Report 99108 Summary - November 1999

California Public Utilities Commission:

Its Decisions About Deregulating the State's Telecommunications Industry Will Not Affect Residents Immediately and the Long-Term Effects of Policy Changes Are Unknown


Telecommunications industry innovations are revolutionizing the ways we communicate, and new government regulations and policies will eventually alter how companies charge consumers for communication services. California's Public Utilities Commission (commission) already faces major decisions about policies that regulate the State's telephone companies. These policies currently allow both rural and urban telephone customers to receive similar services at comparable rates. However, these decisions and changes will occur over several years. Therefore, the State's telephone customers, regardless of where they live, will not soon experience any major alterations in their services or fees. Indeed, the timing and magnitude of any changes arising from the commission's decisions are currently unknown.

Not only will the commission need to analyze how any policy changes will affect telephone companies and customers, but it will also need to ensure that it makes economically sound choices that satisfy conflicting business philosophies and diverse legal requirements. Specifically, the federal Telecommunications Act of 1996 (Act), which requires states to open the telecommunications market to competition, is prompting the commission to reexamine California's long-standing policies of averaging telephone rates across rural and urban areas (geographic rate averaging). The Act also has the commission revisiting California's use of subsidies, which are funded through monthly surcharges on customers' bills, to ensure equitable rates for all Californians. Both policies have supported the State's mission to supply universal service-or affordable, accessible telephone connections-to at least 95 percent of all California households. In apparent contrast to these policies, however, is a premise underlying the Act which presupposes that, in order to remove barriers to competition and promote fair products, states should establish rate structures in which customers pay fees based on the actual costs of their telecommunications services.

Although the commission initially planned to reassess its current system of geographic rate averaging at the end of 1998, they have not yet begun this reevaluation. The commission is waiting for Federal Communications Commission guidance before it begins an official public proceeding to conduct in-depth studies and analyze rate averaging. In the meantime, the commission has been studying other areas concerning the removal of barriers to competition. The commission's decision-making process, its official proceeding on the possible elimination of rate averaging and related matters, will require from 18 months to six years. Telephone customers in California will therefore not immediately feel the results of any commission decisions. Nonetheless, if the commission concludes that rate averaging is not compatible with a competitive telecommunications market, some customers' telephone rates will probably increase, while other customers' rates will decrease. Other possible effects are speculation at this point.

Even though it has not yet determined the future course for rate averaging, the commission must continue to fulfill the federal Act's intent, which is to provide high-quality telephone services at low rates and to encourage the use of new telecommunications technologies. Under current policies, telephone customers receive the same basic telephone services for comparable rates regardless of whether they live in rural or urban areas. Only about 112,000 people in California, who constitute 3 percent of the rural population or less than 1 percent of the State's total population, live in areas where traditional telephone service is not offered. Moreover, some rural areas have newer, more state-of-the-art equipment than urban areas because rural areas are eligible for low-interest federal loans. Although the quality and type of telecommunications equipment can vary among areas in California, the vast majority of rural customers now have access to the same advanced technologies, such as high-speed Internet connections, that are available to urban customers.

Regardless of the technology, rates, and services now in place in California, the telecommunications industry and market will undergo critical changes during the next several years. These changes may have positive and negative, dramatic and insignificant effects on rural customers, urban customers, businesses, schools, and governmental entities. Given the challenges of easing competition into the telecommunications market and the difficulty of revamping complicated existing policies, the commission intends to begin the next phases of its evaluation process in early 2000. In arriving at its conclusions, the commission should seriously consider the possible impacts of its decisions on all players in the telecommunications industry.


The commission generally agreed with the information provided in our report.