TELECOMi\IUNICATIONS STUDY COi\11\IITTEE

Report of the Telecommunications Study Committee to the 2014 Legislature

Co-CHAIRPERSON: Senator Pat Apple

CO-CHAIRPERSON: Representative

LEGISLATIVE MEMBERS: Senators Jay Emler, , , Forrest Knox, , Julia Lynn, Robert Olson, and Mike Petersen, Representatives Rob Bruchman, Will Carpenter, John Doll, Randy Garber, Ramon Gonzalez, , Ronald Ryckman Sr., , Jack Thimesch, and Brandon Whipple

STUDY TOPIC OR CHARGE

• Study telecommunications issues including funding, uses, and sources of:

o The Kansas Universal Service Fund (KUSF); and

o The federal Universal Service Fund (FUSF);

• Review and make recommendations on the state's public policy on telecommunications; and

• Review possible need for funding sources of and uses of a Kansas Broadband Fund.

July 2014

Telecommunications Study Committee December 16, 2014 Attachment 3 Telecommunications Study Committee

ANNUAL REPORT -·· Conclusions and Recommendations

The Committee's final report, which is due December 31, 2014, wiU contain its conclusions and recommendations.

Proposed Legislation: None

BACKGROUND Coi\IMITTEE ACTIVITI ES

The Telecommunications Study Committee The Comm ittee met twice during the 2013 was created by 20 13 HB 2201, a bill which also Legislative Interim on November 6 and December flllther deregulated telecommunications in Kansas, 12. The Committee reviewed its charge and made changes to distributions from the Kansas received presentations on topics including the Universal Service Fund (KUSF), and all owed the history of telecommunications legislation in Board of Regents to charge fees for services Kansas from 1996 through 2013, an overview of provided by the Kan-Ed program. the KUSF, state and federal Do-Not-Call legislation, the process for determining KUSF The Committee's charge is to study high-cost supp01t , and changes to the FUSF. In telecommunications issues, the KUSF, the Federal addition, the Committee received testimony from Universal Service Fund (FUSF), the state's public industry groups on the effects of changes to the pol icy on te lecommunications, the possibility of KUSF and the FUSF, and determined the scope of establishing a Kansas Broadband Fund, and other an audit of the KUSF. issues determined by the Legislative Coordinating Council. In addition, the Committee is charged Telecommunications Legislation in Kansas, with determining the scope of an efficiency and 1996-2013 effectiveness audit of the KUSF. The audit is to be administered by the Kansas Depattment of Staff from the Kansas Legislative Research Revenue and submitted to the Committee by Depattment reviewed maJor telecommunications November I, 2014. bills enacted by the Legislature beginning wi th 1996, the year federal telecommunications law The Committee is req uired to submit an significantly restructured the industry. annual report to the Senate Committee on Util ities and the House Committee on Uti li ties and The telecommunications poli cy framework set Telecommunications and to submit a report and out in the Kansas Telecommunications Act of 1996 policy recommendations for telecommunications remains in effect today. The Act declares it to be to those committees as well as to the Senate the public policy of the State to: Committee on Ways and Means and the House Committee on Appropriations, prior to December 3 1, 20 14. The Telecom mu nications Study • Ensure every Kansan has access to a first Commi ttee sunsets on June 30, 20 15. class telecommuni cations infrastructure that provides exce ll ent se rvices at an affordable price;

Kansas Legislative Research Department 5-1 2013 Telecommunications Study Ensure consumers realize the benefits of for telecommunications local exchancre • • 0 competition through increased services servrce providers (SB 397). 2002 Sub. for and improved facilities and infrastructure HB 2754 further addressed access rate at reduced rates; rebalancing by rural telephone companies; developed a procedure for determining affordable local telephone rates for Promote consumer access to a full range • residential and business service; and of telecommunications services, including required rural telephone companies to advanced services that are comparable in _ - --~a l cu!_ate revem~ requirements and KUSF rural-and urban-areas throughout the state; support based on embedded costs. ---

• Advance development of a statewide • 2006 SB 360 established thresholds for infrastructure capable of supporting price deregulation in exchanges served by applications such as public safety, price-cap carriers (AT&T and telemedicine, services for persons with CenturyLink). Prices were deregulated for special needs, distance learning, public bundled service statewide, individual library services, access to internet components of bundles in urban areas, and providers, and others; and business and residential services in rural areas if the standard for competition was • Protect consumers of telecommunicati ons met. Lifeline services, the initial services from fraudulent business residential li ne, and up to four business practices and practices that are lines at one location remained subject to inconsistent with the public interest, price-cap regulation. convenience and necessity. • 2008 SB 49 required Vo ice over Internet Among its many provisions, the Act required Protocol (Vo!P) service providers to local exchange carriers to change a number of contribute to the KUSF, and SB 570 their business practi ces to increase competition, required broadband service providers to file network infrastructure plans that included report information about service schedules for deploying universal service availability to the KCC, and the KCC to capabilities and the capability to comply with report broadband availability to the quality of service standards, and rebalance Legislature annually. HB 2637 authorized intrastate and interstate switched access charges. local exchange carriers to adjust rates for The bill also required the Kansas Corporation the initial residential line and up to four Commission (KCC) to establish the Kansas business lines at one location without Lifeline Service Program (to help low-income KCC approval, required price deregulated Kansans afford residential local service) and the carriers to automatically enroll eligible KUSF. customers in Lifeline services, and allowed a carrier to be relieved of its Major legislation passed in subsequent years responsibilities as carrier-of-last-resort in included the foll owing: limited circumstances.

• 1998 House Sub. for SB 2 12 reduced the • 201 1 Sub. for SB 72 allowed further size ofthe KUSF. deregulation of a price-cap carrier that has deregulated a majority of its local • 2002 Sub. for SB 296 established the exchange access lines (only AT&T met Kansas No-Call Act, wh ile other this criteria). Such carrier, to be known as legislation that year conformed Kansas an "electing carrier" is subj ect to price-cap law to federal law to provide a uniform regulation only for Lifeline services, must method of sourcing tax revenues from all ow reasonable resale of its retail wireless services (SB 372) and created a service, is eligible to receive KUSF new and separate city franchi se procedure fu nd ing, cannot charge more fo r a single

Kansas Legislative Research Department 5-2 2013 Telecommunications Study residential or business line in its rural public utility, wireless service provider, and Vo iP exchanges than in its urban exchanges, provider offering intrastate telecommunications could choose to be relieved of its service must contribute to the KUSF, but obligation to serve as carrier-of-last-resott companies can pass the assessment through to in urban exchanges, must offer single customers. residential local access lines in its exchanges, and must allow The assessment rate for 20 13 (assessment interconnection by a telecommunications years run from March I through February 28) is carrier to transm it and route voice traffic. 6.42 percent on intrastate revenue. The rate has ranged from a high of 9.0 percent in the Fund's • 20 13 HB 220 1 created the fi rst year of existence to a low of 3.7 percent in Telecommunications Study Committee 2002. and continued deregulation of the telecommunications industry. The Since the Fund's inception a total of $1. 1 legislation eliminated nearly all regulation billion has been awarded through five programs: of electing caniers and telecommunications carriers and changed • High Cost Support, the largest program, distributions from the KUSF. Price-cap accounts fo r 85.4 percent of total support carriers (CenturyLink) were li mited to the provided since 1997. It provides lesser of 90.0 percent of their 20 I I KUSF affordable services in areas that are costly level of support or $11.4 million. to serve, primaril y because of low Distributions to rate-of-return carriers as a population density; group was limited to $30 mi llion annuall y, with the KCC authorized to modify • Kan-Ed, funded primarily from KUSF fo r carriers' KUSF support only based on State FYs 2004 through 20 13, was changes in embedded costs, revenue requirements, investments, and expenses, created to provide broadband Internet until at least 20 17. The identical support access and distance learning capabilities for schools, libraries, and hospitals. It rule was discontinued for competitive accounted for 8.4 percent of total suppott eligible telecommunications carriers, provided, but KUSF support for Kan-Ed whose KUS F high cost support was was eliminated as of June 30, 20 13; capped as of March 1, 2013, and will be reduced to zero beginning March I, 20 18. • Kansas Relay Service, Inc. (KRS I) provides intervention assistance between a Kansas Universal Service Fund hearing or speech impaired customer and a hearing person in order for them to Staff from the Uti lities Division of the KCC communicate. KRS I has received 2.8 presented background information on the KUSF, percent of the support; including the programs fu nded, historical levels of support for programs and carri ers, and audit • Lifeline provides a credit to eligible processes carried out by the KCC. Presenters and households to aid in payment of the bill respondents to questions included the Division fo r local telephone service. Histori cally, it Director, the Chief and the Assistant Chief of has accounted for about 2.5 percent of Telecommunications, and the Chief of Accounting support; and and Financial Analysis. Telecommunications Access Program Overview. The KUS F was created by the • (TAP) helps pay for specialized equipment KCC in 1997, as directed by the 1996 Kansas for persons with certified disabi lities who Telecommunications Act. The purpose of the need assistance in using the te lephone. KUSF is to assure quality services are made Over the years TAP accounted for 0.9 avai lable to all Kansans at affordable rates. Every percent of the support. te lecommunications carrier, telecommunicati ons

Kansas Legislative Research Department 5-3 2013 Telecommunications Study Process for determining KUSF high-cost information reviewed and the types of adjustments support. The KUSF initially was implemented on and allocations made during an audit. a revenue neutral basis - that is, it was set up to allow carri ers to recover the revenue lost when Do-Not-Call Legislation intrastate access rates were reduced under the Kansas Telecommunications Act. The Act also Staff from the Kansas Legislative Research required the KCC to periodically review the KUSF Department provided a briefing on telemarketing to determine if the cost to provide universal laws in response to questions raised by Committee service justified modificatio~ of KUSF. For members. carrie~s that chose price-cap regulation (AT&T and CenturyLink), the KCC mirrored the federal Federal laws were passed in the early 1990s to approach that based support on the cost to provide help protect consumers from unsolicited telephone service if the network were to be built given marketing calls to their homes, including current technology, and a model was developed to automated and prerecorded messages, and to calculate the forward-looking cost of providing restrict telemarketing calls a reasonable consumer service and support. would consider coercive or abusive of the consumer's right to privacy. These laws, enforced The KCC also mirrored the federal approach by the Federal Trade Commission, included for the carriers that chose rate-of-return regulati on requirements on the id entifying information a (the rural independent companies) and based telemarketer had to provide a consumer; a support on historical costs, which has been revised prohibition on placing calls before 8 a.m. or after 9 to include embedded costs, revenue requirements, p.m.; and a requirement for the telemarketer to investments, and expenses. comply with any do-not-call request made during the call. In 2003, the National Do-Not-Call To implement the required periodic review, Registry was establi shed. the KCC initiated KUSF audits based on the amount of KUSF support provided, working from T he Kansas No-Call Act was established in largest to smallest amount of support. The first 2002. It incorporates the protections of the federal audit (AT&T) was conducted in 1998 and the last laws and places additional restrictions on initial audit of a rate-of-return carri er was telemarketers. It clarifies the limited circumstances completed in 20 13 . In all , 16 of 36 rate-of-return under which a telemarketer may contact a person carriers have undergone second audits. Based on a whose phone number is on the No-Call List (For district court ruling, any change to KUSF support example, if expressly requested by the consumer, must be based on a KUSF audit. For example, a if the consumer and the telemarketer have a carrier with a large increase in access lines to business relationship, or if the call is of a remote locations would be required to request an charitable nature.). Violations of the Kansas No­ audit to determine whether it was entitled to Call Act are enforced by the Kansas Attorney additi onal KUSF support. General and are subject to a civil penalty. The Kansas No-Call List is part of the National Do­ Audits, conducted by KCC audit staff and Not-Call Registry, which is managed by the consultants, consist of an in-house review of Federal Trade Commission. carrier data as well as an on-site review of carrier records and facilities. Staff recommendations are Federal Universal Service Fund presented via the docket process to the Commissioners who make the final determination The Chief of Telecommunications, KCC, of KUSF support. provided an overview of the FUSF and the Federal Communications Commission (FCC) Reforms. Detailed information was provided to the Historically, the provisions in federal law to Committee regardi ng the types of expenditures develop a fund to maintain and enhance universal reviewed during an audit and the process for service referred to telephone service. However, in determining a carrier's revenue requirement. 2009, Congress directed the FCC to develop a Schedules from a recent audit demonstrated the National Broadband Plan to ensure ubiquitous

Kansas Legislative Research Department 5-4 2013 Telecommunications Study 3-6 access to broadband service, which has led to for broadband. The Order identified support for significant changes in the way federal universal broadband-capable networks as an express service funds will be deployed in the future. universal service principle and set five performance goals for reform of the FUSF, as In 2012, the FUSF disbursed $8.7 billion follows: nationwide among its four component programs. Telecommunications providers must contribute to • Preserve and advance availability of voice the FUSF through an assessment on their interstate service; and international revenues, and providers typically pass the cost of FUSF contributions to their • Ensure universal availability of modern customers. The programs are described below, networks capable of providing voice and along with the percent of funding each received in broadband service to homes, businesses, 2012: and community anchor institutions;

The High Cost Program allows carriers to • Ensure universal availability of modern recover part of the cost of providing • networks capable of providing advanced service in areas too sparsely populated or mobile and broadband service; too remote to otherwise have affordable telecommunications service ( 47.6 percent); • Ensure rates for broadband services and rates for voice services are reasonably comparable in all regions of the nation; The Lifeline Program provides a discount • and on the cost of service for qualifying low­ income households (25.1 percent); • Minimize the universal service contribution. • The Schools and Libraries Program, commonly referred to as E-rate, offsets the cost of telecommunications in eligible The initial budget for the first six years of FUSF reform was set at $4.5 billion. Price-cap schools and libraries (25.5 percent); and carriers and rate-of-return carriers are treated differently under the Order. • The Rural Health Care Program helps pay the cost of telecommunications service For price-cap carriers (in Kansas, AT&T and necessary for the provision of health care CenturyLink), existing high-cost FUSF support in rural areas ( 1.8 percent). was frozen at 20 II levels. An additional $300 million in CAF Phase l funding was made Kansas receives a large share of the total available, but to qualify for that support a carri er amount of FUSF support awarded. In 2012, had to provide broadband with actual speeds of 4 Kansas was the 14th largest recipient of support megabits per second (Mbps) download and I from all FUSF programs, receiving $218.4 million Mbps upload and deploy broadband to at least one in all, and the 4th largest recipient of High Cost currently unserved location for each $775 in Support, receiving $ 189.6 million for that program additional high-cost support received. Nationwide alone. in 2012, carriers initially accepted only $1 15 mil lion of the $300 million available - AT&T In November 20 II , the FCC issued its Reform declined the $47.9 million offered, and Order for the FUSF. The Order created the CenturyLink accepted $35 million, none of which Connect America Fund (CAF) to support was spent in Kansas. broadband and take the place of the legacy High­ Cost Program, created a Mobility Fund to support In the second round of Phase I funding fo r 30 or better wireless coverage, reformed price-cap carriers, a minimum of $300 million was I ntercarrier Compensation, and expanded the made available. Criteria was modified, and Lifeline Program to allow subsidies to be provided nationwide, the FCC approved $289 million in

Kansas Legislative Research Department 5-5 2013 Telecommunications Study support. AT&T was approved for $95 million, A Government Affairs representative for none designated for Kansas; CenturyLink was CenturyLink said the company receives KUSF approved for nearly $40 million, of which $81,474 suppmi only where the cost to provide voice will be spent in Kansas; and FairPoint service exceeds 125.0 percent of the benchmark Communications Missouri, Inc. was approved for cost of $36.45, which constitutes about 45.0 $2.9 million, of which $9 1,612 will be spent in percent of the company's rural, high cost Kansas. customers. CenturyLink receives no KUSF support for fiber, broadband, or incremental In Phase 2, in each state, each illCUt11_bent investment (the high cost associated with bringing price-cap carrier will be asked to make a state­ service to the last fe\v households). - level commitment to provide affordable broadband to all high-cost locations in its service territory. If The General Manager and CEO for Pioneer the incumbent declines to make the commitment, Communications spoke on behalf of the rural CAF suppoti will be distributed through independent providers, noting that in order to competitive bidding. access KUSF and FUSF suppoti, a rural independent can·ier must first spend money and For rate-of-return carriers, the FCC adopted invest in its network, then "prove" the investment new rules including, elimination of FUSF suppot1 to regulatory entities before cost recovery from in areas completely overlapped by an unsubsidized universal service funding programs is allowed. competitor; capping total FUSF support at $250 Access to KUSF and FUSF support has allowed per line per month; and elimination of, or new companies to build and maintain a robust rural limits on, reimbursement of various other costs network that provides service at afford~ble rates. previously eligible for support. Rate-of-return Both the KUSF and FUSF need to be modernized carriers receiving legacy high-cost suppoti or CAF and adapted to a broadband world. The support to offset lost intercarrier compensation independent carriers continue to experience high must offer broadband service with actual speeds of demand for wired broadband access, with high at least 4 Mbps download and I Mbps upload speeds and no limit on the amount of data that can upon a customer's reasonable request. be accessed during a billing period. However, the reforms put into place by the FCC in 20 II have Industry Comments on Changes to the caused a significant amount of regulatory KUSF and the FUSF uncertainty, have frustrated access to capital for network deployment, and have resulted in a significant slowdown of broadband deployment. Representatives of different types of carriers The FCC reforms, combined with the effect of HB were asked to address how changes in the KUSF 2201, will slow investment by rural independent and FUSF affect their business model as a carriers dramatically. They will receive requests telecommunications provider, and what the future for more bandwidth that neither they nor any other holds. carrier, including wireless, wi ll be able to provide. Without access to broadband, businesses and The Legislative Director for AT&T Kansas yo ung people are less attracted to rural areas, and noted that AT &T's support from the KUSF has the quality of life in rural areas suffers. Without a been significantly reduced over the years as its reliable KUSF, consumers in the most rural areas number of residential retail lines decreased by 81.0 of the state will not be able to afford the cost of percent from 2000 to 2013. Currently, the service. company receives about $5.5 million in KUSF support, but that support will be eliminated as of The Senior Counsel and Director of State January I, 2014, concurrent with the el imination Government Affairs for Sprint said changes made of AT&T's remaining retail regulations and legacy in 2013 to limit the amount paid from the KUSF obligations to serve. Because its wi reless and are positive, but Kansas wireless customers still landline customers pay into the KUSF, AT&T has pay too much fo r funds that go primarily to a vested interest in seeing that the Fund is landline companies. Even with reforms fully effectively and efficiently managed. implemented, the KUSF wi ll give out more than $40 million annually in high cost funds to

Kansas Legislative Research Department 5-6 2013 Telecommunications Study CenturyLink and the rural carriers. Sprint views • The adequacy of applicable Kansas the federal CAF, which is narrowly targeting its statutes and governmental review funds to companies to roll out broadband to processes to ensure the amounts of KUSF unserved and underserved areas, as a good use of moneys disbursed to recipients are not universal service funds. The KUSF should have excessive, including the possible need to goals consistent with the CAF, where efficiency is redefine the types of expenditures eligible expected as access recovery amounts are reduced for reimbursement under the KUSF, and annually, and funding is conditioned on building that appropriate incentives to produce out broadband in currently unserved areas. Sprint efficiencies are created; posed a series of questions for consideration by the Study Committee and KUSF recipients. • Identification of the quantifiable benefits of the KUSF program s. (What has the Scope Statement for· the KUSF Audit program achieved, and what impact has it had on local rates?); The Study Committee was charged with determining the scope of an efficiency and • Comparison of the KUSF programs to effectiveness audit of the KUSF. HB 220 I state-level universal service programs in required the audit to be administeredby the Kansas other states (Are other states Department of Revenue, consistent with the scope accomplishing the same thing in a determined by the Study Committee. The bill different way? Are any other states in the identified metrics that may be included in the process of changing their USF program? audit, and the Committee agreed to a draft scope at Do other states have the same mix of its first meeting. The Committee then invited independent telephone companies that written comments on the draft from all interested Kansas has?); and patties and the draft was further discussed at the Committee's second meeting before being modified and adopted. The audit scope adopted by • Comparison of FUSF distributions to the Committee follows. states, including analysis of the basis for Kansas' share. (Why is Kansas one of the largest recipients of FUSF, and given that AUDIT SCOPE Kansas receives substantial federal assistance, why is there a need for In addition to such other measures as the additional aid in the form of KUSF?) auditors deem appropriate for determining the overall efficiency and effectiveness of the Fund, For the detailed analysis of revenues, the audit should address broad oversight and expenditures and operations, specifi c metrics to be structural questions, as well as detailed analysis of included in the report, to the extent they do not actual revenue, spending and operations of KUSF involve proprietary information and are not, in the recip ients (per recipient and per program). A auditor's opinion, unduly burdensome to collect, detailed review of the Kan-Ed program is not include the following: necessary; a January 2012 audit by Legislative Post Audit that evaluated the effects of eliminating • Historical information on which Kan-Ed addressed operations and effecti veness of companies have received KUSF and in the program, and a January 2013 needs assessment what amounts, including calculation of contracted by the Kansas Department of annual per line, per linear mi le support Commerce entitled '·Building the Broadband (taking population density and/or Future" also contained an assessment of Kan-Ed geography into consideration in outcomes. interpreting the resul ts), or other metrics;

Metrics for the oversight and structure • Total amount of rural utilities service debt assessments inc! ude: and other debt with a nexus to the K USF, by recipient or related entity;

Kansas Legislative Research Department 5-7 2013 Telecommunications Study • Capital expenditures on each technology Note: To the extent a KUSF recipient is part of modality (eg. fiber, copper, wireless), a regional or national company, the analysis of including the supporting rationale; spending and operations should focus on Kansas operations. • Affiliate transactions and transfers with a nexus to the KUSF; ln addition, the report should include descriptive information that helps place the audit findings in context, such as: • Expenditure assessment to ensure the KUSF is only b-eing used to subsidize services authorized by Kansas statutes; • Historical background including when the K USF was created and for what purpose, statutory changes that have taken place • The number of telephone competitors in and why, and how the total size of the each exchange, and whether the exchange KUSF and the assessment rates have is supported by the KUSF; changed over ti me; and

• Economic assessment per exchange, i.e., • "Process" information describing the how do the revenues paid into the KUSF factors that determine how much KUSF and into the FUSF from each exchange support a company receives (including an compare with benefits each exchange explanation of how the cost of delivering receives from the KUSF and from the two-way voice communication is FUSF; separated out from costs of other services a company might provide, such as • Detailed review of the companies with broadband or TV), the role of the third­ high KUSF support per line, to identify party administrator vs the role of the KCC, the factors that contribute to this level of the process for requesting and receiving support; support, and an explanation of the KUSF accounting processes for rate-of-return • Documentation of the change in the carriers, including depreciation of assets. number of landlines over time, with fax and data lines separated from voice lines; Finally, the audit report should include and proposals for legislative consideration and action for adequate oversight of the KUSF. • "Stress test" on the KUSF as the number of land lines decreases by I 0.0 percent, CoNCLUSION AND R ECOMMENDATIONs 25.0 percent, and 50.0 percent. (How does the KUSF distribution process respond to these types of decreases - do payments The Committee's final re port, which is due decrease correspondingly?) December 31 , 2014, wi ll contain its conclusions and recommendations.

Kansas Legislative Research Department 5-8 2013 Telecommunications Study