BILL ANALYSIS
AB 2898
Page 1
ASSEMBLY THIRD READING
AB 2898 (Pescetti)
As Amended April 4, 2002
Majority vote
UTILITIES AND COMMERCE 13-0 APPROPRIATIONS 19-0
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|Ayes:|Wright, Pescetti, |Ayes:|Steinberg, Bates, |
| |Calderon, | |Alquist, Cohn, Corbett, |
| |John Campbell, | |Correa, Daucher, Diaz, |
| |Canciamilla, Cardenas, | |Firebaugh, Maldonado, |
| |Diaz, Horton, Kelley, | |Negrete McLeod, Robert |
| |La Suer, Maddox, Papan, | |Pacheco, Papan, Pavley, |
| |Reyes | |Runner, Washington, |
| | | |Wiggins, Wright Zettel |
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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 the 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 the NRF,
and to the fact that circumstances exist making this special
statute valid because a general law cannot be made applicable.
AB 2898
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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.
FISCAL EFFECT : Potential savings to PUC from avoided
proceedings that might otherwise be undertaken regarding the
regulatory elements suspended in its 1998 decision. [PUC, has
estimated costs of about $3 million for 36 new positions to
develop an alternative regulatory tools-in lieu of those being
suspended in the bill- to ensure just and reasonable telephone
rates. 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 PUC. PUC's cost estimate
is based on how PUC might choose to respond based on the results
of a future audit of the company or companies. Moreover, should
PUC choose to modify NRF regulation, it would have to justify
any request for additional staff for this purpose through the
budget process given PUC's existing regulatory staff and
workload.]
COMMENTS :
1)Before 1989, local telephone companies, or incumbent local
exchange carriers (ILECs), were regulated under a
rate-of-return framework, which 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.
AB 2898
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2)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.
3)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.
4)Sharing: 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.
5)The NRF decision: 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 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.
6)Surewest Communications & Citizens Communications: This bill
applies the suspension of the price cap productivity factor
AB 2898
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and sharing articulated by PUC in the Pacific Bell-Verizon NRF
decision to each telephone company regulated pursuant to the
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
mechanism. 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.
Analysis Prepared by : Paul Donahue / U. & C. / (916) 319-2083
FN: 0004723