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Executive Summary



In the last few years, Americans' use of the Internet and computers has grown substantially:

¬ The rate of Internet growth in the U.S. is two million per month.

¬ More than half of the nation, 54% of the population, is now online.

¬ Children and teenagers use computers and Internet more than any other age group.

¬ Internet use is increasing for people regardless of income, education, age, ethnicity, or gender.

Source: A Nation Online: NTIA/ESA Report

Broadband transmits data at more than four times the speed of that attainable with a regular dial-up connection.

FCC Chairman Michael Powell on "What is Broadband?"

Oddly enough a clear, uniformly accepted definition evades us. It is accepted that whatever broadband is, it is fast (the Commission has defined it as 200 kbps). We have very forceful debates about how fast is fast enough. I submit, however, that broadband is not speed. It is a medium that offers a wide potential set of applications and uses. With the telephone, we knew what the "killer app" was. It was voice. The "broad" in broadband should be recognized as meaning more than the "fat, fast pipe." It should represent the nearly infinite possible uses and applications that might be developed and that a consumer might use. I think broadband should be viewed holistically as a technical capability that can be matched to consumers' broad communication, entertainment, information, and commercial desires. Source: Remarks of Michael K. Powell Chairman Federal Communications Commission At the National Summit on Broadband Deployment Washington, D.C. October 25, 2001

We may consider today's "broadband" to be narrowband

when tomorrow's technologies are deployed and consumer

demand for higher bandwidth appears on a large scale3

Consumers access the Internet primarily via basic phone line "Dial-up"

Who is not on line?

People Without Internet

Access in the U.S.

"National average is 46%"

People in households with low family incomes:

¬ 75% of people who live in households where income is less than $15,000

¬ 66.6% of those in households with incomes between $15,000 and $35,000;


¬ 68.4% of all Hispanics and

¬ 85.9% of Hispanic households where Spanish is the only language spoken;

African American:

¬ 60.2% of African Americans

Adults with low levels of overall education

¬ 60.2% of adults (age 25+) with only a high school degree

¬ 87.2 of adults with less than a high school education

Source: "A Nation Online"


The universal service decision standards for changing definition of "basic service":

Service must be "essential", used by 65% of customers, and benefits must outweigh cost.

PUC Defined Basic Service Components:

· Single party local exchange services;

· Interchange carrier access;

· Directory assistance;

· Directory listing;

· Operator services;

· Information services;

· Ability to place and receive calls;

· Touch-tone dialing;

· Lifeline rates for eligible customers;

· Customer choice of flat or measured service (California High-Cost Fund A entities are exempt from this requirement);

· Voice grade connection to public switched network;

· One-time billing adjustment for charges incurred inadvertently;

· Free access to information about ULTS (Lifeline), emergency services, and to information regarding service activation, termination, repair, and billing.

The Commission Universal Service


Shared Structural Requirements for Federal and State Universal Service Programs:



A. The Commission Sought Comment On the Proposed Changes to the Definition of Basic Service From A Wide Range of Interested Persons

Comments by Californians

PPH participants sought greater availability of advanced services, and improvements in the CTF.

Letters and telephone calls oppose expanding the definition of basic service to include broadband.

Parties filing formal comments oppose expanding the definition of basic service as too costly and beyond the Commission's jurisdiction.

Changes to Accommodate the Needs of Deaf and Disabled Customers Should Be Made to the Programs Specifically Directed At Those Customers, Not Universal Service

Modifying California Teleconnect Fund is a better way of increasing Internet access.

Chapter 4

· Broadband is not an essential service.

· Including broadband in the definition of basic services is not feasible, as defined in SB 1712.

· Expanding the definition of basic service to include broadband does not meet the universal service standards.

· Dial-up connection provides Internet access.

· Enhancements of the CTF will promote Internet use among low-income households.

A broadband subsidy program for all customers is too costly.

Type of Service


Residential Rate Per Customer

Monthly Lifeline (ULTS) Rate

Per Customer

Annual ULTS

Program Costs


Monthly ULTS

Surcharge on

Intrastate Services

Pacific Bell BasicService Rate





Pacific Bell RateWith Universal Broadband





Verizon BasicService Rate





Verizon RateWith Universal Broadband





Note: Estimated lifeline and residential rates for universal broadband represent a statewide average for all local exchange telephone companies.

A Two-Tiered Approach would also be too expensive.

Broadband Subscription Rate

Basic Service Broadband Rate

Basic Service Broadband ULTS Rate

Total ULTS Surcharge













Low-income broadband access subsidy program

LIBAS Subscription Rate (1)

LIBAS Monthly Voucher Subsidy

ULTS Annual Costs with LIBAS

ULTS Surcharge with LIBAS

Percent Increase from Current 1.45% ULTS Surcharge

10% (340,000)


$383.7 (Million)



50% (1.7 million)


$791.7 (Million)



100% (3.4 million)


$1.3 (Billion)



Technological and competitive neutrality would be difficult to achieve.

Funding is not equitably distributed.

Benefits do not justify costs.

It is not essential - subscription rates are 13-17%.

Benefits of speedier access do not outweigh costs, which disproportionately impact low-income customers.

Market not sufficiently established to determine whether intervention is needed.

Dial-up Connection provides Internet Access

· More than half of U.S. households are now online and 80% of these households use dial-up connection.

· High-speed Internet access service is now available to almost 75% to 80% of all homes in the U.S. via DSL or cable modem service, but only 11% of individuals use broadband services.

· While 73% of Californians have access to broadband services; only 13-17% have chosen to subscribe to them.

· California has a 97% phone penetration rate, so 97% of Californians could access the Internet via dial-up connection.

· The key to promoting future broadband use in California is to keep telephone service affordable and to promote Internet access within low-income households.

The key to promoting broadband services in California is to keep telephone service affordable and to promote Internet access within low-income households.

The Commission is expanding basic phone service to unserved and underserved communities.

The Universal Service Decision established CTF.

The Commission is considering the expansion of CTF.


Broadband Internet access does not satisfy the feasibility standards contained in SB 1712 nor the Commission's current standards for expanding the definition of basic service.

73% of Californians have access to broadband; however, only 13-17% subscribe to this service.

Low cost basic telephone service is one important element within the Commission's jurisdiction for maintaining and increasing access to the Internet for low income Californians.

The Commission should maintain its commitment to keeping basic telephone service as affordable as possible.

The Commission will consider in Fall 2002, an order that directs enhancements to improve utilization of the CTF program.





SB 1712, CH. 943 STATS. 2000



a. Address the "feasibility" of any proposed change to the definition of universal service, as that term is defined in Section 871.7(d), including whether the benefits justify the costs and whether the funding burden can be equitably distributed so as to prevent regulated utility ratepayers from bearing a disproportionate share of funding responsibility.

b. What additional criteria should be used to determine the nature and definition of universal service?

a. How should the Commission regulate video, data, voice over IP and Internet providers providing services included as part of an enhanced Universal Lifeline Service Program? What regulatory and legislative changes are needed at a state and/or federal level?

b. How would the Commission regulate and audit payments made to providers of video, data, and Internet services under an enhanced Universal Lifeline Service program?

c. Address the "feasibility" of implementing an enhanced Universal Lifeline Service Program, as that term is defined in Section 871.7(d).

a. Improved quality of life.

b. Expanded access to public and private resources for education, training, and commerce.

c. Increased access to public resources enhancing public health and safety.

d. Assistance in bridging the "digital divide" through expanded access to new technologies by low income, disabled, or otherwise disadvantaged Californians.

e. What criteria should be used to determine whether and how the definition of basic service should be modified? Do the criteria set forth in D.96-10-066, Appendix B, Rule D, provide a useful analytical framework for making this determination?

f. Address the "feasibility" of modifying the definition of basic service to incorporate the latest technologies, as that term is used in Section 871.7(d).

9. Should the California Teleconnect program be revised? If so, how?

10. What process and procedures should the Commission adopt to periodically review and revise the definition of universal service, as necessary, to reflect new technologies and markets consistent with the intent of Section 871.7©. (§ 883(b)(7))

13. Are there alternatives to revising the basic service definition at this time that can achieve the enhanced service objectives at lower cost?

14. When is it appropriate to provide subsidies for "digital services" when individuals who may be subject to both "digital" universal service and lifeline program funding fees are not themselves subscribers to, or beneficiaries of the digital service?

15. Is access to digital services essential? Why? If not essential now, under what conditions should access to digital services be considered essential?

16. How much digital bandwidth access is essential?

17. Should the Commission reprioritize the use of available universal services subsidies? For example, should subsidies for digital access services take precedence over the significant percentage of California territory not served by any phone?

18. Is dial-up modem access to digital services (Internet) essential?

19. Is wireless phone service access to digital services (Internet) essential?

20. What should the Commission consider in determining whether wired or wireless digital service is essential?

21. Have the current Universal Service, Lifeline, and/or Teleconnect programs achieved their goals? Are the goals changing?

22. If program Universal Service, Lifeline, and/or Teleconnect Program goals are changing, what alternatives exist to achieve the new goals?








FISCAL YEAR 2002-2003



















(1) The adopted budget for claim payments for FY 2002-2003 total $53.8 million.

(2) $53.8 million was estimated based on the historical approved discount amounts for

qualified entities.


(3) The percentage distribution for the different entities is based on the historical

    number of approved application received from the qualified entities. It does not indicate funding limits.

(4) For FY 2002-2003, CTF funds are available on a first come first served

basis. Thus, the budget amount of $53.8 million will be given to

qualified applicants who applied first.





    With DSL

    Percentage Increase





    ULTS Budget

    $281.68 million

    $982.6054 million


    ULTS Surcharge



1 "A Nation Online: How Americans Are Expanding Their Use of The Internet," a joint project of the National Telecommunications and Information Administration and the Economics and Statistics Administration, relying on the September 2001 US Census Bureau's Current Population Survey, published February 2002. 2 In the Matter of Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, and related Matters, CC Dockets No. 02-23, 95-20, and 98-10, at note 2 (February 15, 2002). 3 Ibid. 4 "Federal Communications Commission Third Report, CC Docket 98-146," adopted and released February 6, 2002.

5 LBJ School of Public Affairs' Policy Research Project gary.chapman@mail.utexas.edu mailto:%20gary.chapman@mail.utexas.edu.

6 According to A Nation Online: NTIA/ESA Report, February 2002, most common activities by Internet users are: e-mail (84%), search for information (67.3%), and source of news (61.8%). 7 Satellite service provides nearly 100 percent broadband coverage. However, satellite service is subscribed by a small percentage of broadband service users. 8 Preliminary Commission staff analysis. Commission staff has issued data requests of the industry to further refine its analysis. 9 A Nation Online: NTIA/ESA Report, February 2002. 10 Internet service provider dial-up prices are generally at least two times less expensive than broadband service charges. For example AOL (ISP) charges $23.90 (This includes both access service and ISP services offered by AOL.) per month and SBC Pacific Bell DSL service (broadband) charges $49.95. 11 A Nation Online: NTIA/ESA Report, February 2002. 12 Adopted in D.96-10-066, Universal Service Decision. 13 The Infrastructure Report included public input gathered during three Commission En-Banc `Hearings held with a diverse group of representatives from the fields of medicine, education, technology, public interest and industry. 14 There are 17 small LECs, but only 13 are qualified to participate in the CHCF-A. 15 Two of those hearings were scheduled for September 11 and 12, and were cancelled due to the events of September 11, 2001. 16 Telecommunication devices with keyboard and visual display for people who are deaf, hard of hearing or speech impaired. 17 FCC July 2002, table 7 Report, "High-speed services for Internet Access", status as of Dec 31, 2001. Table 7 shows 928,345 DSL lines and 786,789 cable modem lines in California. FCC, Telephone Subscribership in United States, July 2001, at table 6 shows total California households of 12,086,380. Additionally, proprietary information provided by broadband providers indicates a less than 9% subscription rate per service accessible households. We estimated the 13-17% broadband subscription rate based on this proprietary information. 18 The Universal Service program is comprised of six programs, each with its own surcharge. Table 3-1 estimates do not include quantifying the effect of expanding the definition of basic service to include broadband on one of the six programs. 19 A combined price of $60.69 for Pacific bell and $67.25 for Verizon includes $50 for DSL and purchase of basic service.

20 1. Attachment F included only start-up costs necessary to make 100% of access lines DSL-ready or it assumed 100% availability and then spread these costs over all residential customers.

21 See Inquiry Concerning High-Speed Access to the Internet Over Cable and Other Facilities, Internet Over Cable Declaratory Ruling, Appropriate Regulatory Treatment for Broadband Access to the Internet Over Cable Facilities, GN Docket No. 00-185, CS Docket No. 02-52, Declaratory Ruling and Notice of Proposed Rulemaking, FCC 02-77 (rel. March 15, 2002) at para. 9 ("cable Declaratory Ruling") and Third 706 Report at para. 28. 22 "A Nation on Line", NTIA/ESA Report, February 2002. 23 http://www.parksassociates.com/, survey of 2,500 U.S. households done in July 2001. 24 According to research by Jupiter Media Metrix, www.jmm.com. 25 "The Broadband Difference" How online Americans' behavior changes with high-speed Internet connections at home, John B. Horrigan and Lee Rainie, Pew Internet & American Life Project. 26 "Telephone Subscribership in the United States", Alexander Belinfante, Federal Communications Commission, February 2002. 27 http://www.parksassociates.com/, survey of 2,500 U.S. households done in July 2001 28 Resolution T-16542 29 The time limits or sunset adopted in Resolution T-16542 are: (a) a two-year period from the due date for January 2000 and thereafter CTF claims; (b) October 12, 2001 for February 1997 through December 1997 CTF claims; and (c) February 4, 2002 for January 1998 through June 1999 CTF claims; and (d) March 4, 2002 for July 1999 through December 1999 CTF claims. 30 See Attachment D. The amounts are based on historical numbers of approved applications, but CTF funds are available on a first-come first-served basis to qualified applicants. 31 Added by Resolution T-16546 August 23, 2001 32 In Resolution T-16435, the Commission projected there would be more than 3.7 million lifeline customers during 2001. 33 The purpose was to ascertain the impact of subsidizing such costs on existing Universal Service subsidy programs and hence DSL technology was chosen. 34 "The last mile is a critical link between existing backbone and middle mile infrastructure on the one hand and the last 100 feet to the end-user's terminal on the other hand" per FCC Report and Order in, "Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment pursuant to Section 706 of the Telecommunications Act of 1996" SECOND REPORT, FCC 00-290. CC Docket No. 98-146. pp.11 35 The Universal Service programs subsidize local loops of California ILECS 36 AB 140 would subsidize the extension of phone service to these areas according to Ed Fletcher in. "Getting connected gets easier: A new law aims to help rural areas bring in wired phone service" Sacramento Be January 1, 2002 37 FCC, Industry Analysis Division, Local Telephone Competition: Status as of December 31, 2000. Report released in August 2001 and updated until December 2001 in July 2002. 38 Ibid. In this publication, the FCC identifies the access lines of price cap and non price cap regulated ILECs separately. 39 FCC 43-08 (ARMIS Report): Table III. Access Lines in Service by Customer 40 The cost averages over business and residential access lines and therefore we could multiply by the appropriate number of access lines (business and residential) to get the break-up of costs. 41 These estimates are based on current proprietary data submitted by ILECs and CLECs to the CPUC. A tutorial at the International Engineering Consortium's website provides an alternate source. See Table 1 at http://www.iec.org/online/tutorials/dslam/topic05.html 42 These estimates are based on the NECA Rural Broadband Cost Study published by the National Exchange Carrier Association. Summary results are available at http://www.neca.org/bbattach.pdf. 43 Based on proprietary and non-proprietary data sources. 44 The estimates assume that if DSL becomes a part of basic service, there will be very little competition. The estimates are net of marketing, interconnection and promotional costs, including costs of ordering customer premises equipment and installation fee waivers. 45 Technical experts in the Industry now claim that new architectures such as the BLC (broadband loop carrier) would drive down incremental costs of new loops even further. See the Technical Report published by DSL Forum. "DSL Anywhere: A paper designed to provide options for Service Providers to extend the reach of DSL into previously un-served areas". 2000; and also SBC's description of Project pronto on its website http://www.sbc.com/data/network/0,2951,5,00.html 46 To keep the aggregate estimates simple, the proposed rates use the standard Telecommunications Utility Market Rate of Return (ROR) adopted for some California ILECs in D.98-10-026. Changes in number of access lines, population growth and inflation rates are ignored. 47 Bank Loan Report, "Top-Tier Telecoms Face Rejection From Banks and Bond Market" April 23, 2001. 48 TD chose Scenario B since technology change is assumed to occur after three years and hence recovering fixed costs over a three-year time horizon seems reasonable. 49 TD assumes the total cost of including DSL in basic service will be borne by the customer via monthly billings. 50 The incremental monthly ULTS subsidy per access line is the difference between the existing subsidy per line and the estimated subsidy per line for expanded basic service ($22.52 - $5.34 = $17.18). 51 As of November 2001,there were 3.4 million ULTS subscriber lines. $17.18 X 3.4 million = $58.41 million. 52 $58.41 million x 12 = $700.92 million. 53 TD assumed no increases in program administrative fees and merely added the incremental annual cost of including DSL service to the 2001/2002 program expenses to determine the estimated annual ULTS program expenses. 54 Represents the total of the current ULTS program expenses and the incremental cost of adding DSL ($281.68 million + $700.92 million = $982.60 million). 55 The Commission adopted the current surcharge in Resolution T-16435. 56 The surcharge is calculated by dividing the program budget by the billing base. The billing base in Resolution T-16435 was used as a starting point with the proposed DSL revenue added ($982.60 million / $24.785 billion = 3.96%).

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