Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Public Utilities Commission (8660)

The Public Utilities Commission (PUC) is responsible for the regulation of privately owned "public utilities," such as gas, electric, telephone, and railroad corporations, as well as certain passenger and household goods carriers. The commission's primary objective is to ensure adequate facilities and services for the public at equitable and reasonable rates. Throughout its various regulatory decisions, the commission also promotes energy and resource conservation.

The budget proposes total expenditures for PUC in 2001-02 of $100.1 million from the General Fund ($2.7 million), various special funds ($83.7 million), federal funds ($1 million), and reimbursements ($12.7 million). This is about $4.3 million, or 4.1 percent, less than estimated current-year expenditures. This decrease results mainly from a decrease of $10.5 million in reimbursements offset by increases of (1) $5.4 million in activities funded by the PUC Utilities and Transportation Reimbursement Accounts and (2) $0.4 million in electricity-related activities supported by the General Fund. The Governor's budget also proposes an increase of 14.8 personnel-years (PYs) over the current-year level of 871.5 PYs.

Universal Service Telephone Programs

Background

The PUC administers four universal service programs that seek to expand access to basic telephone services. It does so by subsidizing the cost of service for certain people (such as low-income persons and persons living in remote areas) through surcharges on all telephone users' monthly bills. Currently, these surcharges total slightly more than 4.5 percent of billed services, supporting more than $850 million in expenditures. The following is a brief description of these programs.

Universal Lifeline Telephone Service, also known as the Lifeline program, provides basic telephone service for low-income persons at 50 percent of the standard rates. By PUC decision, basic service includes features such as a single-party line, unlimited incoming calls, and touch tone dialing.

The California High Cost Fund-A (CHCF-A) subsidizes basic telephone service provided by 17 small local telephone companies serving high-cost, predominantly rural areas of the state. These companies cannot charge customers more than 150 percent of Pacific Bell's basic service average rates for urban areas. If a company's cost to provide basic service exceeds this ceiling, the fund reimburses the company for the difference.

Similarly, the California High Cost Fund-B (CHCF-B) subsidizes basic service in high-cost areas of the service territories of the four large local telephone companies—Pacific Bell, Verizon (formerly GTE), Roseville, and Citizens. Companies providing telephone services in above-average cost areas within a territory receive a subsidy for the amount over the average.

The California Teleconnect Fund (CTF) subsidizes telephone service for various entities—50 percent for schools and libraries, 25 percent for community-based organizations, and 20 percent for city- and county-owned hospitals and clinics.

The Deaf and Disabled Telecommunications Program (DDTP) provides three services to hearing-impaired and disabled persons.

• Telecommunications Devices for the Deaf—Loans telecommunications devices like teletypewriters to eligible individuals, schools and organizations serving the deaf or hearing-impaired, and state departments with significant public contact.
• California Relay Service—Provides access, through the standard telephone system, to a third-party operator who relays the information between the parties talking with one another.
• Supplemental Telecommunications Devices for the Disabled—Provides specialized telecommunications equipment like amplifiers, speaker telephones, and cordless telephones to individuals with hearing, vision, mobility, speech, and cognitive disabilities.

Program Budgets. The PUC annually approves a budget and surcharge level for each program. Figure 1 lists each universal service program with its current surcharge level and budgeted funding as approved by PUC.

The PUC's Report

In December 1999, the PUC issued a legislatively required report on the universal service telephone programs, addressing four issues.

• Funding Mechanism. The effectiveness of the program's funding mechanism in ensuring "equitable and nondiscriminatory" contributions to support universal service.
• Competitively Neutral and Flexible Services. The ability of the programs to offer current services on a competitively neutral basis, while being flexible enough to incorporate additional services as telecommunications technology advances.
• Comparability of Rates and Service. The success in providing universal access in rural and high-cost areas to services that are comparable in cost and content to service provided in urban areas.
• Reducing Subsidies and Auctioning. The possibility of (1) reducing or eliminating subsidies where competition exists and (2) auctioning the right to provide universal service in high-cost areas.

Chapter 931, Statutes of 2000 (AB 994, Wright), requires the Legislative Analyst's Office to (1) review the findings of PUC's report and consider whether any issues we identify affect continued implementation of the programs or warrant changes to existing law and (2) report our findings in the Analysis of the 2001-02 Budget Bill.

Below, we first summarize PUC's responses to the four issues specified in current law.

Funding Mechanism. In its report, PUC states that contributions to fund the universal service programs are equitable and nondiscriminatory because all companies providing local telephone service must apply the surcharges for these programs to their customers' bills. Furthermore, PUC notes that the Federal Communications Commission showed that California had met its goal of 95 percent of households subscribing to telephone service.

Competitively Neutral and Flexible Services. The PUC requires all companies providing local telephone service to provide the basic services as defined by the commission. The PUC states that this meets the requirement to provide current services in a manner that treats companies equally. In addition, PUC planned to begin a triennial review of its universal service programs in 2000. The PUC cites this effort as demonstrating flexibility to incorporate new services as telecommunications technology advances. This triennial review, however, has not yet begun. Furthermore, the review itself provides the opportunity for PUC to be flexible and incorporate new technological developments in the universal service programs. But it does not demonstrate that flexibility itself. The PUC's response to such a review would show that flexibility or lack thereof.

Comparability of Rates and Service. As mentioned above, all companies providing local telephone service must provide the same basic services. Thus, basic telephone service is comparable for all areas of the state. With respect to rates, PUC notes in its report that under CHCF-A the rate paid by customers for basic residential service does not exceed 150 percent of Pacific Bell's average rates for the same basic service in urban areas, as required by law. For CHCF-B, however, PUC only states that the fund subsidizes areas with above-average costs. The PUC does not address whether this is a reasonable standard and why it differs from the standard for CHCF-A. In addition, while CHCF-A subsidizes all telephone lines serviced by the small telephone companies, CHCF-B only subsidizes one telephone line per residence serviced by the large telephone companies. The PUC does not address whether these differences treat customers in high-cost areas served by small and large companies in an equitable manner.

Reducing Subsidies and Auctioning. The PUC states that a lack of interested bidders precludes using an auction to determine an appropriate subsidy amount to provide basic telephone service in high-cost areas. In fact, according to PUC, competition is just beginning to develop in urban areas, which typically develop competitive markets first. The PUC indicates that it will monitor these auction issues in the triennial review of universal service programs. Currently, in the absence of an auction, PUC determines the companies' costs of service and sets subsidy amounts accordingly.

More Specific Programmatic Information Needed

To improve legislative oversight, we recommend that the Legislature adopt supplemental report language that requires PUC to submit to the Legislature an annual report that includes detailed programmatic information for each of the universal service programs.

Currently, there is little information provided to the Legislature on the performance and effectiveness of these universal service programs. For example, only the Lifeline program and DDTP have annual reporting requirements in statute. For the Lifeline program, PUC must annually report the services included, rates charged, eligibility criteria, and telephone penetration rates broken down by income, ethnicity, and geography. However, these reports have only been completed periodically. In addition, there is no readily available information showing what proportion of eligible households participate in the program or are in urban or rural areas. The board that markets the Lifeline program plans to conduct a market research study in 2001 that should include all this information. Lacking this information, it is not possible to determine the overall effectiveness of the program in reaching eligible households or various segments of the eligible population.

The DDTP annual report simply shows the total numbers of telecommunications devices in service and otherwise available. The report, however, does not address the effectiveness of the program. For example, there is no information on how the equipment is distributed to eligible individuals, the extent to which individuals use the telecommunications devices put in public places, or the provisions of the contracts with MCI Worldcom and Sprint for operating the relay service.

For the remaining programs—the two high-cost funds for subsidized basic telephone service and the teleconnect fund for school, library, hospital, and organization subsidies—PUC does not report the costs and accomplishments to the Legislature. Thus, information such as the following is not provided:

• The number of households that receive subsidized service from each of the high-cost funds and their locations.
• The number of schools, libraries, community-based organizations, and hospitals that receive subsidized service from the teleconnect fund and their locations.
• The proportion of schools and other eligible entities benefiting from the teleconnect fund.

Lacking this information, the Legislature cannot determine the effectiveness of the programs.

Legislation Addresses Need for Better Information. Before PUC submitted the December 1999 report required by law, the Legislature adopted Chapter 677, Statutes of 1999 (SB 669, Polanco), which made several changes to the universal service programs that address some of the concerns we have discussed. For each program, Chapter 677 does the following:

• Creates a State Fund and an Advisory Board. Chapter 677 requires program funds—currently held in bank trusts—to come under state control and be subject to appropriation by the Legislature. Chapter 677 conforms to current practice with respect to having boards oversee program operations.
• Requires PUC to Approve an Annual Budget Subject to Appropriation in the Budget Act. The PUC currently approves program budgets, but funding has not been subject to appropriation by the Legislature.
• Requires an Annual Report on Board Activities. As noted previously, only the Lifeline program and DDTP have statutory reporting requirements.

The requirement that program funding be appropriated in the budget act ensures that the Legislature will be informed of the cost of each of the universal service programs. In addition, the reporting requirement should keep the Legislature informed of the accomplishments of and performance data for each program. To improve legislative oversight further, we recommend that the Legislature adopt supplemental report language requiring the annual reports for each program to include the kind of detailed programmatic information we have described above.

Compliance With Recent Legislation

We recommend that the Legislature amend the Public Utilities Commission's (PUC's) appropriation in the budget act to include funding, on a line-item basis, for each of the universal service programs. Further, we recommend that prior to budget hearings, PUC report on the plan for and progress of the required investigation of the universal service programs, issues PUC expects to address, and the schedule for completing the report.

The Governor's budget does not include the universal service programs in PUC's budget item. Therefore, it is not clear how the administration plans to fund these programs in the budget year, in accordance with the Chapter 677 requirement that funding be appropriated in the budget act. Chapter 677 also requires PUC to submit a transition plan for implementing the statute to the Legislature by July 1, 2000, with estimates of annual revenue and expenditures for each program. The PUC has not submitted this plan. This plan, as well as a proposed budget for each program, should be submitted to the Legislature for review prior to budget hearings. We recommend that upon receipt and review of this information, the Legislature include funding as appropriate, on a line-item basis, for each of the universal service programs.

Revisit Definition of Universal Service. Chapter 943, Statutes of 2000 (SB 1712, Polanco), requires PUC to begin an investigation to consider incorporating recent technologies into the definition of universal service. Chapter 943 specifies that this investigation is to begin by
February 1, 2001, and PUC must report its results to the Legislature by January 1, 2002. The PUC should report to the Legislature prior to budget hearings on the plan for and progress of the investigation, issues PUC expects to address, and the schedule for completing the report.

Other Issues

Monitoring of San Diego Gas & Electric (SDG&E) Electricity Purchases

We recommend that the Legislature approve $682,000 and four positions for monitoring of electricity purchases on a two-year limited-term basis because of the uncertainty surrounding the electricity industry.

The budget proposes $682,000, including four permanent positions and $359,000 for consultant contracts, for the duties specified in Chapter 328, Statutes of 2000 (AB 265, Davis). Chapter 328 requires PUC to (1) track the cost of electricity purchased by SDG&E above the rate cap imposed by the statute and (2) start a proceeding to determine the reasonableness of prices the utility paid beginning June 1, 2000 to purchase electricity for distribution to its customers.

Chapter 328 imposed a 6.5 cent per kilowatt-hour rate cap on the retail price SDG&E charges its customers for electricity through December 31, 2002 (December 31, 2003 if extended by PUC). This was in response to dramatically higher electricity costs during the summer of 2000. In addition to the rate cap, Chapter 328 requires PUC to track the difference between the rate the utility paid to acquire electricity for its customers and the 6.5 cents per kilowatt-hour it could charge those customers. The utility would then be permitted to recover any "reasonable" difference from its customers at a future date. Chapter 328 also required PUC to begin a proceeding to determine the "prudence and reasonableness" of the prices SDG&E paid to purchase electricity for its customers beginning June 1, 2000.

The proposed positions would form a team of auditors to track the utilities' costs. According to the commission, the workload created by Chapter 328 is not for a limited term because PUC will conduct regular reviews of the manner in which the utilities purchased electricity. However, the rate cap imposed in the SDG&E service territory expires on December 31, 2002 (December 31, 2003 if the commission extends the cap). Given the uncertainty and changing circumstances in the electricity industry, we recommend that the Legislature approve the funding and positions requested on a two-year limited-term basis. This would give the Legislature an opportunity to review the need to extend this effort beyond 2002-03.

Consultant Funds for Office of Ratepayer Advocates (ORA)

We recommend that the Legislature delete the $456,000 request for additional consultant funds because (1) the complaint trend monitoring duplicates work performed by the Consumer Services Division and
(2) the proposed commission proceedings workload should be prioritized within the Office of Ratepayer Advocates' existing budget for consultants. (Reduce Item 8660-001-0462 by $456,000.)

The budget proposes $456,000 for ORA, which represents ratepayers in PUC proceedings, to augment existing funds for consultants. The ORA would use these funds to (1) begin monitoring trends in complaints taken by the commission's Consumer Services Division and (2) increase its involvement in commission proceedings (for example, rate making cases, applications for mergers or asset sales or transfer, and regulatory framework proceedings).

The PUC budget includes a budget-year augmentation for the Consumer Services Division to implement a more systematic analysis of trends in customer complaints. Thus, ORA's proposal duplicates this effort.

With respect to increased involvement in commission proceedings, ORA has had a budget of $550,000 for contracts since 1998-99 and has prioritized its use of these funds for its involvement in PUC cases. The ORA should continue to prioritize the allocation of its existing contract funds, and—if appropriate—use them for increased involvement in commission proceedings.

As a result, we recommend that the Legislature delete the $456,000 request for additional consultant funds.