BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 2669| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 445-6614 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 2669 Author: Maldonado (R) Amended: 8/7/02 in Senate Vote: 21 SENATE ENERGY, U.&C. COMMITTEE : 5-0, 6/11/02 AYES: Bowen, Morrow, Alarcon, Battin, Murray SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8 ASSEMBLY FLOOR : 69-0, 5/13/02 - See last page for vote SUBJECT : Public utilities: stocks and security transactions SOURCE : Verizon DIGEST : This bill permits telephone companies that are regulated under a specified regulatory structure to issue stock or debt unless the State Public Utilities commission can prove that the stock issuance would not be in the public interest. ANALYSIS : Current law requires a utility that wants to issue stock or debt to obtain prior approval from the State Public Utilities Commission (PUC). The PUC 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 CONTINUED AB 2669 Page 2 debt. The PUC may re-impose the requirement if it finds doing so is 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 new regulatory framework that utilizes a price-cap index, price adjustment formula, or substantially similar mechanism established by the PUC, as long as the company doesn't pledge to plant or assets to secure the financing. 2.Specifies that the PUC shall continue to approve issuance of financial instruments for telephone companies that are also electric or gas public utilities. 3.Allows the PUC to re-impose PUC approval of stock and bond issuance for telephone companies if the PUC finds, in a proceeding, that it is required by 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 PUC 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. AB 2669 Page 3 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 PUC 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 PUC in February 1997 without a hearing after the PUC found the issuance of such securities wasn't adverse to the public interest. In April 2001, Verizon asked the PUC to exempt it from a number of regulations regarding the issuance of stock or debt, including the requirement for prior approval. The PUC denied that request. However, the PUC did grant Verizon an exemption from the PUC'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. Related Legislation This bill is similar to AB 1082 (Calderon), which passed the Legislature in 2000, but was vetoed by the Governor. The veto messages states, in part, that AB 1082 "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." FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No SUPPORT : (Verified 8/5/02) Verizon (source) AB 2669 Page 4 SBC Pacific Bell OPPOSITION : (Verified 8/5/02) California Public Utilities Commission Office of Ratepayer Advocates ASSEMBLY FLOOR : AYES: Aanestad, Alquist, Aroner, Ashburn, Bates, Bogh, Briggs, Calderon, Bill Campbell, John Campbell, Canciamilla, Cardenas, Cardoza, Chan, Chavez, Chu, Cogdill, Cohn, Corbett, Correa, Cox, Daucher, Diaz, Dickerson, Dutra, Florez, Frommer, Harman, Havice, Hollingsworth, Horton, Keeley, Kehoe, Kelley, Koretz, La Suer, Leonard, Leslie, Longville, Lowenthal, Maddox, Maldonado, Migden, Mountjoy, Nakano, Negrete McLeod, Oropeza, Robert Pacheco, Rod Pacheco, Papan, Pavley, Pescetti, Reyes, Richman, Runner, Salinas, Shelley, Steinberg, Strickland, Strom-Martin, Vargas, Washington, Wayne, Wiggins, Wright, Wyland, Wyman, Zettel, Wesson NC:cm 8/7/02 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****