4. Phase I Reforms to the B-Fund Program
4.1 Should the B-Fund Program Continue?
In D.06-08-030 (the URF Phase I Decision), we found the California telecommunications market to be competitive given the major changes wrought at the federal level with the Act. As an initial issue, we consider whether, in light of the competitiveness of the telecommunications industry, the B-Fund program is still necessary in order to meet universal service goals. In D.06-08-030, we found that AT&T, Frontier, SureWest, and Verizon lack market power because competitive alternatives exist throughout their service territories.34 We also found that competition is present throughout the four ILEC service territories with no meaningful difference between high cost and low-cost areas.35 Therefore, various parties contend that the B-Fund support may no longer be necessary as a result of competitive industry forces, and in view of the sunset provisions of § 739.3. Some parties argue that the B-Fund works to skew competition in favor of the ILECs. Alternatively, to the extent that continuation of high cost support remains necessary, we must consider how the B-Fund should be reformed, while preserving the goals of universal service.
Parties express differing views as to whether the B-Fund has helped to keep basic rates affordable, and whether it needs to continue to ensure universal service. Parties do not dispute that universal service goals in California have been achieved. They disagree, however, as to whether, or to what extent, the success of universal service is attributable to the B-Fund program. AT&T and SureWest support the continuation of the B-Fund program, arguing that it is "indisputably promoting universal service." AT&T argues, however, that the Fund "has not fully compensated all carriers for the associated costs."36 AT&T claims that not only have the engineering principles underlying an efficient network changed since 1996 but, also, cost inputs relating to the network. While certain costs, such as for equipment, have decreased over that period, AT&T claims that other costs, such as for labor and copper, have increased. AT&T contends that the CHCF-B has contributed to preserving service in high cost areas because California's high service penetration rates are partially attributable to AT&T's current statewide basic service rates, which it asserts are below cost. AT&T contends that those below cost rates are, in turn, "partially attributable" to the CHCF-B.
SureWest likewise contends that the B-Fund promotes universal service by keeping residential basic service rates "lower than they would have been." SureWest further claims that, without the CHCF-B, the COLR ILECs "would have to consider raising residential basic service rates to ensure cost recovery."37 SureWest notes, however, that at current funding levels, its customers are required to pay more in B-Fund surcharges than they receive in subsidy support for basic service. SureWest argues that such an imbalance is unfair and SureWest is entitled to higher levels of B-Fund support than what is currently received.
Verizon argues that the B-Fund should be reduced by raising the threshold for eligibility to draw a subsidy, with serious consideration to eliminating the fund entirely over time.38 Verizon believes that complete elimination now may be premature, however, particularly in light of the FCC's pending proceeding to reform the federal universal service program. Verizon also argues that the failure of new intermodal competitors to participate in the fund is undermining the fund's sustainability as well as the requirement for competitive neutrality.
Frontier believes that, in the present competitive environment for telecommunications services, the B-Fund program has become "outdated," and should be discontinued. If the B-Fund program is continued, however, Frontier argues that each ILEC should be permitted to elect to withdraw and no longer participate. Frontier argues that its own residential customers subscribing to basic residential service receive no direct benefit from the B-Fund.
Parties representing competitors, as well as DRA, argue that the B-Fund program should be eliminated now. Sprint argues that there is no logical basis or necessity for the CHCF-B program to continue. Since competitors are already serving throughout California without the benefit of CHCF-B subsidies, as affirmed in D.06-08-030, Sprint argues, such competitors already offer access to affordable basic service. Sprint further argues that the CHCF-B program is unfair and has an anticompetitive impact on non-ILEC-affiliated wireless and cable telephony providers. All of the CHCF-B funds generated by surcharges on their customers' bills have served to fund reductions in ILEC non-basic service prices.
DRA likewise claims that the CHCF-B program does not promote universal service, noting that residential basic service rates in high cost areas did not change when the CHCF-B was instituted.39 The direct effect of the CHCF-B has been to effectively increase basic residential rates slightly (through the
CHCF-B surcharge) and to decrease the ILECs' business and non-basic residential rates. Moreover, Section 254(e) of the Act mandates that carriers receiving the high cost support "shall use that support only for the provision, maintenance, and upgrading of facilities and services for which the support is intended." DRA notes, however, that the ILECs have no data confirming that they use the
CHCF-B funds for such designated purposes.40
As another basis for advocating elimination of the B-Fund program, certain parties (e.g., Sprint and DRA) argue that ILECs get an unfair competitive advantage by continuing to receive B-Fund subsidies. Pursuant to D.06-08-030, the ILECs no longer have restrictions on the pricing of services other than basic service. Frequently, such services are bundled with residential access lines provided in high cost areas. The ILECs are now free to price such bundles on a geographically deaveraged basis.41 Since the ILECs now have the freedom to increase the prices of services that were previously required to be lowered to offset B-Fund subsidies, Sprint and DRA contend that surcharges to "support" lines provided as part of a service bundle violate Pub. Util. Code § 739.3(d). This provision requires that the surcharge "reasonably equals the value of the benefits of universal service to contributing entities and their subscribers." DRA argues that the Commission must eliminate universal service support wherever the CHCF-B surcharges for such support exceed any value that telecommunications subscribers receive from the program.42 DRA argues, consequently, that any continued B-Fund support should be limited to primary residential lines in high cost areas provided at á la carte, price-capped rates.
DRA further argues that the CHCF-B has no direct effect on reducing rate disparities between urban and rural areas since the CHCF-B subsidies go to carriers, but do not directly affect retail rates. Both before and after the institution of the CHCF-B, each ILEC was required to provide basic residential local exchange service at a single price throughout its service territory, with no geographic deaveraging and no disparity between urban and rural area rates.43 The Commission has retained this requirement for primary residential lines through January 1, 2009.44 Thus, within the ILECs' respective territories, there are no urban-rural residential primary-line rate disparities.
TURN disagrees with those parties advocating elimination of the CHCF-B. TURN argues that there is not sufficient information to conclude that universal service goals could be met without continuation of some form of subsidy program.45
Given the statutory mandates of § 739.3(f), the B-Fund must continue at least until the expiration of the statute scheduled for January 1, 2009.46 Moreover, even after the mandate of § 739.3 expires, the Commission will continue to have independent authority to ensure that universal service goals are met, and that customers can have access to basic service at affordable rates. Ongoing mandates to provide for universal service are independently set forth in Pub. Util. Code § 709 requiring that we "ensure that competition in telecommunications markets is fair and that the state's universal service policy is observed."47 Thus, even assuming § 739.3 expires with no legislative extension or enactment of new legislation, independent statutory authority exists providing the Commission discretion to continue the B-Fund beyond January 1, 2009, as necessary to meet universal service goals.
In addition to such state law requirements, federal statutes also identify the preservation and advancement of universal service support as important continuing goals. Specifically, as noted earlier, Sec. 254(b)(3) of the Act requires "sufficient federal and state mechanisms to preserve universal service"48 Likewise, Sec. 254(f) delineates state authority to preserve and advance universal service. Therefore, we find strong support in both federal and state statutory law for the continuation of the B-Fund program beyond January 1, 2009, as an essential requirement to ensure that universal service goals continue to be met within California.
Parties disagree as to how much the achievement of universal service goals may be attributed to the B-Fund program. Although, as noted by DRA, the ILECs have not provided any data confirming that they have used CHCF-B funds only to pay for facilities serving high cost areas, there is no requirement under our rules for the production of such data. Moreover, it would be inconsistent with URF policies, as adopted in D.06-08-030, to engage in such a review of how a particular carrier has spent money on specific facilities. We are persuaded, however, that at least in reference to providing service in truly high cost areas, the availability of B-Fund support has played a key role in keeping rates affordable in such areas. We draw this conclusion by observing how well universal service goals have been realized since the B-Fund was implemented. We adopted a 95% penetration rate as a reasonable representation of universal service in D.96-10-066 (p. 563). Over 95% of California households have basic telephone service today.49 Such robust subscribership figures places California tied for thirteenth among U.S. states and territories.50
As discussed below, we conclude that the B-Fund program should continue beyond January 1, 2009, albeit in more limited and targeted form, to ensure customers continued access to affordable basic service in high cost areas. In view of the dramatic technological, competitive, and regulatory changes in the telecommunications landscape over the past decade, however, we conclude that competitive market forces can be relied upon to a greater degree than in the past to meet universal service goals, when coupled with a more technology-neutral Lifeline low-income program.
Ten years ago, competition for local residential voice service was in its infancy. Today, ILECs vigorously compete with wireless, cable video providers, and Voice over Internet Protocol providers in both the local and long distance communications markets. Subscribers to wireless service in California now number more than 27.5 million, exceeding wireline phone subscribers by over five million.51 Customers can obtain an array of services over their wireless phones, plus mobility, at rates competitive with those offered by the ILEC. Although there is competition for long distance services, "long distance" is disappearing as a stand-alone service as more consumers opt for bundled service packages52 or use internet protocol-based networks.53 Thus, consumers increasingly communicate in ways that bypass the traditional public switched telephone networks entirely. It is in this vastly different voice market that we look at a B-Fund program whose roots lie in a vastly different monopoly regulatory environment.
Our preference, therefore, is to minimize interference with competitive market forces in meeting universal service goals. As observed in D.06-08-030, CHCF-B subsidies are "market distorting."54 Further, we conclude that continuing to rely on system average cost as the benchmark is the primary cause of any market distorting effects. Accordingly, we seek to appropriately target subsidy levels under the B-Fund program to minimize the potential to distort competitive market forces through regulatory subsidies to one market player.
In this regard, the CHCF-B has provided greater subsidies to AT&T more than any other carrier, whose customers in 2005 contributed about $110 million into the B Fund but AT&T received a payout of $341 million, a net gain of $231 million for the year.55 SureWest "currently receives less than $500,000 annually from the CHCF-B..." but its "customers paid over $1,300,000 into the CHCF-B in 2005."56 While Frontier's residential customers subscribing to basic service (other than Lifeline) are assessed a 1.3% B-Fund surcharge, they also receive surcredit offsetting the support received by Frontier for service to areas designated as high cost. The 3.63% surcredit to offset the B-Fund subsidy applies only to services other than residential service.
Only three competitors (Cox and the pre-merger interexchange carriers AT&T and MCI) obtained COLR status (entitling them to make claims on the CHCF-B) over the past ten years. Since the acquisition of the former AT&T and MCI by the parent companies of the two largest California ILECs, Cox is the only remaining unaffiliated competitor to seek and obtain eligibility to draw high cost support from the CHCF-B.57 Except for these three carriers, access to the B-Fund has not led any other actual or potential competitor to seek COLR status in any high cost service area.
The customers of the pre-merger AT&T and MCI paid more surcharge revenues to support price reductions in ILEC non-basic services than AT&T and MCI ever drew from the CHCF-B.58 Thus, for non-COLR telecommunications providers generally, the CHCF-B may actually discourage competition to the extent that it subsidizes prices beyond what is necessary to achieve universal service goals.
Another way to promote competitive neutrality in access to B-Fund support is to consider modifications to the applicable standards to qualify as a COLR. As noted above, Verizon raises the concern that the failure of intermodal competitors to participate in the Fund under current rules undermines principles of competitive neutrality. Sprint likewise argues that the Commission should consider permitting wireless carriers to become eligible to draw B-Fund subsidies when they serve customers in designated "high cost" areas. 59
We recognize that under current definitions of "basic service" qualifying for B-Fund support, Lifeline Service must be included as a component thereof. Since wireless carriers cannot presently provide Lifeline Service, they are precluded, by definition, from being a COLR.60 We believe, however, that the issues raised by Verizon and Sprint warrant further consideration regarding the possible modification of existing rules to accommodate a broader base of eligibility for B-Fund support to include wireless and other intermodal carriers. We shall solicit further comments on the merits of this issue in the next phase of this proceeding as a basis for considering further reforms to promote competitive neutrality, consistent with other public policy goals.
We also recognize that the CHCF-B has not reduced or eliminated rate disparities between ILECs. For example, although AT&T and SureWest share adjacent service territory boundaries, AT&T's residential customers pay only $10.69 per month for basic service while SureWest's residential customers pay $18.90. Verizon's and Frontiers' residential customers pay about the same, though slightly less than SureWest's customers.
Therefore, it is in the interests of a competitive market to minimize the market-distorting effects of B-Fund subsidies by ensuring that subsidized lines are in truly high cost areas.61 While the levels of B-Fund support should be scaled back, however, we find that complete elimination of B-Fund support at this time would not be prudent and could jeopardize universal service goals in high cost areas.
We disagree with parties that argue that the fund is not needed since competition exists for ILEC wireline service ubiquitously, including within high cost areas. While competitors have the capability to serve high cost areas without B-Fund support, however, competitors also reasonably expect to recover their costs. Until we update the relevant proxy associated with providing basic service in high cost areas (scheduled for the next phase of this OIR), we cannot confirm that ubiquitous cost-based pricing for basic service would remain affordable without the B-Fund. Because the record has not yet been updated to reflect revised cost proxies, moreover, there is no evidence to support AT&T's claim that its basic residential service rates are necessarily below cost, or that it has not been adequately compensated through the B-Fund. Thus, while we have serious questions about continuing the current levels of B-Fund support, we still believe that some ongoing level of support remains necessary. Further, to the extent the ubiquity of the UNE-L unbundling scheme throughout the service territories of each of the four COLRs relies on B-Fund support to ensure wholesale service is provided in high cost areas, elimination of the B-Fund would harm the competitive landscape of California.
The B-Fund must continue, at least for now, to ensure that customers in designated high cost areas continue to have access to basic service at affordable rates. Excessively high rates for basic service would conflict with the statutory mandate to preserve universal service. Unaffordable rates that undermined universal service goals would not be considered "just and reasonable" as required by Pub. Util. Code § 451.62 In this regard, the Commission is obligated pursuant to Pub. Util. Code § 451 to ensure that "[a]ll charges demanded or received by any public utility...for any service rendered...be just and reasonable." Likewise, continuation of the B-Fund is consistent with Pub. Util. Code § 709(a), which calls for "the continued affordability and widespread availability of high-quality telecommunications services to all Californians."
By raising the threshold and reducing the number of lines eligible for subsidized support, however, we will minimize any dampening effects that the B-Fund may have on competition while ensuring service is affordable in truly high cost areas. We discuss how the threshold should be revised in the following section.
34 D.06-08-030, mimeo. at 117.
35 D.06-08-030, mimeo. at 118-133.
36 AT&T Opening Comments at 27.
37 SureWest Opening Comments at 14.
38 Verizon Opening Comments at 8.
39 Verizon reports a limited exception. MCI's California rates are set by zone and the CHCF-B funding MCI receives was used in a calculation to offset higher than average costs and to reduce rates in some zones. Verizon Response to DRA Data Request 1-7.
40 DRA Opening Comments at 20-21.
41 D.06-08-030, mimeo. at 138-143, 192-193 and 255.
42 Pub. Util. Code § 739.3(d).
43 A limited exception applies in Verizon's California service territory as an artifact of the merger between the former GTE and Contel. Verizon provides residential basic exchange service at a single "statewide-average" price in the former GTE California service territory and at a different (and lower) "statewide-average" price in the former Contel California service territory.
44 D.06-08-030, mimeo. at 151-156.
45 TURN Reply Comments at 3-4.
46 § 739.3(f) states: "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."
47 Pub. Util. Code § 709 states:
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; and (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.
48 47 U.S.C. § 254(b)(3).
49 See AT&T Comments of April 27, 2007, referencing FCC Reference Book of Rates, Prices Indices, and Household Expenditures for Telephone Service, Table 1.1 (rel. Aug. 11, 2006).
50 FCC Telephone Subscribership in the United States, Table 2 (rel. Jun. 29, 2007).
51 See Sprint Nextel Comments of 4/27/07, p. 10.
52 Local Exchange Carriers offer both local and long distance calling in one package, and compete against wireless providers that offer "bucket plans" of minutes in interstate calling areas.
53 Voice over Internet Protocol service is national or international in scope. Vonage Holdings Corporation Petition for Declaratory Ruling Concerning an Order of the Minnesota Public Utilities Commission, WC Docket No. 03-211, Memorandum Opinion and Order, 19 FCC Rcd 22404 (2004).
54 D.06-08-030, p. 143.
55 AT&T Responses to DRA Data Requests 1-6 and 1-17.
56 SureWest Opening Comments at 4.
57 OIR at 12-13.
58 AT&T Responses to DRA Data Requests 1-6 and 1-17; Verizon PROPRIETARY Responses to DRA Data Requests 1-6 and 1-17 (including attachments thereto).
59 Sprint Comments of 4/27/07, at 18.
60 See D.96-10-066, Appendix B, Adopted Universal Service Rules §§ 1 (Definitions), 4 (Basic Service).
61 As discussed supra, the Commission should update the High Cost proxy model, and ensure only truly high cost areas are subsidized.
62 Pub. Util. Code § 739.3(c).
