BILL ANALYSIS                                                                                                                                                                                                    



                                                                       


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                                 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  
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          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.   







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          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)







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          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

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