California Advanced Services Fund Program - Reissued

CALIFORNIA PUBLIC UTILITIES COMMISSION Reissued Audit Report CALIFORNIA ADVANCED SERVICES FUND PROGRAM January 1, 2016, through December 31, 2018 BETTY T. YEE California State Controller April 2021 BETTY T. YEE California State Controller April 13, 2021 Erika Contreras, Secretary of the Senate State Capitol, Room 3044 Sacramento, CA 95814 Dear Ms. Contreras: Pursuant to Public Utilities Code section 912.2(a), the State Controller’s Office performed the third interim performance audit of the California Advanced Services Fund (CASF) Program for the period of January 1, 2016, through December 31, 2018. This reissued report updates our previous report dated March 3, 2018. The transmittal letter of the previous report incorrectly stated that the audit period was January 1, 2016, through June 30, 2018, instead of January 1, 2016, through December 31, 2018. We also added additional detail of the audit procedures performed to the Objective, Scope, and Methodology section of the report. Our conclusion remains the same. We verified the current status of program operations and progress in implementing legislative requirements. We determined that:  The California Public Utilities Commission (CPUC) implemented the CASF Program according to state laws and CPUC rules when awarding grants, denying applications, and prioritizing projects; and  The CASF Program successfully increased deployment of broadband service to all Californians. However, we found that the CPUC did not follow its internal policies and procedures for awarding CASF Program grants and maintaining appropriate supporting documentation. In addition, expanding the CASF Program’s scope would improve the program’s likelihood of successfully increasing deployment of broadband services to all Californians. Details are provided in the Findings and Recommendations section of this report. If you have any questions, please contact Andrew Finlayson, Chief, State Agency Audits Bureau, by telephone at (916) 324-6310, or by email at afinlayson@sco.ca.gov. Sincerely, Original signed by MICHAEL REEVES, CPA Acting Chief, Division of Audits Erika Contreras, Secretary of the Senate -2- April 13, 2021 MR/as cc. Rob Osborn, Director Communications Division California Public Utilities Commission Selena Huang, Program Manager Communications Division California Public Utilities Commission Lindsey Tong, Analyst Communications Division California Public Utilities Commission Cindy McReynolds, Analyst Communications Division California Public Utilities Commission Melanie Balfour, Analyst Communications Division California Public Utilities Commission Sue Parker, Chief Clerk California State Assembly Amy Leach, Minute Clerk California State Assembly Cara L. Jenkins, Legislative Counsel California Office of Legislative Counsel California Public Utilities Commission California Advanced Services Fund Program Contents Reissued Audit Report Summary ............................................................................................................................ 1 Audit Authority .................................................................................................................. 1 Background ........................................................................................................................ 1 Objectives, Scope, and Methodology ............................................................................... 4 Conclusion .......................................................................................................................... 9 Follow-up on Prior Audit Findings .................................................................................. 9 Views of Responsible Officials .......................................................................................... 9 Reason for Reissuance ....................................................................................................... 9 Restricted Use .................................................................................................................... 10 Findings and Recommendations ........................................................................................... 11 Attachment 1—California Public Utilities Commission’s Response to Draft Audit Report Attachment 2—2018 Annual Report – California Advanced Services Fund, Issued April 2019 California Public Utilities Commission California Advanced Services Fund Program Reissued Audit Report Summary Pursuant to Public Utilities Code (PUC) section 912.2(a), the State Controller’s Office (SCO) performed the third interim performance audit of the California Advanced Services Fund (CASF) Program for the period of January 1, 2016, through December 31, 2018. We verified the current status of program operations and progress in implementing legislative requirements. We determined that:  The California Public Utilities Commission (CPUC) implemented the CASF Program according to state laws and CPUC rules when awarding grants, denying applications, and prioritizing projects; and  The CASF Program successfully increased deployment of broadband service to all Californians. However, we determined that the CPUC did not follow its internal policies and procedures for awarding CASF Program grants and maintaining appropriate supporting documentation. In addition, expanding the CASF Program’s scope would improve the program’s likelihood of successfully increasing deployment of broadband service to all Californians. PUC section 912.2(a) requires the CPUC’s five-member board Audit (Commission) to conduct interim financial audits and a final financial Authority audit, in addition to interim performance audits and a final performance audit. These audits of the implementation and effectiveness of the CASF are “to ensure that funds have been expended in accordance with the approved terms of the grant awards and loan agreements pursuant to Section 281.” The performance audit was performed by the SCO on behalf of the CPUC. The authority to conduct this audit is given by Interagency Agreement No. 19NS1086, dated February 29, 2020, between the SCO and CPUC, which provides that the SCO conduct the third interim financial audit (Audit of CASF Program Financial Transactions – Revenue and Expenditures) and third interim performance audit(s) of the CASF. Further authority is provided by Government Code section 12410, which states, in part: The Controller shall superintend the fiscal concerns of the state. The Controller shall audit all claims against the state, and may audit the disbursement of any state money, for correctness, legality, and for sufficient provisions of law for payment. The CPUC implemented the CASF Program on December 20, 2007, when Background it adopted Decision (D.) 07-12-054, in accordance with PUC section 701. The CPUC allocated $100 million to the program, funded by a 0.25% surcharge on revenues collected from end-users for intrastate telecommunications services, effective January 1, 2008. The CASF -1- California Public Utilities Commission California Advanced Services Fund Program Program provides grants to bridge the “digital divide” in unserved and underserved areas of California. The CPUC adopted the CASF Program application requirements, timelines, and scoring criteria for parties to qualify for broadband project funding in Resolution T-17143, issued on June 12, 2008. The Legislature reaffirmed the CPUC’s creation of the CASF Program with a program sunset date of January 1, 2013, in Senate Bill 1193, which Governor Schwarzenegger signed on September 27, 2008. The CASF Program is codified in PUC section 281. The Legislature passed, and the Governor signed into Law, several bills to expand PUC section 281, including:  SB 1040 (Padilla, Chapter 317, Statutes of 2010) – extended the program indefinitely; increased CASF Program funding to $225 million; established the Broadband Infrastructure Grant Account (Infrastructure Grant Account), the Rural and Urban Regional Broadband Consortia Grant Account (Consortia Account) and the Broadband Infrastructure Revolving Loan Account (Infrastructure Loan Account); and allocated $100 million to the Infrastructure Grant Account, $10 million to the Consortia Account, and $15 million to the Infrastructure Loan Account;  SB 740 (Padilla, Chapter 522, Statutes of 2013) – added an additional $90 million to the Infrastructure Grant Account, increasing total CASF Program funding to $315 million;  Assembly Bill 1299 (Bradford, Chapter 507, Statutes of 2013) – established the Broadband Public Housing Account (Public Housing Account), which was funded by reallocating $20 million from the Infrastructure Grant Account and $5 million from the Infrastructure Loan Account. Pursuant to AB 1299, any remaining funds not awarded from the Public Housing Account by December 31, 2016, would be returned to the original funding accounts, proportionally;  AB 1262 (Wood, Chapter 242, Statutes of 2015) – reallocated $5 million from the Infrastructure Loan Account to the Consortia Account;  SB 745 (Hueso, Chapter 710, Statutes of 2016) – postponed the date for the return of unused funds from the Public Housing Account to the Infrastructure Grant Account and the Infrastructure Loan Account to December 31, 2020; and  AB 1665 (Garcia, Chapter 851, Statutes of 2017) – eliminated the Infrastructure Loan Account as of January 1, 2018, and directed that funds remaining in that account be transferred to the Infrastructure Grant Account; extended the Infrastructure Grant Account to include funding to households for line-extension with the aggregate amount of grants awarded not to exceed $5 million (thus creating the Broadband Line Extension Program); created the Broadband Adoption Account (Adoption Account); and allocated $300 million to the Broadband Grant Account, $10 million to the Consortia Account, and $20 million to the Broadband Adoption Account. The additional $330 million of funding is to be collected beginning January 1, 2018 and continuing through the 2022 calendar year. -2- California Public Utilities Commission California Advanced Services Fund Program PUC section 281(a) states, in part: The commission shall develop, implement, and administer the California Advance Services Fund program to encourage deployment of high- quality advanced communications services to all Californians that will promote economic growth, job creation, and the substantial social benefits of advanced information and communications technologies… Pursuant to PUC section 281(b): The goal of the program is, no later than December 31, 2022, to approve funding for infrastructure projects that will provide broadband access to no less than 98 percent of California households in each consortia region... Pursuant to PUC section 281(c), the CASF is allocated to four accounts within the fund, with the following purposes:  The Infrastructure Grant Account assists in financing the building and/or upgrading of broadband infrastructure in areas that are unserved by existing broadband providers.  The Consortia Account provides grants to eligible consortia “to facilitate deployment of broadband services by assisting infrastructure applicants in the project development or grant application process.”  The Public Housing Account provides grants and loans to eligible publicly supported communities, either to finance projects to connect a broadband network to that publicly supported community, or to support programs designed to increase adoption rates of broadband services by residents of that publicly supported community.  The Adoption Account provides grants to increase publicly available or after-school broadband access and digital inclusion. The Line Extension Program, which provides funding to households that would otherwise not be able to afford a line extension to the property, is funded through the Broadband Grant Account PUC section 912.2 (a) requires the CPUC to conduct one interim financial audit and a final financial audit, and one interim performance audit and a final performance audit, of the implementation and effectiveness of the CASF “to ensure that funds have been expended in accordance with the approved terms of the grant awards and loan agreements pursuant to Section 281.” PUC section 912.2 (a) further requires the CPUC to report its interim findings to the Legislature by April 1, 2020, and to report its final findings to the Legislature by April 1, 2023. The reports must also include “an update to the maps in the final report of the California Broadband Task Force and data on the types and numbers of jobs created as a result of the program.” The CPUC makes all CASF Program reports available on its website at the following URL: https://www.cpuc.ca.gov/General.aspx?id=9226 -3- California Public Utilities Commission California Advanced Services Fund Program The first interim performance audit report, submitted in April 2011, is available at the following URL: https://www.cpuc.ca.gov/uploadedFiles/CPUC_Public_Website/Cont ent/Utilities_and_Industries/Communications_- _Telecommunications_and_Broadband/Reports_and_Presentations/ VolumeIPerformanceAudit.pdf The second interim performance audit report, submitted in April 2017, is available at the following URL: ftp://ftp.cpuc.ca.gov/Telco/CASF/Reports%20and%20Audits/S16CS F0002%20FINAL%20OSBLessAttachment3.pdf The CPUC’s 2018 Annual Report on the activities conducted by the CASF Program, published in April 2019, is available at the following URL: https://www.cpuc.ca.gov/uploadedFiles/CPUCWebsite/Content/Abo ut_Us/Organization/Divisions/Office_of_Governmental_Affairs/Leg islation/2019/CASF%202018%20Annual%20Report%20April%202 019.pdf The 2018 Annual Report is also included in this report as Attachment 2. General Information about the Entity The CPUC’s Communications Division performs administrative duties related to the CASF Program, including, but not limited to, reviewing CASF Program grant applications and recommending approval,1 reviewing grantee progress reports, and approving grantee payment requests. The Communications Division also oversees the Telecommunications and User Fee Filing System for the electronic reporting and remittance of surcharges and user fees due to the CPUC from telecommunications corporations and Voice over Internet Protocol providers. The CPUC engages interdepartmental and external consulting and professional services including, but not limited to, financial eligibility reviews of loan applications; loan processing and servicing; processing and validation of broadband data collected from California’s service providers; expertise related to Geographic Information System mapping for the California Interactive Broadband Map; and environmental reviews in accordance with the California Environmental Quality Act. Objectives, Scope, We conducted this performance audit of the CASF Program to: and Methodology  Verify the current status of program operations, and progress in implementing legislative requirements;  Determine whether the CPUC implemented the CASF Program 1 D. 18-06-032 assigns Communications Division staff the task of approving applications that meet certain criteria for expedited review. -4- California Public Utilities Commission California Advanced Services Fund Program according to state laws and CPUC rules when awarding grants, denying applications, and prioritizing projects; and  Determine whether the CASF Program successfully increased deployment of broadband service to all Californians. For this third interim performance audit, the scope is from January 1, 2016, through December 31, 2018. The CASF Program is reported to the Legislature on a calendar-year basis. The 2018 Annual Report – California Advanced Services Fund (2018 Annual Report) was issued in April 2019. The report covers the period of January 1, 2018, through December 31, 2018. The 2018 Annual Report covers the scope period of this audit and contains the cumulative totals necessary to meet the objectives of this audit. Therefore, we determined that the audit methodology should be applied only to the data contained in the 2018 Annual Report. Figure 1 summarizes the grants authorized and awarded since inception of the CASF Program, as reported in the 2018 Annual Report. Figure 1 CASF Grants Awarded as of December 31, 2018 Amount Amount Account Authorized Awarded Since Inception Since Inception Infrastructure Grant $ 565,000,000 $ 236,184,034 Consortia 2 5,000,000 1 2,549,852 Public Housing 2 5,000,000 1 4,357,085 Adoption 2 5,000,000 2,605,647 Total $ 640,000,000 $ 265,696,618 The CPUC’s Utility Audit, Finance, and Compliance Bureau (UAFCB) issued the first interim independent performance audit of the CASF for the period of January 1, 2008, through December 30, 2010, Issued April 2011. The report concluded that CASF Program funds were expended in compliance with PUC sections 281 and 282, other state laws, and CPUC directives. As the 2018 Annual Report’s audit population includes transactions that were also included in UAFCB’s report and in SCO’s second interim performance audit report for the period of January 1, 2008, through December 31, 2015, we accepted UAFCB’s conclusion that those balances meet the audit objective for the first interim period. During this audit, we reviewed contracts awarded between January 1, 2016, and December 31, 2018. We assessed the implementation and effectiveness of the CASF to ensure that funds were expended in accordance with the approved terms of the grant awards and loan agreements. We also reviewed data, if available, on the types and numbers -5- California Public Utilities Commission California Advanced Services Fund Program of jobs created as a result of CASF Program projects. The audit covered the following accounts:  The Infrastructure Grant Account;  The Infrastructure Loan Account;  The Consortia Account;  The Public Housing Account; and  The Adoption Account. To achieve our audit objectives, we:  Reviewed three successful grant applications in each CASF grant account, and confirmed that CPUC staff made recommendations in accordance with PUC section 281, other state laws, and CPUC directives. Provided process improvements, when identified;  Reviewed progress reports, payment invoices, and completion reports for grant awards in addition to communications with CPUC staff and management to confirm that CPUC oversight was in accordance with PUC sections 281, 282, and 912.2(a), other state laws, and CPUC directives. Provided process improvements, when identified;  Analyzed transactions during the Audit of Financial Transactions; Revenue and Expenditures to confirm that CASF Program funds were expended in accordance with the approved terms of the grant awards and loan agreements, and to confirm that the CASF Program increased deployment of broadband service consistent with PUC section 281;  Reviewed survey data on the types and numbers of jobs created, both direct and indirect, and other indicators of economic growth. Considered the contributions to broadband deployment made by recipients of grants and loans from each CASF account, and determined whether certain awardees or accounts made no substantial contribution;  Conducted inquiries, interviews, and surveys of sample communities, City Councils, etc and submitted data requests to gain an understanding of whether the approved CASF Program projects helped promote economic growth, job creation, and the social benefits of advanced information and communications technologies; and  Assessed CPUC’s internal controls related to the CASF Program by reviewing policies and procedures, guidelines, grant agreements, contracts, expenditure reports and supporting documents. We reviewed the following internal control components and principles that are significant to the audit objectives: o Control Environment  The oversight body and management should demonstrate a commitment to integrity and ethical values.  The oversight body should oversee the entity’s internal control system.  Management should establish an organizational structure, assign responsibility, and delegate authority to achieve the -6- California Public Utilities Commission California Advanced Services Fund Program entity’s objectives.  Management should demonstrate a commitment to recruit, develop, and retain competent individuals.  Management should evaluate performance and hold individuals accountable for their internal control responsibilities. o Risk Assessment  Management should define objectives clearly to enable the identification of risks and define risk tolerances.  Management should identify, analyze, and respond to risks related to achieving the defined objectives.  Management should consider the potential for fraud when identifying, analyzing, and responding to risks.  Management should identify, analyze, and respond to significant changes that could impact the internal control system. o Control Activities  Management should design control activities to achieve objectives and respond to risks.  Management should design the entity’s information system and related control activities to achieve objectives and respond to risks.  Management should implement control activities through policies. o Information and Communication  Management should use quality information to achieve the entity’s objectives.  Management should internally communicate the necessary quality information to achieve the entity’s objectives.  Management should externally communicate the necessary quality information to achieve the entity’s objectives. o Monitoring  Management should establish and operate monitoring activities to monitor the internal control system and evaluate the results.  Management should remediate identified internal control deficiencies on a timely basis.  Conducted limited tests of those controls deemed significant to the audit objective in order to determine whether the controls were functioning as intended; and whether CPUC was in compliance with written internal policies and procedures, and applicable provisions of laws, regulations, and established criteria;  Tested a non-statistical (judgmental) sample of transactions associated with project expenditures from the Infrastructure Grant Account, -7- California Public Utilities Commission California Advanced Services Fund Program Consortia Account, Public Housing Account, and Adoption Account; and traced those transactions to supporting documentation, as summarized in Figure 2; Figure 2 CASF Grants Awarded, CY 2016–CY 2018 Grants Amount Grants Amount Account Awarded Awarded Sampled Sampled Infrastructure Grant 16 $ 115,593,967 3 $ 7,838,642 Consortia 17 4,651,634 3 797,500 Public Housing 335 10,726,711 3 143,850 Adoption 48 2,714,229 3 142,323 Total 416 $ 133,686,541 12 $ 8,922,315  Reviewed and analyzed the CPUC’s process for awarding the grant awards reported in the CASF Program annual reports since CY 2008, as shown in Figure 3. Judgmentally selected a non-statistical sample of grant awards and performed limited tests of controls to confirm and validate that documented processes and procedures were functioning as designed; Figure 3 Remaining Balance of CASF Grants to be Awarded Amouont Amount Balance to be Account Authorized Awarded Awarded Since Inception Since Inception Infrastructure Grant $ 565,000,000 $ 236,184,034 $ 328,815,966 Consortia 2 5,000,000 1 2,549,852 $ 12,450,148 Public Housing 2 5,000,000 1 4,357,085 $ 10,642,915 Adoption 2 5,000,000 2,605,647 $ 22,394,353 Total $ 640,000,000 $ 265,696,618 $ 374,303,382 o Tested the California State Accounting and Reporting System to ensure that the system can identify Program Cost Account codes related to revenues and expenditures, as indicated by the CPUC’s written policies and procedures and internal control interviews; o Tested the same targeted selection to determine whether the amounts claimed were adequately supported and in compliance with PUC sections 281 and 282, other state laws, and CPUC directives; o Reviewed authorized grants not yet awarded; as of December 31, 2018, a balance of $374,303,382 has not been awarded. We did not audit CPUC’s financial statements. We limited our audit scope to planning and performing audit procedures necessary to achieve our audit objective. In addition, our review of internal control was limited to gaining an understanding of the transaction flows and financial- management accounting system, and performing limited tests of controls regarding CASF’s ability to accumulate and segregate reasonable and allowable program costs. -8- California Public Utilities Commission California Advanced Services Fund Program We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. During our audit, we verified the current status of program operations and Conclusion progress in implementing legislative requirements. We determined that:  The CPUC implemented the CASF Program according to state laws and CPUC rules when awarding grants, denying applications, and prioritizing projects; and  The CASF Program successfully increased deployment of broadband service to all Californians. However, we found that the CPUC did not follow its internal policies and procedures for awarding CASF Program grants and maintaining appropriate supporting documentation. In addition, expanding the CASF Program’s scope would improve the program’s likelihood of successfully increasing deployment of broadband services to all Californians. Details are provided in the Findings and Recommendations section of this report. Follow-up on The CPUC has satisfactorily resolved the findings noted in our prior audit report for the period of July 1, 2010, through December 31, 2015, issued Prior Audit on March 30, 2017. Findings Views of We issued a draft report on December 1, 2020. Robert Osborn, Director, Communications Division, responded by letter dated December 10, 2020 Responsible (Attachment 1), disagreeing with Finding 1 and partially agreeing with Officials Finding 2, and indicating that the Communications Division has taken steps to correct the deficiency noted. We will follow up during the next CASF audit to verify that these corrective actions were adequate and appropriate. This report has been reissued to correct the audit period in the transmittal Reason for letter from January 1, 2016, through June 30, 2018, to January 1, 2016, Reissuance through December 31, 2018. We also added additional detail of the audit procedures performed to the Objective, Scope, and Methodology section. Our conclusion remains the same. -9- California Public Utilities Commission California Advanced Services Fund Program Restricted Use This report completed the legislatively required third interim performance audit and is solely for the information and use of the CPUC, the California State Legislature, and the SCO. It is not intended to be and should not be used by anyone other than these specified parties. This restriction is not intended to limit distribution of this audit report, which is a matter of public record, and is available on the SCO website at www.sco.ca.gov. Original signed by MICHAEL REEVES, CPA Acting Chief, Division of Audits April 13, 2021 -10- California Public Utilities Commission California Advanced Services Fund Program Findings and Recommendations FINDING 1— The CPUC did not follow its internal policies and procedures for awarding CASF Program grants and maintaining appropriate supporting CPUC did not documentation. follow internal policies and We reviewed 12 of the 416 contracts awarded and found that the scoring procedures sheet for one awarded grant from the Consortia Account did not appear to meet the threshold for approval. In addition, the scoring sheet was incomplete. Communications Division representatives stated that the documentation used to make the final decision to award the contract may have been misplaced during a system transition. Due to this lack of supporting documentation, we cannot make a determination on whether this grant adequately and effectively fulfills the CASF Program’s stated goals. We determined that this instance does not represent a significant internal control deficiency. However, the lack of supporting documentation could indicate a reasonable possibility that noncompliance with policies and procedures, provisions of laws, or regulations will not be prevented, or detected and corrected, on a timely basis. Government Code section 13401 (a) states, in part: (3) Effective systems of internal control provide the basic foundation upon which a structure of public accountability must be built. (4) Effective systems of internal control are necessary to ensure that state resources are adequately safeguarded, monitored, and administered. (5) Systems of internal control are necessarily dynamic and must be routinely monitored, continuously evaluated, and, where necessary, improved. Pursuant to Government Code section 13401 (b) (1) “Each state agency must maintain effective systems of internal control as an integral part of its management practices.” Recommendation We recommend that the CPUC:  Ensure that internal controls over contract awarding are functioning as intended; and  Follow its own policies and procedures for documenting and awarding grants, to ensure that all awarded grants meet the threshold for approval and are documented as such. CPUC’s Response CD [Communications Division] disagrees with SCO’s finding that the CPUC did not follow its internal controls and stated policies and procedures in regards to awarding CASF Program grants and maintaining appropriate supporting documentation of CASF Program grant awards. Furthermore, CD disagrees with SCO’s assessment that -11- California Public Utilities Commission California Advanced Services Fund Program the lack of documentation could indicate a reasonable possibility that noncompliance with policies and procedures, provisions of laws, or regulations will not be prevented, or detected and corrected, on a timely basis to the overall program. SCO’s finding was based on a single misplaced Consortia Account scoring sheet for Gold Country Broadband Consortium (GCBC). The CASF Consortia Account has Administrative Manuals and policies and procedures in place for documenting and awarding grant awards to ensure all awarded grants meet the threshold for approval and are documented as such. The documentation for the Consortia Account score sheets were complete overall. The GCBC met the threshold for approval and the scoring sheet was completed, which is demonstrated because the grant was approved in Resolution T-17538 with other consortia grants. Specifically, page 8 of Resolution T-17538 states that GCBC scored at least 70 of 100 points with clear and detailed proposals. It appears likely that the missing/incomplete score sheet was due to a problem with the fileserver that stored the program documentation. In June 2019, CD discovered that some files in the CASF fileserver were either deleted or missing. CD has since worked with ITSD [Information Technology Services Division] to resolve the issue and restore files. Specifically, CD has addressed the file storage issue and has implemented a new system that backs up all CASF Account files. Per ITSD, it is currently backing up all servers, databases, and files using a newly implemented Rubrik technology to address shortfalls in previous backup and restore capabilities. The Rubrik technology is the Commission’s new standard as of December 2019 that was purchased to protect the enterprise environment. It is currently in place and functioning. In addition, all program documentation is now stored in Commission-provided secure systems. SCO Comment Our finding and recommendation remain unchanged. The SCO understands that certain files and documentation may have been misplaced. It is possible that, under normal non-Covid-19 circumstances, such documentation would have been found or recovered. The SCO determined that this is an internal control finding because the documentation was not readily available. The Communications Division should ensure that such processes exist because the performance measures of these contracts are subjective in nature. Past contractors have been subject to litigation; therefore, it is important to ensure that controls are in place. FINDING 2— Expanding the CASF Program’s scope would improve the program’s Expanding CASF likelihood of successfully increasing deployment of broadband services to all Californians. The CASF Program’s stated goal is to provide broadband Program scope access to no less than 98% of California households in each consortia would improve the region by December 31, 2022. The 2018 Annual Report showed that few likelihood of unserved areas remain. However, it may not be economically feasible to achieving program deploy broadband to the remaining unserved areas. In addition, the number goals of grant applications has been declining steadily, as have the number of projects that meet CASF Program goals as stated. -12- California Public Utilities Commission California Advanced Services Fund Program CPUC D. 07-12-054 defines an unserved area as “any service region in which no facilities-based provider offers any level of broadband service such that internet connectivity can only be achieved through dial-up service.” CPUC D. 07-12-054 defines an underserved area as one in which “in which no facilities-based provider offers broadband service at the benchmark transmission speeds of at least 3 [MBPS] upload and 1 MBPS download.” PUC section 281 (b) defines an “unserved household” as one “for which no facility-based broadband provider offers broadband service at speeds of at least 6 megabits per second (mbps) downstream and one mbps upstream.” As noted in the 2018 Annual Report, the definition of “underserved” was changed to “unserved-slow-service” to conform to current statute. At present, few unserved areas remain. The 2018 Annual Report shows that as of December 31, 2017, 96.5% of households in each consortia region of California had broadband speeds of at least 6 MBPS/1MPBS. However, it may not be economically feasible to reach all households in California that are still unserved or unserved-slow-service. Of the unserved households, 59.3% are urban and 40.7% are rural. Although there are fewer unserved households in rural areas, the costs of deploying broadband in rural areas may be disproportionately higher due to difficult terrain and distance from provider facilities. One project noted in the 2018 Annual Report will provide wireline (DSL, cable modem, and fiber to the home) access to 458 unserved households, at an average cost of $16,784. Project costs also depend on the technology used to provide connections. As noted in the 2018 Annual Report, one project will provide fixed wireless access (via radio signals from cellular towers) to 1,537 unserved households at a projected cost of $742 per household. Another project will use abandoned hybrid fiber-coaxial infrastructure to provide broadband internet service to 5,480 unserved households at a projected cost of $93 per household. Our audit found that the number of applications each year has been declining consistently since 2008. The decline in applications coincides with an increase in CASF Program revenue being collected. Although the CASF Program has occasionally experienced reduced ability to collect revenue, it has been able to accumulate more revenue than existing projects are able to expend. In addition, the list of programs that meet CASF Program goals as stated are both decreasing and becoming more economically unfeasible for grantees. These conditions may provide an opportunity for wasteful or inefficient spending of CASF Program resources. The difference between current available technologies and those available when the CASF Program was established is vast. The regulatory environment has also changed significantly. Communications Division staff members are applying policies as stated at program inception, and procedures as currently stated. As a result, the adequacy and effectiveness of the CASF Program policies and procedures is limited by technological and regulatory constraints. -13- California Public Utilities Commission California Advanced Services Fund Program Pursuant to Section 3 (a) of the Internet For All Now Act (Chapter 851 of the Statutes of 2017): The commission shall develop, implement, and administer the California Advanced Services Fund program to encourage deployment of high- quality advanced communications services to all Californians that will promote economic growth, job creation, and the substantial social benefits of advanced information and communications technologies, consistent with this section and with the statements of intent in Section 2 of the Internet For All Now Act. During the audit, we were aware of pending and potential legislation that could affect the CPUC’s ability to improve the program’s performance measures. There were no effects during our scope period, nor were they measureable during fieldwork. However, such legislation could affect future improvement of the program’s performance. This situation will be followed up on in subsequent audits. Recommendation We recommend that the CPUC:  Initiate a cost/benefit analysis of deploying broadband access to the remaining unserved areas;  Determine how economically feasible it would be for grantees to complete broadband projects in unserved areas;  Consider whether awarding grants only to projects that do not use outdated or abandoned technologies and infrastructures would make better use of program funds; and  Expand the program scope to include emerging technologies (for example, 5G) to improve the CASF Program’s likelihood of successfully increasing deployment of broadband service to 98% of California households in each consortia region. CPUC’s Response CD agrees that broadening the CASF scope would improve the likelihood of achieving program goals. In addition to changes enacted by legislation, the CPUC has and continues to engage stakeholders in its efforts to broaden the scope, improve the program and processes based on lessons learned with each application cycle. Regarding the [number] of applications received, CD notes that the [number] of applications declined consistently during the program’s inception and during the time period of this audit (January 1, 2016, through December 31, 2018). The decline was probably for the following three reasons. First, the CASF Program has many rules and requirements and the initial application and challenge processes, where incumbent carriers can block applicants if they claim to serve the area now or in the future, were cumbersome and often delayed the process. Second, large providers did not apply for CASF. Historically, Rural and Competitive Local Exchange Carriers were the providers applying for -14- California Public Utilities Commission California Advanced Services Fund Program CASF grant money. Third, on October 15, 2017, the Governor signed Assembly Bill (AB) 1665 (Chapter 851, Statutes of 2017) into law. This urgency legislation amended the statutes governing the CASF Program. For example, CASF eligible areas were changed significantly: the “underserved” designation was eliminated, designating more of the state as “unserved,” and the speed threshold for eligible areas was lowered. Significant parts of the state eligible for Connect America Fund Phase II (CAF II) funding were also deemed ineligible. The most constraining restriction of the statute was that it severely limited the entities who could apply for funding for the first two years in an attempt to leverage federal funding. Taken together, this reduced the number of areas eligible for CASF infrastructure grants and, hence, the number of Infrastructure Account applications the Commission has received. [The number of applications is no longer in decline.] On May 4, 2020, CD received 54 applications requesting approximately $533 million in total funding from the Infrastructure Grant Account. The increase in applications was probably due to changes in program rules and legislation. In Decision (D.)18-12-018, the CPUC simplified and streamlined the CASF Infrastructure application and approval processes. A yearly application window was instituted (applications were no longer received on a rolling basis) and the project challenge period was limited to 21 days after project posting. Furthermore, the significant increase in the 2020 application cycle was likely due to the expiration of the AB 1665 restrictions on awarding CASF grants in census blocks where a facilities-based service provider had accepted federal funding from the CAF II. Additionally, Assembly Bill 82, enacted June 29, 2020, may contribute to an increase in the number of applications received in the 2021 application cycle, as it amended Pub. Util. Code section 281 to allow applicants to stack federal funding on top of CASF funding to supplement broadband infrastructure deployment. CD disagrees with SCO’s statement that, “The decline in applications coincides with an increase in CASF Program revenue being collected. Although the CASF Program has reduced the amount of revenue collected in prior years, it has been able to accumulate more revenue than existing projects are able to expend.” The requested amount of funding in the May 4, 2020 application cycle is more than twice the balance of the remaining CASF funds. Therefore, not all proposed projects will be funded even if all CASF rules and requirements are met. Further, even if all 54 applications from the May 4, 2020 application cycle met CASF rules and requirements, there would not be a guarantee that the goal of the program would be met. CD disagrees that the existing program “may provide an opportunity for wasteful or inefficient spending of CASF Program resources.” As explained in the 2019 CASF Annual Reports, the CPUC has awarded 77 broadband infrastructure projects [from] the beginning of the program in 2008 through December 31, 2019. The 77 projects include last-mile, hybrid, and middle-mile projects that provide (or will provide) broadband access to [an estimated] 320,734 potential households. Additionally, given the sheer geographic size of the state of California and the challenge of providing broadband service to rural and sparsely populated areas, it is estimated that it would take up to $6 billion to -15- California Public Utilities Commission California Advanced Services Fund Program provide broadband to every household in the state; the current CASF amount earmarked for this program is only $565 million, a mere 9.4 percent of the required amount. CD responds to the statement that “the adequacy and effectiveness of the CASF Program policies and procedures is limited by technological and regulatory constraints.” Currently, there are no statutory or programmatic rules that prohibit the incorporation of future technologies such as Fixed Wireless 5G; and CD has received one application for a 5G-like broadband infrastructure deployment that is under consideration. The following are CD’s responses to SCO’s recommendations related to Finding #2: 1. “Initiate a cost/benefit analysis of deploying broadband access to the remaining unserved areas.” CD agrees with this recommendation and believes that a new priority study would be of value and an important element of R.20-08-021. Resolution T-17443, adopted on June 26, 2014, cited areas in California that various CASF-funded regional consortia groups and state agencies have identified as priorities for broadband infrastructure deployment. This information was beneficial to help service providers identify underserved areas and several CASF projects were awarded in these priority areas. However, the CASF Program awards grants rather than [building] networks. Because of this, cost information on broadband deployment for specific areas of the state and their expected value has been limited to average historical data gathered from past grant awards. A more granular level of analysis on an area basis would require additional staffing resources and expertise. 2. “Determine how economically feasible it would be for grantees to complete broadband projects in unserved areas” As mentioned previously, CASF analysts are not engaged in feasibility studies for building networks, but rather are focused on providing monetary grants to applicants. While the CASF fund mitigates the capital cost of building networks in unserved areas, the economic feasibility calculation, and therefore the risk of maintaining that network and realizing profitable rates and rates of return, are the responsibility of the applicant. A grantee’s cost for building a network is variable—heavily dependent on the technology (FTTH, Hybrid-fiber cable, fixed wireless) balanced against the number of residents and businesses subscribing to the network (take rate). Also, unserved areas are not comparable across the state; in exurban areas just beyond a city’s suburb, the cost per home to [provide] broadband may be less than [in] a sparsely populated rural area. The goal of CASF is precisely to fund these areas which do not meet the feasibility standard and therefore would not [be served] without subsidization. 3. “Consider whether awarding grants only to projects that do not use outdated or abandoned technologies and infrastructures would make better use of program funds.” The CASF Program’s statute requires that the program be technology- neutral, and also has a very low build out minimum of 10/1 Mbps. This limits the ability of the Commission to exclude applications using antiquated services, such as DSL, or lower quality fixed wireless services that do not provide “future-proof” served speeds. This does not preclude -16- California Public Utilities Commission California Advanced Services Fund Program emerging technologies such as 5G. Staff is currently reviewing one 2020 CASF application which would fund 5G technology deployment. 4. “Expand the program scope to include emerging technologies (for example, 5G) to improve the CASF Program’s likelihood of successfully increasing deployment of broadband service to 98% of California households in each consortia region.” As noted [in our response to] recommendation #3, the CASF Program is technology neutral [and] does not preclude emerging technologies such as 5G. SCO Comment Our finding and recommendation remain unchanged. The CASF program is ongoing and reported on a cumulative basis. We understand that actions during the scope period do not necessarily produce auditable results during the same scope period; and that such actions may have positive results in future periods. Therefore, an audit can only review historical performance, and is a not predictor of future results. This is a bi- annual audit: the effects of the subsequent events will be reviewed during subsequent audits, not as a follow-up to this audit. The finding was written to document our conclusions based on the information audited and provided during the audit. Although we agree that the CPUC has been able to vet more contracts after our scope period, the effect of these contracts is not yet measurable and must be reviewed in future audits. We understand that events occurring after we conducted the audit may affect the future relevance of our recommendation. However, we believe that this recommendation is appropriate for the audit period. If the circumstances that created the finding are unchanged after the audit period, then CPUC should take corrective actions. This finding is similar, but not identical, to the finding in the previous audit. The CASF Program is not an early adopter of technology, which limits the program’s ability to adapt and to implement appropriate performance metrics. Although this is not CD’s fault, as the division can only execute the program at the direction of the Commission, efforts to be proactive would greatly increase the program’s effectiveness. We did not determine that wasteful spending is occurring. However, as noted, the gap between evolving technology and static program criteria could lead to engagement in CASF Program projects that are outdated before they are implemented. We recognize that additional information may have developed under normal non-Covid 19 circumstances. We documented our conclusions with the understanding that the CPUC could propose corrective actions in its response; and that the effectiveness of such corrective actions would be followed up in future audits. -17- California Public Utilities Commission California Advanced Services Fund Program Attachment 1— California Public Utilities Commission’s Response to Draft Audit Report -18- California Public Utilities Commission California Advanced Services Fund Program California Public Utilities Commission California Advanced Services Fund Program California Public Utilities Commission California Advanced Services Fund Program California Public Utilities Commission California Advanced Services Fund Program California Public Utilities Commission California Advanced Services Fund Program Attachment 2— 2018 Annual Report California Advanced Services Fund, Issued April 2019 State Controller’s Office Division of Audits Post Office Box 942850 Sacramento, CA 94250 http://www.sco.ca.gov S20-CSF-0002