BILL ANALYSIS
AB 2669
Page A
Date of Hearing: April 22, 2002
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Roderick D. Wright, Chair
AB 2669 (Maldonado) - As Introduced: February 22, 2002
SUBJECT : Public utilities: stocks and security transactions.
SUMMARY : Permits telephone companies that are regulated under a
"price cap" regulatory structure to issue stock or debt unless
the California Public Utilities Commission (PUC) can prove that
the stock issuance would not be in the public interest.
Specifically, this bill :
1)Provides that requirements for PUC approval of issuance by
utilities of financial instruments, including stocks, bonds
and notes do not apply to a telephone corporation that is
regulated under a price-cap regulatory structure, as long as
the company doesn't pledge a plant or assets to secure the
financing.
2)Defines "price-cap regulatory structure" as a system under
which rates are limited by a maximum price that may be charged
for a service, not by a rate base or rate-of-return regulatory
form.
3)Specifies that PUC shall continue to approve issuance of
financial instruments for telephone companies that are also
electric or gas public utilities.
4)Allows PUC to re-impose PUC approval of stock and bond
issuance for telephone companies if PUC finds in a proceeding
that it is required by the public interest.
EXISTING LAW :
1)Authorizes PUC to review and approve stock and security
transactions of public utilities.
2)Allows PUC to waive review and approval if it finds that it is
in the public interest to do so.
FISCAL EFFECT : Unknown.
COMMENTS :
AB 2669
Page B
Historically, the basic regulatory framework for utility
regulation in the state relied on traditional cost-of-service
regulation, commonly known as rate base and rate-of-return
regulation, to set rates for the utilities. PUC's traditional
cost-of-service regulation was challenged based on changes in
the telecommunications industry and the California marketplace
that occurred in the 1980's from advancing technology and
regulatory efforts to promote competition and market principles
in the telecommunications market. In response to these changing
industry conditions, PUC replaced general rate case application
proceedings in 1989 with a New Regulatory Framework (NRF).
NRF began an incentive-based regulatory process centered on a
price cap indexing mechanism focused on the prices that
telephone companies may charge for various services.
Sponsor's statement
Verizon, the sponsor of this measure, contends that continued
"pre-approval" regulation is unnecessary under an
incentive-based price cap regulatory scheme because the
shareholders bear the entire risk of the operations and the
financial decisions of the company. Customers are no longer
responsible for bailing out a telephone company for business
decisions. Thus, Verizon believes that the company has every
incentive to seek the lowest possible financing because it
cannot pass on any excess costs to ratepayers.
Verizon contends that continued PUC pre-approval has
disadvantaged the company. The timeframes involved in taking
advantage of favorable opportunities are very short, and PUC
approval can take several months. Furthermore, Verizon cannot
request authority to issue long term debt securities that would
anticipate all types of financing opportunities.
Opponent
The Office of Ratepayer Advocates (ORA) contends that this bill
could affect all ratepayer classes since certain securities
transactions may have an effect on price-cap regulation.
According to ORA, if a regulated utility issues additional
stock, the transaction costs of the stock issuance may be
compensable in rates. If PUC deemed them compensable, rates
AB 2669
Page C
would increase to reflect the transaction costs, but PUC could
only evaluate the level of transaction costs since they would
not be able to evaluate the reasonableness of the stock issue
itself.
ORA supported this issue when the matter was before the
Legislature in 2000, stating among other things that
"[o]stensibly, earnings are no longer tied to rates, and
therefore the necessity to review the prudence of investments?is
obviated."
Related legislation
This bill is a re-introduction of AB 1082 (Calderon), which
passed the legislature in 2000,<1> but was vetoed by the
Governor. The veto message states in part that AB 1082
(Calderon) "duplicates existing PUC procedures that allows PUC
to exempt telephone companies on a case-by-case basis from
regulatory review of their financing proposals. It also places
ratepayers at risk if local telephone companies make bad
financial decisions and must seek additional forms of revenue to
offset the losses."
REGISTERED SUPPORT / OPPOSITION :
Support
Verizon (source)
Opposition
Office of Ratepayer Advocates
Analysis Prepared by : Paul Donahue / U. & C. / (916) 319-2083
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<1> Vote on Senate Third Reading, 37-0, 6/29/2000; vote on
Assembly vote,