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,