Brief⁽¹⁾

S.B. 290 amends certain provisions in the Kansas Telecommunications Act of 1996 (Kansas Act). The bill would:

• �Amend the definition of "enhanced universal service" in the Kansas Act to conform to the definition of "advanced telecommunications capability" in the Federal Telecommunications Act of 1996 (Federal Act) (Section 1(q)). The Kansas Universal Service Fund (KUSF) may be used to reimburse eligible local telephone companies and other eligible telecommunications carriers for their investments in high-speed, switched, broadband capable services ("enhanced universal service") in high-cost, generally rural, areas of the state. The definition included in the bill is not technology specific. Correspondingly, references in the bill to touch-tone services were changed to tone dialing to make those services less technology specific (Section 5(e)).



• �Delete the requirements that the Kansas Corporation Commission (KCC) adopt, periodically review and, to the extent necessary, modify the definition of "universal service" and "enhanced universal service." However, the KCC would be required to establish and, to the extent necessary, modify rules and guidelines to determine what services qualify as enhanced, in accordance with the definition proposed in the bill (Section 3, new (h)). Two amendments are made to the definition of "universal service" to more closely conform that definition to the definition adopted by the Federal Communications Commission (FCC) (Section 1(p)).



• �Delete the existing approval procedures for deployment of enhanced universal service. These procedures would be replaced by a requirement for the KCC to establish rules and guidelines by June 30, 2000, to address access to enhanced telecommunications services and information services that are reasonably comparable between urban and rural areas throughout Kansas. (This language corresponds to language used in the Federal Act.) Local telephone companies would be reimbursed from the KUSF if they provide verification, and information concerning timing, of deployment-related expenditures. The deadline of July 1, 2003, in existing law governing deployment of enhanced universal services would be eliminated (Section 5 (a)).



• �Delete references to "revenue neutrality" in existing law. The concept of "revenue neutrality" in this context is the replacement of revenues lost by a local telephone company through reduced intrastate access charges by other revenues to make that company "whole" (Section 5 (g), (h)) .



• �Amend the Kansas Act to authorize the KCC to bring intrastate access rates into parity with interstate rates and structure, in a cost-based manner, after the initial three-year phase-in has terminated (Section 5 (c)). This amendment corresponds to the proposed deletion of the revenue neutrality concept in the previous amendment. The argument is that revenue neutrality in rate rebalancing (the activity of reducing intrastate access charges and recovering such revenues through increases in local rates or the KUSF) is not compatible with a cost-based KUSF.



• �Amend the Kansas Act to authorize the KCC to conduct audits and investigations and obtain cost and revenue information deemed necessary to carry out the Commission's obligation under the Kansas and Federal Acts. However, the bill would prohibit the KCC from using any audit or investigation and related information to regulate the earnings of a price cap company (currently, Southwestern Bell and Sprint). Regulation of earnings in the bill would not include an adjustment to KUSF support provided to a price cap company so long as that adjustment is based on the cost of providing universal service and enhanced universal service (Section 5 (u)).



• �Authorize any company that has elected price cap regulation to rescind that election and return to rate-of-return regulation at any time (Section 5 (b)).



• �Appear to require the KCC to complete its cost of service docket on Southwestern Bell by October 1, 1999. After completion of this docket (on or before October 1, 1999), all cost review dockets, including those pertaining to companies other than Southwestern Bell, must be completed within 180 days of initiation or application (Section 6 (d)).



• �Amend the Kansas Act to change the formula governing disbursements from the KUSF to Southwestern Bell, effective October 1, 1999, if company specific cost-based support has not been established through a Commission order by that date. Absent such an order, on and after October 1, 1999, Southwestern Bell would receive $36.88 per high cost access line per year (the amount established for reimbursement to other competing carriers) but may petition for additional funding if cost justified. If the company requests additional support, it could petition the KCC within 60 days of having its KUSF funding reduced. If an increase is approved, the additional amount would be paid to the company retroactive to the date the application is filed (Section 6 (d)).



• �Exempt Sprint from the $36.88 per access line formula as the company currently receives federal universal service support (Section 6 (d)). The KCC would still be required to determine cost-based universal service support for Sprint but, until that determination is made, Sprint would continue to receive Kansas universal service support on a revenue neutral basis.



• �Require any company to specifically identify on its customers' bills the amount assessed those customers for KUSF support (Section 6 (g)).



• �Change the policy statement governing the Kansas Act to reflect recommendations made by the KUSF Working Committee (Section 2).



• �Delete certain provisions that are no longer relevant. Specifically, the Hill City exchange is now owned by Rural Telephone Company (Sections 1(h) and 7 (a); network infrastructure plans had to be filed with the KCC on or before January 1, 1997 (Section 5 (a) and Section 3, old (d); and the KCC no longer enforces slamming restrictions (Section 3, old (j)). (That authority was shifted to the Attorney General's office pursuant to passage of 1998 House Sub. for S.B. 212.)



• �Conform language concerning implementation of intrastate dialing parity with the Federal Act and rules and regulations of the FCC (Section 4(e) and (f)). This amendment would correspond to a ruling of the U.S. Supreme Court on January 25, 1999, authorizing the FCC to order implementation of intrastate dialing parity.



• �Authorize the KCC to submit its report on the regulatory framework in Kansas, already required in the Kansas Act, by posting its contents on the agency's Internet home page (Section 3, new (j)).



• �The Act would take effect upon publication in the Kansas Register (Section 9).

Background

The 1996 Kansas Legislature enacted the Kansas Telecommunications Act of 1996 (hereafter referred to as the Kansas Act). That legislation authorized creation of the KUSF in K.S.A. 66-2008. The KUSF was subsequently established in March 1997, in accordance with provisions of that statute and an order issued by the KCC in December 1996. The KUSF was created as an explicit funding mechanism paralleling the explicit nature of the federal universal fund. The Kansas Act also created the regulatory framework to move delivery of intrastate telecommunications services from a monopolistic environment to a competitive environment. To that end, various sections of the Kansas Act specify the necessary conditions for that transition to occur, specifically, activities related to resale terms and conditions governing local telephone companies (Southwestern Bell, Sprint/United) (K.S.A. 66-2003), and features of price cap regulation for local telephone companies (Southwestern Bell, Sprint/United) (K.S.A. 66-2005).

The most notable example of the meshing of objectives of competition and universal service was the Legislature's treatment of intrastate access charges in the Kansas Act. A step in the transition to a more competitive environment was the mandated reduction of intrastate access charges which have historically subsidized local rates (K.S.A. 66-2005(c)). Customers' local rates, in general, have not been sufficiently high to cover all the booked costs of the local telephone company in operating and maintaining the local telephone network. Some of those costs have been recovered through charges to long distance companies, such as AT&T, Sprint, and MCI, which use the local networks to originate and complete their long distance calls. These charges are called access charges and are included in the costs long distance companies incur in providing long distance service. The FCC has been reducing those access charges under its jurisdiction (interstate access charges) in order to move access rates to cost and reduce subsidies paid by long distance companies to support local service. Reduced access charges, in turn, have the effect of lowering long distance rates. Such an action, both at the federal and state level, is considered a precondition for the development of competition among telecommunications service providers.

Switched access charges under Kansas' jurisdiction (intrastate

access charges) have been historically higher than interstate levels. Consequently, the Kansas Act required intrastate switched access rates to be reduced over a three-year period with the objective of equalizing interstate and intrastate rates in a "revenue neutral, specific and predictable manner" (K.S.A. 66-2005(c)). What revenue neutrality essentially means in this context is that any revenue losses experienced by a local telephone company through reduced intrastate access charges must be replaced by other revenues to make that company "whole." The KCC elected to initially compensate local telephone companies for those losses through disbursements from the KUSF and then to perform cost studies for each company to raise local rates to a reasonable level and adjust KUSF disbursements so they are based on cost. The revenues used to initially capitalize the Fund were recovered from all providers of telecommunications services, including wireless providers, on a revenue neutral basis (K.S.A. 66-2008). All providers who must contribute to the KUSF are authorized (but not required) to collect the assessments from their customers. The 1998 amendments to the Kansas Act imposed a limit on the percentage governing monthly collections from customers.

The introduced version of S.B. 290 was drafted in response to concerns raised by certain members at a meeting of the Senate Commerce Committee on January 26, 1999. At that meeting, staff of the KCC were asked for recommendations on measures to reduce the size of the KUSF and expedite the process of obtaining information to make the Fund cost-based. The KCC staff assisted in drafting the introduced version of the bill and reviewed the provisions of the bill for the Senate Commerce Committee.

In testimony on the introduced version of the bill, several conferees supported (Representative Jim Morrison, Mike Lura, Citizens' Utility Ratepayer Board) or took issue with the proposed amendments to the definition of enhanced universal service (Susan Myers, Grant Consultant for Hays Medical Center; Dr. Ed Hammond, President, Fort Hays State University). However, most of the deliberation on the bill focused on the proposed express authority to the KCC to conduct audits and obtain cost and revenue information and the proposed change in reimbursements from the KUSF for price cap regulated companies (Southwestern Bell and Sprint). Conferees opposed to those provisions were Shawn McKenzie, President, Southwestern Bell-Kansas and Richard Lawson, Sprint. Conferees representing CURB, AT&T, and CompTel-Kansas, testified in support of the introduced version of the bill and, specifically, of the proposed changes to the regulation of price cap companies.

The Senate Committee Chairperson, Senator Alicia Salisbury, appointed a subcommittee to review the bill and testimony from the hearing and propose any amendments, if needed.

The Senate Committee endorsed the subcommittee's amendments and proposed additional amendments to: require the KCC to periodically establish, and, to the extent necessary, modify rules and guidelines to determine what services qualify as enhanced universal service; authorize a price cap company (Southwestern Bell and Sprint) to rescind price cap regulation at any time; clarify that any future rebalancing might involve moving toward parity with interstate flat rate access charges, as well as interstate switched access charges; replace references to touch tone service with tone dialing service; specify what may be subject to any audit or investigation and information used with respect to price cap regulated companies; require the formula of $36.88 to Southwestern Bell for high cost access lines to take effect on October 1, 1999, and not upon publication in the Kansas Register, if a company specific cost-based formula has not been established by that date; exempt Sprint from the $36.88 per year formula; and require that customers' assessments for KUSF support be itemized on their bills. Other amendments were technical.

1. *Supplemental notes are prepared by the Legislative Research Department and do not express legislative intent. The supplemental note and fiscal note for this bill may be accessed on the Internet at http://www.ink.org/public/legislative/bill_search.html