BILL ANALYSIS
AB 2958
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Date of Hearing: April 1, 2002
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Roderick D. Wright, Chair
AB 2958 (Wright) - As Introduced: February 25, 2002
SUBJECT : Telecommunications: regulatory framework.
SUMMARY : Codifies in statute operative portions of a 1998
decision by the California Public Utilities Commission (PUC)
adopting a new regulatory framework program and price adjustment
formula for two major incumbent local exchange telephone
carriers. Specifically, this bill :
1)Affects SBC-Pacific Bell and Verizon, companies that were
subject to the modifications made by PUC to the new regulatory
framework (NRF) in Decision 98-10-026.
2)Specifies that any price cap price cap index productivity
factor, sharing mechanism, and related elements shall continue
to be suspended, consistent with the PUC decision.
3)Provides that 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.
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 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.
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.
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FISCAL EFFECT : Unknown.
COMMENTS :
NRF in general
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 ("Z factors").
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.
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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.
The PUC decision regarding SBC-PacBell and Verizon
In the 1998 decision established as the NRF benchmark of AB
2958, PUC ordered continuing suspension of the price cap index
and productivity factor previously suspended in 1995, and
suspended 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 (outlined
above)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 PacBell 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. PUC also voiced concern about asymmetric application
of sharing; giving potential competitors an ability to make
investment decisions without similarly imposed profit
constraints.
Return to rate of return?
Sponsors and supporters contend that recent actions by PUC and
the Office of Ratepayer Advocates (ORA) indicate an
institutional desire to return to a system in which earnings are
capped, either by way of rate of return regulation or through a
price index and sharing mechanism. According to the sponsor and
supporters, these activities have already created measurable
doubt as to the wisdom of continuing the current level of
investment in California technology and information
infrastructure because of the risk that future investment will
not be recouped in a manner or timeframe that will ensure
financial health of the companies.
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ORA contends that this measure would not allow PUC to conduct a
full review of PacBell or Verizon. ORA objects to "freezing" of
NRF, thereby removing PUC's authority to reinstate earnings
sharing or to adjust price cap productivity index.
Audit
PUC recently announced completion of a Section 314.5 triennial
audit of Pacific Bell, covering the years 1997 through 1999.
The audit recommends customer refunds of almost $350 million for
the years 1997 and 1998, consistent with the sharing mechanism
in place during the relevant time. PUC intends to review the
audit report in a formal proceeding, during which Pacific Bell
and interested parties will have an opportunity to be heard on
the audit findings.
AB 2958 does not affect the audit review process, including the
adjudication of whether or not refunds in the form of sharing
are due to consumers.
Related Legislation
AB 2898 (Pescetti) requires any price cap index mechanism
previously suspended by PUC in regulating a telephone
corporation shall be suspended until 2007. AB 2898 also
suspends sharing under NRF until January 1, 2007.
REGISTERED SUPPORT / OPPOSITION :
Support
SBC-Pacific Bell (sponsor)
Advanced Fibre Communications
Applied Materials
California Business Roundtable (co-sponsor)
California Chamber of Commerce (co-sponsor)
California Hispanic Chambers of Commerce
California Manufacturers & Technology Association (co-sponsor)
California Small Business Association
California Telecommunications Association
Communication Workers of America
Congress of California Seniors
Consumers First
Diamond Gateway Chamber of Commerce
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Greater Los Angeles African-American Chamber of Commerce
Intel
NAACP Sacramento Chapter
Pat Brown Public Policy Institute
Sacramento Central Labor Council AFL-CIO
San Diego Regional Chamber of Commerce
San Jose Silicon Valley Chamber of Commerce
Silicon Valley Manufacturing Group
Verizon
G. Mitchell Wilk, former PUC Commissioner
Opposition
California Public Utilities Commission
Consumers Union
MCI WorldCom
Office of Ratepayer Advocates
TURN
Analysis Prepared by : Paul Donahue / U. & C. / (916) 319-2083