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
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|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 |
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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 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
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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.
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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.
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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