifically adopted the 95% penetration rate for phone service as a statewide goal to ensure universal service in D.95-07-050.30
To offset the subsidy paid to the COLR, the Commission ordered reductions in certain rates (other than for residential services) equivalent to the B-Fund subsidy. In this manner, the B-Fund explicit subsidies replaced the implicit subsidies that had previously been built into rates for various services priced above cost. By making implicit subsidies explicit, the B-Fund program was intended to provide a competitively neutral funding mechanism applicable to all service providers in the ILECs' service territories. Prices for services other than basic residential service could thereby be aligned more closely with actual costs. Cost-based pricing for such service sends a more economically efficient price signal and is conducive to a competitive market.
The CHCF-B program began in 1996 at an initial funding level of about $350 million per year. The California Budget Act of 2002 transferred $250 million to the State's general fund. The B Fund budget for fiscal year 2005-06 budget was $447.1 million and for fiscal year 2006-07 budget was $434.6 million31 with actual expenses for the 2005-2006 budget year exceeding $419 million.32
Over the past 10 years, the CHCF-B surcharge has fluctuated between 1.42% and 3.80%.33
12 D.96-10-066, mimeo. at p. 16.
13 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 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.
14 47 U.S.C. § 253 (b).
15 47 U.S.C. § 151; Pub. Util. Code §§ 709(a), 709.5(a).
16 47 U.S.C. § 254(b)(3) (emphasis added).
17 47 U.S.C. § 254(f).
18 Pub. Util. Code § 709(a).
19 Pub. Util. Code § 709.5(a).
20 See D.94-12-053, adopting an initial procedural plan to facilitate opening local exchange telecommunications markets to competition. 58 CPUC 2d, 393,395.
21 AB 3643 (Statutes 1994 Chapter 278). See also D.95-12-021, initiating proceedings to establish a proxy cost study in the universal service proceeding (R.95-01-020/
I.95-01-021) 62 CPUC 2d 690-698.
22 The Commission was to "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 service exceeds rates charged by providers, as determined by the Commission" See Pub. Util. Code § 739.3(c), pursuant to SB 207 (Stats. 1996, Ch. 750).
23 We concurrently changed the name of the fund previously established for the Small LECs to the California High Cost Fund-A (CHCF-A), and created the separate fund (i.e., CHCH-B) to provide universal service support for the major ILECs. The CHCF-A is designed to support affordable basic exchange rates for small ILECs serving High Cost areas.
24 The four largest ILECs in California which are covered by the B-Fund are: AT&T, Verizon, SureWest, and Frontier.
25 The following services are exempt from paying into the B-Fund: Universal Lifeline Telephone Service, coin-operated paid calls, debit cards messages, one-way radio paging, customer-owned pay telephone usage, directory advertising and pre-existing customer contracts executed on or before September 15, 2004. (See D.96-10-066, p. 191.)
26 See D.94-09-065, pp. 6-7. See also D.95-07-050, p. 548.
27 The adopted list of "basic service" elements covered under the B-Fund subsidy is set forth in D.96-10-066, Appendix B, Rule 4B.
28 See D.95-07-050, p. 549.
29 D.94-09-065, pp. 6-7.
30 D.95-07-050, p. 548.
31 R.06-05-028 at 4-6.
32 Any funds in excess of directed expenditures are used to reduce future collections.
33 See OIR 06-06-028, filed June 29, 2006, in Appendix A, Table 4. The current program budget was established in Resolution T-17028 dated July 20, 2006. Resolution T-17078, dated March 1, 2007, reduced the surcharge rate from 2.00% to 1.30% effective April 1, 2007. Appendix A of the resolution shows that by June 30, 2008, the fund balance was estimated to be approximately $46.3 million.
