BILL ANALYSIS 1
1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 2669 - Maldonado
Hearing Date: June 11, 2002
A
As Introduced: February 22, 2002 FISCAL
B
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6
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9
DESCRIPTION
Current law requires a utility that wants to issue stock
or debt to obtain prior approval from the California
Public Utilities Commission (CPUC). The CPUC may waive
this requirement if it finds doing so is in the public
interest.
This bill exempts most large telephone corporations from
the prior approval requirement for the issuance of stock or
debt. The CPUC may reimpose the requirement if it finds
doing so is in the public interest.
BACKGROUND
Utility rates have historically been based on the cost of
providing the service, plus a reasonable return on the
utility's investment - a process known as "cost-based
ratemaking." The cost of stock or debt is one of many
costs that are factored into that rate setting calculation.
Since 1989, the CPUC has altered that ratemaking process
for telephone corporations such as SBC, Verizon, and
Roseville Telephone Company to focus on prices paid by
customers rather than the costs or profits of the telephone
company. Under this approach, prices for telephone
services are categorized in monopoly, discretionary, and
competitive categories. Prices for monopoly services are
set, prices for discretionary services are allowed to vary
between established bands, and prices for competitive
services are allowed to move as the telephone corporation
sees fit. This approach, known as the NRF or New
Regulatory Framework, gives the telephone corporation a
benefit when it can reduce its costs because its profits
will go up. Conversely, the utility suffers when its costs
rise because it isn't permitted to raise rates.
Theoretically, this price-cap form of ratemaking shields
customers from poor financing decisions that a utility
might make because the increased costs can't be recovered
in rates (although if prices are set below the caps, the
utility could raise prices up to the cap).
In November 1996, Pacific Bell (now SBC) asked the CPUC for
broad authority to issue a variety of debt and preferred
stock for up to $1 billion at unspecified interest rates
for unspecified purposes. This request was approved by the
CPUC in February 1997 without a hearing after the CPUC
found the issuance of such securities wasn't adverse to the
public interest.
In April 2001, Verizon asked the CPUC to exempt it from a
number of regulations regarding the issuance of stock or
debt, including the requirement for prior approval. The
CPUC denied that request. However, the CPUC did grant
Verizon an exemption from the CPUC's competitive bidding
rule requiring that debt issuances be subject to
competitive bid. This exemption was granted because
Verizon was able to demonstrate the exemption enabled it to
issue debt on advantageous terms.
COMMENTS
1.Do/Should Customers Care About Utility Costs? Part of
the rationale for this bill is NRF regulation makes
customers indifferent to utility costs. If a utility
makes a bad decision and issues unnecessary or
unnecessarily costly debt or equity, the consequences of
that decision are born entirely by the utility.
Recent experience with electric utilities has shown that
this is true only up to a point. Utilities have a
special standing in that they deliver essential services
which California's society and economy cannot do without.
Consequently, it seems highly unlikely that California
will ever let a utility fail. Given that rationale, the
author and committee may wish to consider amending the
bill to make clear that the exemption created by this
measure would be eliminated if the CPUC ever opted to
abandon NRF and return to cost-based ratemaking.
2.Going From "No Unless We Say Yes" to "Yes Unless We Say
No." Under current law, the CPUC can exempt most large
telephone corporations from the prior approval
requirement for the issuance of stock or debt. As noted
in the background section of the bill, the sponsor of
this measure, Verizon, asked the CPUC for such an
exemption in April 2001 but was denied.
This measure overrides the CPUC decision and flips the
current system 180 degrees by making these exemptions the
"rule" instead of the "exception." However, it still
gives the CPUC the ability override the exemption created
by this bill if it finds doing so is in the public
interest. Given that, the author and committee may wish
to consider why it's appropriate to shift the burden of
proof by requiring the CPUC to prove it's in the public
interest to deny an exemption instead of the current
system which requires the utility to prove it's in the
public interest to be granted an exemption.
3.Haven't We Seen This Movie Before? This bill is nearly
identical to AB 1082 (Calderon) of 2000. That bill was
approved by this Committee 9-0, but was vetoed by
Governor Davis. The veto message read in part:
"AB 1082 duplicates existing PUC procedures
that allow the 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. It is
important that local telephone companies
obtain state review before issuing stock or
debt so the public can be protected from
imprudent corporate finance decisions."
ASSEMBLY VOTES
Assembly Floor (69-0)
Assembly Appropriations Committee (23-0)
Assembly Utilities and Commerce Committee(15-0)
POSITIONS
Sponsor:
Verizon
Support:
SBC Pacific Bell
Oppose:
California Public Utilities Commission
Office of Ratepayer Advocates
Randy Chinn
AB 2669 Analysis
Hearing Date: June 11, 2002