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F I S C A L I M P A C T R E P O R T

SPONSOR Rodella

DATE TYPED 3/15/05

HB 776/aSCORC

SHORT TITLE State Rural Universal Service Fund

SB

ANALYST Rosen

APPROPRIATION

Appropriation Contained

Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

NFI

SCORC amendment negates

3.5% increase on

state agencies’ intrastate

telecommunications services

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates SB218a

SOURCES OF INFORMATION

Attorney General’s Office (AGO)

Public Regulation Commission (PRC)

AARP New Mexico (AARP)

Verizon Wireless

Cingular Wireless

Public Education Department (PED)

No Responses Received From

General Services Department (GSD)

SUMMARY

Synopsis of SCORC Amendment

Senate Corporations and Transportation Committee amendment to House Bill 776 exempts ap-

plication of the surcharge to telecommunications services provided to the state, a county, mu-

nicipality or other governmental agency, as well as public school districts, or public institutions

of higher learning.

Significant Issues

It appears that the amendment has been drafted to eliminate a fiscal impact on the state.

House Bill 776/aSCORC-- Page 2

Non-profit associations, charities and non-public schools are still not exempt from the surcharge.

PRC notes the following:

1.

The amendment eliminates the fiscal impact on public governmental and educational en-

tities; however these same entities may benefit from the potential lowering of intrastate

long distance rates resulting from the lowering of access rates.

2.

Schools and governmental entities receive their telecommunications services through dif-

ferent types of technologies e.g. T-1s, PBXs, business lines, etc. It is impossible, prior to

PRC rulemaking decision, to assess the “savings” to public entities from this amendment

because PRC, in its rulemaking, may or may not assess the surcharge, or assess the sur-

charge differently, on different ways of provisioning service.

3.

To the extent that certain categories of telephone customers are exempted from the sur-

charge, other customers must pick up the additional burden. This is not a problem when

the exemption is minimal, such as low income telephone customers, but can be a signifi-

cant burden if the exemption is extended to large groups of telephone customers, as pro-

posed by this amendment.

4.

Is it appropriate to distinguish telecommunications services provided to public school dis-

tricts and public institutions of higher learning from private schools and private institu-

tions of higher learning when applying the surcharge.

Synopsis of Original Bill

House Bill 776 creates a process for the PRC to reform intra-state switched access rates, the

monies telecommunications carriers pay to each other to originate and terminate calls on their

respective networks, and to provide revenue for the rural universal service fund that supports

telecommunications carriers operating in rural, high-cost areas.

The bill amends the current State Universal Service Fund statute (63-9H-6) for the purpose of

reducing “intrastate switched access charges to interstate switched access charge levels in a

revenue-neutral manner.” PRC, through rulemaking, is to: (1) establish eligibility criteria for

participation in the fund, (2) establish an affordability benchmark rate for basic services that will

be used to determine the level of support for each eligible carrier, (3) provide for the collection

of the surcharge on a competitively neutral basis and the administration and disbursement of

money from the fund, and (4) determine those services requiring support from the fund.

The bill mandates completion of a PRC rulemaking to determine a “revenue neutral” surcharge

for the New Mexico universal service fund by November 1, 2005. The surcharge will be applied

directly to consumers, and will replace the intrastate switched access charges companies cur-

rently pay to each other. The fund is designed to ensure availability of local telecommunications

services at affordable rates in rural high cost areas. PRC must commence the three-year phase-in

of reductions of intrastate switched access charges by April 1, 2006. The fund administrator

must make a joint report to the legislature by December 1, 2008 regarding the effects of access

reductions and recommendations for any changes to the structure, size or purposes of the fund.

The funds to be collected are specifically designated as not being “public funds.”

Incumbent rural telecommunications carriers that reduce their intrastate switched access charges

will be eligible to receive fund monies upon a PRC finding that such payments are needed to en

House Bill 776/aSCORC-- Page 3

sure the availability of flat-rate local calling. PRC shall also establish eligibility criteria for

competitive telecommunications companies to participate in the fund. Eligibility criteria include:

whether eligible status would increase customer choice, the impact on the size of the fund, the

competitor’s service offering, quality of service and ability to offer service within a reasonable

time frame.

Phase-in of reductions for switched intrastate access shall commence April 1st, 2006. By May

1st, 2008 intrastate rates shall be equal to the federally determined interstate access rates as of

January 1st, 2006. PRC retains on-going authority to adjust intrastate rates.

In the rulemaking PRC is directed to establish an “affordability benchmark” rate for local resi-

dential and business services, instead of geographic areas, as was the case previously. Initially

the benchmark rate shall be the weighted statewide average basic exchange rate after Qwest ad-

justs its rates to offset intrastate switched access charge reductions. All incumbent and competi-

tive carriers are eligible for participation in the fund. Carriers that have reduced their access

charges may increase rates for basic, flat-rate residential service up to the benchmark rate (“reve-

nue-neutral rate rebalancing”); and authorize payments from the fund to eligible carriers, in an

amount equal to the reduction in revenue resulting from reduced intrastate switched access

charges.

Significant Issues

Switched access charges are the rates charged by local telephone companies to long distance

companies to originate and terminate calls on the local network. According to PRC, the problem

addressed by this bill is one that is based upon historic patterns of ratemaking under rate of re-

turn methodology. Traditionally, local rates were kept low and some costs of the local loop were

shifted to access charges. The effect of high access rates is to make rates for in-state long dis-

tance calls high as well. The Federal Communications Commission (FCC) addressed this prob-

lem at the interstate level by lowering the allowable access rates for interstate calls and recover-

ing the revenue lost through a federal access charge of $6.50 on each customer. The result has

been a lowering of the rates for interstate long distance calling.

PRC indicates this bill makes a similar adjustment in New Mexico to the one made by the FCC:

it reduces the access rates allowable for in-state calls to the same level as that charged at the in-

terstate level, shifts the revenue lost to a surcharge on the bills of all intrastate telecommunica-

tions customers, and allows companies to raise local rates to a benchmark set by the PRC. The

range of access charges in the state now is from 3.4 cents to 38 cents and the range of access

charges allowed at the federal level is from 1 cent to 3 cents. The lowest rate for local service in

the state is $8.50 per month and the highest rate is $26.00 per month. The size of the fund and

the surcharge are not known at this time. However, PRC assumes the fund size will be approxi-

mately $22.5 million, the size of fund required based upon all companies charging an affordable

benchmark rate of $15.29 per month for local service, resulting in a surcharge on all intrastate

retail telecommunications services of 3.5%.

PRC indicates this bill also addresses a disparity in the access rates paid by competing carriers in

the state. The FCC allows only cost-based access charges to be charged to wireless companies

originating and terminating calls on the local network, typically about 1 cent or less, whereas

long distance carriers in the state pay non-cost based access rates that are much higher. This re-

sults in a competitive advantage for wireless carriers in the state.

House Bill 776/aSCORC-- Page 4

AARP indicates less than 10% of residential market is served by competitive local companies

and this reform of switched access charges will not create or enhance a competitive marketplace.

AARP believes “revenue neutral” access reform should be made relative to ratepayers and not to

rural telecommunications service providers. According to AARP, those who make numerous

long-distance calls may benefit from this bill and those on fixed incomes, who make few long-

distance calls, will see a significant increase in their flat local service rates.

FISCAL IMPLICATIONS

All customers, including state agencies, will likely see increases in their phone bills due to the

surcharge to finance the fund and increases in rates for basic services. As noted above, PRC es-

timates this increase could be as much as 3.5%. However, it is impossible at this time to esti-

mate the actual fiscal impact of this bill on state agencies due to a lack of response from GSD.

AGO indicates revenue neutrality for carriers will not result in “bill” neutrality for individual

consumers. AGO believes the access charge reform rulemaking will probably increase local,

residential flat-rate service. Consumers, both business and residential, who make many intrastate

long distance calls may see decreases in the toll rates for such calls and consumers who do not

make many intrastate long distance calls may not see such benefits.

Over time, increases in basic services rates may result as customers who are able to do so choose

other means of making intrastate long distance calls, such as internet telephone services like

Voice over IP (VoIP) or wireless telephone services. Less revenue from access charges will then

be available to subsidize rates for basic services, forcing those basic service rates upwards.

ADMINISTRATIVE IMPLICATIONS

Indeterminate

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Duplicates SB218

TECHNICAL ISSUES

AGO notes the bill makes conforming amendments to Section 63-9A-6.

PRC notes Section 63-9H-7 is amended to remove a cross reference to a portion of 63-9H-6E

that is being deleted in this bill and to replace the cross reference with language similar to that

deleted in the previous section.

OTHER SUBSTANTIVE ISSUES

Although the bill does not require a carrier to raise its rates for basic services, no carrier can re-

ceive payment from the fund until its revenue loss from access charge reduction exceeds the dif-

ference between its current rates for basic services and the benchmark rate. Thus, the fund

should not be used to subsidize noncompetitive rates. Also, the bill mandates that reductions in

charges for access services be passed through for the benefit of consumers in New Mexico and

House Bill 776/aSCORC-- Page 5

mandates PRC to require providers of intrastate retail telecommunications service to participate

in a plan to ensure accurate reporting of intrastate retail telecommunications revenues.

According to AGO, a number of other states have instituted or completed some type of proceed-

ing on “access reform” through a variety of differing approaches with a variety of results. Thus,

data from other states regarding impact of switched access reform on industry or consumers may

be of limited value in assessing potential impacts of this bill.

This bill eliminates a fund advisory board comprised of industry participants and AGO. Elimi-

nating the rural universal service fund advisory board removes the oversight function provided

by AGO and the telecommunications industry on how the fund monies are disbursed.

Verizon Wireless indicates specific concern regarding the abdication of legislative authority to

establish standards or parameters for a state access fund subsidy by instead delegating broad

powers to PRC. Verizon Wireless notes the bill does not mandate that funding levels and sur-

charge levels be tied to actual assessment of need for a carrier subsidy based on empirical data,

the bill does not establish a process or mechanism for making such assessments and the bill does

not set limits on taxation or subsidy amounts.

According to Verizon Wireless, PRC should not assume the need for a carrier subsidy until each

carrier establishes specific grounds and justification for that subsidy in an administrative pro-

ceeding. PRC should also not assume carriers are operating efficiently and, as a result, provide

subsidies to maintain poorly managed rural telecommunications service provide companies.

POSSIBLE QUESTIONS

How many rural telephone companies will receive subsidies from this surcharge. How have

these companies established and documented their need for this subsidy.

How large will the state rural universal service fund be allowed to grow. Will the surcharge be

reduced or eliminated if the fund grows too large.

Why are the funds to be collected specifically designated as not being “public funds”.

Why is the weighted statewide average basic exchange rate to be calculated after Qwest adjusts

its rates to offset intrastate switched access charge reductions.

Can most New Mexico ratepayers obtain flat-rate local calling by means other than those offered

by traditional wireline telecommunication services.

JR/yr:lg