BILL ANALYSIS
AB 2898
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Date of Hearing: April 24, 2002
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Darrell Steinberg, Chair
AB 2898 (Pescetti) - As Amended: April 4, 2002
Policy Committee: Utilities and
Commerce Vote: 13-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill codifies operative portions of a 1998 Public Utilities
Commission (PUC) decision regarding telecommunications
regulation-specifically the new regulatory framework (NRF) and
price adjustment formulas. This bill:
1)Specifies that any price cap index productivity factor,
sharing mechanism, and related elements shall continue to be
suspended, consistent with the PUC decision.
2)Provides that the PUC shall maintain authority to regulate
prices for all services subject to its jurisdiction, and shall
continue to have authority to move service between all pricing
categories.
3)Applies the above to every telephone company regulated by the
PUC pursuant to the NRF. (This would apply to four telephone
companies-SBC-Pacific Bell, Verizon, Citizens, and Surewest.)
4)Sunsets these provisions in January 2007.
FISCAL EFFECT
Potential savings to the PUC from avoided proceedings that might
otherwise be undertaken regarding the regulatory elements
suspended in its 1998 decision.
[The PUC, for a similar bill (AB 2958, Wright) has estimated
costs of about $1.4 million for 14 new positions to develop an
alternative regulatory tools-in lieu of those being suspended in
the bill- to ensure just and reasonable telephone rates.
AB 2898
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However, by freezing the existing regulatory scheme with respect
to certain elements of NRF, AB 2898, in and of itself, does not
impose additional workload on the PUC. The commission's cost
estimate is based on how the commission might choose to respond
based on the results of a future audit of the company or
companies. Moreover, should the commission choose to modify NRF
regulation, it would have to justify any request for additional
staff for this purpose through the budget process given the
commission's existing regulatory staff and workload.]
COMMENTS
1)Background. Before 1989, local telephone companies were
regulated under a rate-of-return framework. In 1989, the PUC
adopted a new regulatory framework of "price-cap regulation"-a
system whereby phone rates are adjusted annually based on a
formula that accounts for inflationary cost increases and cost
decreases from increased productivity. The NRF was intended
to promote the PUC's 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.
Category I, II, and III Services. NRF classifies basic
monopoly services, like dial tone, as Category I services, and
the PUC sets prices for these services. Category II includes
partially competitive and discretionary services, which 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. NRF contains a price cap index formula,
equal to inflation minus a productivity factor, applicable to
Category I and II services.
Sharing. NRF also contains an earnings-sharing mechanism,
which includes a benchmark, ceiling and floor rate of return.
Telephone companies retain 100 percent of earnings up to the
benchmark, but return earnings at varying percentages to
ratepayers for earnings above the ceiling rate of return.
2)PUC Decision . In 1995, the 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. In a 1998 decision affecting
Pacific Bell and Verizon, the PUC ordered continued suspension
AB 2898
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of the price cap index and productivity factor based on a
finding that this would advance the goals of NRF and produce
just and reasonable rates. In this decision, the PUC also
suspended sharing 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. The PUC also voiced
concern about the asymmetric application of sharing, giving
potential competitors an ability to make investment decisions
without similarly imposed profit constraints. The PUC noted
that the above suspensions do not eliminate its authority over
rate caps, floors, or ceilings on Category I or II services.
3)Purpose . AB 2958 (Wright), also on today's committee agenda,
provides that the 1998 PUC decision involving SBC Pacific Bell
and Verizon shall remain in effect until 2007, but is
applicable only to those two entities. AB 2898 differs from
AB 2958 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 apply to the
two other NRF-regulated telecommunications companies-Surewest
Communications (formerly Roseville Communications) and
Citizens Communications.
In 2001, the PUC reviewed Surewest's NRF structure and, among
other things, ordered the retention of its sharing mechanism.
In Rulemaking 01-09-001, the 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 AB 2898 will enable Surewest and Citizens
to be on the same regulatory footing as Pacific Bell and
Verizon.
4)Opposition . The PUC states that, among other things, AB 2898
reverses recent PUC orders continuing sharing for Surewest,
and remains convinced of the correctness of its prior
decisions.
Analysis Prepared by : Chuck Nicol / APPR. / (916) 319-2081