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 --------------------------- <1> Vote on Senate Third Reading, 37-0, 6/29/2000; vote on Assembly vote,