BILL ANALYSIS
AB 2898
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Date of Hearing: April 15, 2002
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Roderick D. Wright, Chair
AB 2898 (Pescetti) - As Amended: April 4, 2002
SUBJECT : Telephone corporations: New Regulatory Framework.
SUMMARY : Codifies in statute portions of a 1998 decision by the
California Public Utilities Commission (PUC) adopting a new
regulatory framework (NRF) program and associated rules.
Specifically, this bill :
1)Specifies that any price cap price cap index productivity
factor, sharing mechanism, and related elements of NRF shall
continue to be suspended, consistent with a 1998 PUC decision
concerning NRF that pertained to SBC-Pacific Bell and Verizon.
2)Applies the suspension of price cap and sharing components of
NRF, ordered by PUC in the above decision, to each telephone
company that is regulated by PUC under NRF.
3)Continues PUC authority to regulate prices for all services
subject to its jurisdiction, and to move service between all
pricing categories.
4)Clarifies that PUC's existing authority to regulate the
quality of service provided by telephone corporations shall be
preserved.
5)Sunsets on January 1, 2007.
6)Makes various legislative findings with reference to NRF, and
to the fact that circumstances exist making this special
statute valid because a general law cannot be made applicable.
EXISTING LAW :
1)Grants PUC regulatory authority over local telephone
corporations, and authorizes PUC to establish just and
reasonable rates.
2)Requires PUC to inspect and audit the books and records of
telephone corporations for regulatory and tax purposes at
least once every three years.
AB 2898
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FISCAL EFFECT : Unknown.
COMMENTS :
Before 1989, local telephone companies, or incumbent local
exchange carriers (ILECs), were regulated under a rate-of-return
framework, which in general sets rates based on expenses
incurred in providing service, allowing a reasonable profit on
the utility's assets that are used to provide the service.
In 1989, PUC adopted NRF, an incentive-based regulatory system
designed to promote PUC goals of universal service, economic
efficiency, technological advancement, rate stability, full
utilization of the local exchange network, and avoidance of
cross-subsidies and anti-competitive behavior.
Under NRF, rates are adjusted annually based on a formula that
offsets inflation costs against cost decreases due to increased
productivity, additionally allowing cost recovery on matters
outside the control of the utility.
Category I, II and III services
NRF classifies basic monopoly services like dial tone as
Category I services. PUC sets prices for all Category I
monopoly services. Category II includes partially competitive
and discretionary services. These services have price ceilings
and floors approved by PUC, and the regulated entity is free to
adjust price in between. Utilities are allowed maximum pricing
flexibility for Category III, or fully competitive, services.
Price Cap Index & Productivity Factor
NRF contains a price cap index formula, equal to inflation minus
a productivity factor, and applicable to Category I and II
services. The productivity factor was designed as a substitute
for market forces, passing through gains in productivity to
customers. In 1995, PUC suspended the price cap index and
productivity factor on the belief that the market was evolving
and that market conditions did not warrant continued application
of the formula.
Sharing
AB 2898
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NRF contains an earnings-sharing mechanism, which includes a
benchmark, ceiling and floor rate of return. ILECs retain 100%
of earnings up to the benchmark, but return earnings at varying
percentages to ratepayers for earnings above the ceiling rate of
return.
SBC-Pacific Bell and Verizon and AB 2958 (Wright)
In the 1998 decision referred to in this bill , PUC continued to
suspend the price cap index and productivity factor previously
suspended in 1995, and began a suspension of sharing for Pacific
Bell and Verizon.
PUC found that continuing the suspension of price caps and the
productivity factor would advance the goals (outlined above) of
NRF and would produce rates that are just and reasonable. PUC
noted that suspension does not eliminate PUC authority over, or
remove, rate caps, floors or ceilings on Category I and II
services.
In the decision, PUC suspended sharing for Pacific Bell and
Verizon on the belief that sharing distorts operating and
investment decisions because it changes the forecast of present
and future cash flows, and introduces uncertainty into the
stream of returns.
AB 2958 (Wright), which this Committee passed on April 1, 2002,
provides that the 1998 PUC decision involving SBC Pacific Bell
and Verizon shall remain in effect until 2007, but applicable
only to those two entities.
Surewest Communications<1> & Citizens Communications
This bill differs from AB 2958 (Wright) in that it applies the
suspension of the price cap productivity factor and sharing
articulated by PUC in the Pacific Bell-Verizon NRF decision to
each telephone company regulated pursuant to NRF, thus making it
also effective as to Surewest & Citizens Communications, the
other NRF-regulated telecommunications companies.
In 2001, PUC reviewed Roseville Telephone's NRF structure and,
among other things, ordered the retention of its sharing
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<1> Formerly Roseville Communications Co.
AB 2898
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AB 2898
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mechanism.<2> In Rulemaking 01-09-001, PUC is considering
whether to eliminate the sharing mechanism, continue the
suspension of the sharing mechanism, or to reinstate the sharing
mechanism.
Supporters note that this measure will enable Roseville and
Citizens to be on the same regulatory footing as Pacific Bell
and Verizon, the only other companies now regulated under NRF.
Opponent PUC states among other things that this bill reverses
recent PUC orders continuing sharing, and PUC remains convinced
of the correctness of its decisions.
REGISTERED SUPPORT / OPPOSITION :
Support
Hewlett-Packard Company
Placer County Board of Supervisors
City of Roseville
Verizon
California Telephone Association
Construction & General Laborers' Local 185
PRIDE Industries
Intel
McClellan Park
California Chamber of Commerce
SureWest Communications
Opposition
Public Utilities Commission
Office of Ratepayer Advocates
Analysis Prepared by : Paul Donahue / U. & C. / (916) 319-2083
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<2> Decision 01-06-077, rehearing denied, D. 01-12-024