BILL ANALYSIS AB 2958 Page 1 ASSEMBLY THIRD READING AB 2958 (Wright) As Amended May 6, 2002 Majority vote UTILITIES AND COMMERCE 15-0 APPROPRIATIONS 21-0 ----------------------------------------------------------------- |Ayes:|Wright, Pescetti, |Ayes:|Steinberg, Bates, | | |Calderon, | |Alquist, Ashburn, Cohn, | | |John Campbell, | |Corbett, Correa, Daucher, | | |Canciamilla, Cardenas, | |Diaz, Firebaugh, | | |Diaz, Horton, Kelley, La | |Goldberg, Maldonado, | | |Suer, Leonard, Maddox, | |Negrete McLeod, Robert | | |Liu, Papan, Reyes | |Pacheco, Papan, Chu, | | | | |Runner, Washington, | | | | |Wiggins, Wright, Zettel | ----------------------------------------------------------------- SUMMARY : Codifies in statute 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 (ILECs). 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, index productivity factor, sharing mechanism, and related elements of NRF shall continue to be suspended, consistent with PUC's 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 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: AB 2958 Page 2 a) Making reference to NRF; b) That, in exchange for certainty provided by the Legislature, telephone corporations should reinvest in the state's communications network and employment base; and, c) 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. FISCAL EFFECT : According to the Assembly Appropriations Committee, potential savings to 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 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)Before 1989, 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. AB 2958 Page 3 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. 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 PUC decision regarding SBC-Pacific Bell and Verizon: In the 1998 decision established as the NRF benchmark in this bill, 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 (outlined above) of NRF and would produce rates that are just and reasonable. AB 2958 Page 4 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. PUC also voiced concern about asymmetric application of sharing; giving potential competitors an ability to make investment decisions without similarly imposed profit constraints. 6)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. This bill does not affect the audit review process, including the adjudication of whether or not refunds in the form of sharing are due to consumers. Analysis Prepared by : Paul Donahue / U. & C. / (916) 319-2083 FN: 0004523