BILL ANALYSIS
AB 2958
Page 1
Date of Hearing: April 24, 2002
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Darrell Steinberg, Chair
AB 2958 (Wright) - As Introduced: February 25, 2002
Policy Committee: Utilities and
Commerce Vote: 15-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill codifies operative portions of a 1998 Public Utilities
Commission (PUC) decision regarding the new regulatory framework
(NRF) and price adjustment formulas affecting SBC-Pacific Bell
and Verizon. Specifically, 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 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)Sunsets the above 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 estimates 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. However, by freezing the existing regulatory
scheme with respect to certain elements of NRF, AB 2958, 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
AB 2958
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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. 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. 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 Decisions. 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
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
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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 codifies the PUC's 1998 decision with
respect to maintaining the suspension of the price cap index,
productivity factor, and sharing until January 2007. The bill
is sponsored by SBC-Pacific Bell, who along with other
supporters contend that recent actions by the PUC and the
Office of Ratepayer Advocates (ORA) indicate an institutional
desire to return to a system in which earnings, rather than
prices, are capped either by way of rate of return regulation
or through a price index or sharing mechanism. According to
the sponsor and supporters, these activities have created
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.
4)Opposition. The ORA contends that this measure would not allow
PUC to conduct a full review of PacBell or Verizon. ORA
objects to "freezing" NRF, thereby removing PUC's authority to
reinstate earnings sharing or to adjust price cap productivity
index. The Consumers Union and TURN are also opposed to the
bill for these reasons.
Analysis Prepared by : Chuck Nicol / APPR. / (916) 319-2081