BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 2898 - Pescetti Hearing Date:
June 25, 2002 A
As Proposed to be Amended FISCAL B
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DESCRIPTION
NOTE: The analysis reflects amendments the author will propose
in committee to limit the application of this bill to Roseville
Telephone Company and Citizens Communications.
Current law requires that telephone rates be just and
reasonable.
Current law provides that it's the policy of the state to
promote lower prices, broader consumer choice, and avoidance of
anti-competitive conduct.
This bill states legislative intent to maintain the progress
created by the California Public Utilities Commission's (CPUC)
new regulatory framework (NRF) for telecommunications companies.
This bill finds that telecommunications companies regulated
under NRF require certainty with respect to its provisions.
This bill requires the CPUC to suspend any price cap index,
productivity factor, and sharing mechanism until January 1, 2007
for Roseville Telephone Company and Citizens Communications.
BACKGROUND
This bill is identical to AB 2958 (Wright), which is scheduled
to be before the committee today, except that it - as proposed
to be amended by the author -applies only to Roseville Telephone
Company and Citizens Communications.
Federal and state laws and policies have consistently tried to
transform telecommunications monopolies into competitive
markets. This started with the market for telephone sets in the
early 1980's, moved to long distance telephone service in the
mid-80's, then to short distance telephone service in the late
80's, and finally to local telephone service in the mid-90's.
As the markets became competitive, regulation changed.
Telephone sets, once only obtainable through the AT&T monopoly
at regulated prices, can be purchased virtually anywhere. Long
and short distance service can be purchased from hundreds of
companies. Local telephone service is now starting to become
competitive, based upon very recent decisions at the state and
federal level.
NRF, or New Regulatory Framework, is the now outdated name for
the regulatory structure for the larger local telephone
companies. It was created by the CPUC in 1989 to replace the
long-standing process of setting telephone rates equal to the
cost of serving those customers, plus a fair profit for the
telephone company. Under NRF, rates charged were indexed
annually - increased by the rate of inflation and decreased by a
"productivity factor" aimed at reflecting gains from
technological innovation occurring in telecommunications
markets. Initially, NRF applied to only the two largest local
telephone companies, SBC and Verizon (then Pacific Bell and GTE
California). Subsequently, NRF was applied to the next two
largest local telephone companies, Citizens Communications and
Roseville Telephone Company (RTC).
Citizens Communications offers services in 24 states, serving
primarily rural areas. It's the 3rd largest local telephone
company in California, serving about 145,000 lines with the
biggest concentration in Elk Grove. Citizens has been regulated
under a form of NRF since 1996. At that time, NRF consisted of
a sharing mechanism with prices indexed to inflation less a
productivity adjustment. In 2000, the CPUC altered Citizens'
NRF to suspend the price indexing, but to retain the profit
sharing. Citizens' NRF is currently under review at the CPUC
and the company has asked the CPUC to eliminate the profit
sharing mechanism.
RTC is a division of SureWest Communications, headquartered in
Roseville. RTC is the 4th largest local telephone company in
California, serving about 135,000 lines exclusively in the
Roseville/Sacramento area. RTC has been regulated under a form
of NRF since 1996. The beginning NRF consisted of a price
index, which effectively capped prices and a profit sharing
mechanism. In 2001, the CPUC tinkered with the NRF structure
and continued the profit sharing mechanism. RTC has petitioned
the CPUC to change the 2001 decision.
COMMENTS
1)CPUC Proceedings . Citizens is in the midst of a NRF review at
the CPUC. RTC's NRF was just reviewed by the CPUC and RTC is
in the process of challenging the CPUC's decision. Therefore,
this bill in one case reverses a CPUC decision (for RTC) and
prejudges a CPUC decision in another case (Citizens).
The Legislature long ago gave the CPUC clear policy direction
that telecommunications rates must be "just and reasonable,"
and left with the CPUC the job of creating the mechanism for
meeting that policy. For decades, the CPUC met the
Legislature's policy goals through traditional rate of return
regulation. In response to the changing telecommunications
market place, the CPUC replaced that old regulatory scheme
with the NRF. NRF is wholly a creature of the CPUC and the
Legislature appropriately never codified the NRF or changed
its structure, because doing so would have moved the
Legislature into the business of rate-making and would have
limited the discretion of future CPUCs.
2)Is Freezing the Current Version of the NRF Good For
Ratepayers? Apart from the philosophical question of whether
the Legislature should effectively override the decisions of
the CPUC when it comes to NRF is the practical question of
whether freezing the current terms of NRF in place is good for
ratepayers.
Theoretically, in a fully competitive market regulators
wouldn't need to review or constrain prices or profits,
because competitors would provides such a check on one
another, allowing ratepayers to benefit. As this committee
heard during an informational hearing on June 10, there is
little evidence to suggest that competition is anywhere close
to approaching "robust." According to the CPUC's recently
released competition report, The Status of Telecommunications
Competition in California (June 5, 2002), 95% of the telephone
lines in the state are controlled by SBC, Verizon, and the
other incumbent telephone companies as of June 2001. (The
number is slightly higher for residential lines and lower for
business lines.) This finding is corroborated by data from
the Federal Communications Commission, which found that
competitors provide about 7% of the lines.
3)Bill Implications . The NRF is intended to represent a
balanced application of regulatory tools which leads to just
and reasonable rates. This bill takes away the CPUC's
flexibility to utilize the profit sharing and price indexing
tools to meets its statutory obligation of assuring that
prices are just and reasonable. Since the NRF was established
in 1989, the CPUC has continued to tinker with the balance in
the NRF by adjusting profit sharing levels, price indexes, and
permanent rate adjustments, all in response to changing market
conditions.
This bill has one of two implications. The first is that it
is intended to substitute for the CPUC's judgement on whether
existing rates are fair and reasonable. This could be
inferred from the intent language in the bill which speaks to
"maintaining the progress created by the commission's NRF" and
the findings about the need for certainty about the provisions
of the NRF. By locking the 1998 version of NRF in place
through 2006, this bill appears to make adherence to a
particular regulatory structure (NRF, which has been altered
three times to reflect changing market conditions since 1989)
more important than adherence to the CPUC's overall statutory
charge of protecting ratepayers (which is to ensure ratepayers
are charged no more than just and reasonable rates).
The second, alternative implication is that the bill is solely
intended to restrict the CPUC's use of the profit sharing and
price indexing tools but not its ability to ensure prices are
just and reasonable. If that's the case, then the CPUC will
have to find some other mechanism to meet that larger
statutory mandate. In that sense, the bill paradoxically
moves the CPUC back to traditional rate of return regulation,
as that's the one known mechanism that can produce fair and
reasonable rates. Perhaps some alternative mechanism can be
found, but that of course is what the NRF represented.
4)Picking Winners . Supporters of this bill assert that freezing
the current NRF in place creates strong incentives to invest.
Objective data supporting this analysis is hard to come by,
though several highly touted infrastructure initiatives
designed to deploy advanced technologies throughout California
have been shelved or curtailed.
In a tightly regulated, non-competitive world, regulators may
choose to increase the allowed return of the regulated
companies to encourage those companies to invest in necessary
infrastructure. However, providing incumbent telephone
companies with strong incentives to invest in a world where
competitors are also trying to enter only skews the
competitive marketplace. While the possibility of high
returns for the incumbent regulated company will of course
create an incentive to invest, it will also tip the playing
field against competitors. The extra incentive for incumbents
to invest will drive out competitors that won't want to
compete in a biased game. Striking the right balance which
encourages healthy competition is a tricky task, and one which
is extremely difficult to find in an instrument as blunt as
this bill.
Clearly investment will go where returns are best, but
remember that the revenues that make returns high come from
telephone customers. To the extent that investment is
attracted by the highest returns, customers may be paying too
much. Consider the recent short-lived boom in electric
powerplant investments, which resulted from the high prices
customers paid for electricity.
5)Can You Hear Me Now? Since the mid 1990's, Citizens has had
problems with the quality of its telecommunications service in
the Elk Grove area. Citizens has admitted to service quality
problems and in 1995, the CPUC reduced Citizens' telephone
rates as a penalty. Service quality subsequently improved and
in 2000, Citizens and the CPUC's Office of Ratepayer Advocates
agreed that the required service quality improvements had been
made.
6)Mitigating Circumstances for RTC . Some circumstances make RTC
unique among California's larger and more well-known incumbent
local telephone companies. First, all of its operations are
in California, so all of its investments stay in California.
Second, through its affiliates RTC is investing not just in
its own service territory but also in the service territory of
its much bigger rival, SBC. No other sizeable incumbent local
telephone company has attempted to compete by investing in
their own facilities as vigorously as RTC and its affiliates.
While this may not justify the Legislature overriding a CPUC
decision, it is a distinction worth noting.
ASSEMBLY VOTES
Assembly Floor (64-2)
Assembly Appropriations Committee (19-0)
Assembly Utilities and Commerce Committee
(13-0)
POSITIONS
Sponsor:
Roseville Telephone (Surewest Communications)
Support:
California Chamber of Commerce
California Telephone Association
Citizens Telecommunications Company of California Inc.
City of Roseville
Construction and General Laborer's Local 185
County of Placer Board of Supervisors
Hewlett-Packard Company
Intel Corporation
Kerman Telephone Company
McClellan Park
Placer Electric Inc.
PRIDE Industries
Rocklin Area Chamber of Commerce
Roseville Chamber of Commerce
Sacramento Metropolitan Chamber of Commerce
SBC Pac Bell
Verizon
Oppose:
AARP California
California Association of Competitive Telecommunications
Companies
California Public Utilities Commission
Office of Ratepayer Advocates
Pac West Telecomm, Inc.
The Utility Reform Network
XO Communications, Inc.
Randy Chinn
AB 2898 Analysis
Hearing Date: June 25, 2002