BILL ANALYSIS 1 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE DEBRA BOWEN, CHAIRWOMAN SB 23X - Soto Hearing Date: May 1, 2001 S As Amended: April 24, 2001 FISCAL B X 1 2 3 DESCRIPTION Current law requires the formation of a new special district to be subject to approval by a Local Agency Formation Commission (LAFCO). As part of the LAFCO approval process, the California Public Utilities Commission (CPUC) is required to investigate and report on whether formation of the new special district will substantially impair the ability of the public utility to provide adequate service at reasonable rates within the remainder of the service area of the utility. (Cities that want to form municipal electric departments don't have to go through the LAFCO process.) This bill prohibits a LAFCO from denying the approval of the formation of a special district to provide gas or electric service if the LAFCO receives a resolution in support of the formation by the legislative body of each city included in the proposed district and, where relevant, by the county board of supervisors. Under this circumstance, the CPUC report on service adequacy described above has no bearing on the creation of the special district. Current law creates a rebuttable presumption of public necessity for condemnation of private gas or electric utility property. Current law allows most special districts to be created with majority voter approval, but requires MUDs to be created with majority vote approval by public agencies representing 2/3 of the voters within the proposed district. This bill replaces the rebuttable presumption with a conclusive presumption and lowers the threshold from a 2/3 voter approval requirement to a majority vote requirement. This bill requires that MUDs created pursuant to this new process shall not provide communications or cable television service to retail customers, shall allow communications and cable television corporations to attach to the condemned property at cost-based rates which, for five years, may not exceed the price charged by the utility from whom the property was acquired indexed for inflation, and shall provide nondiscriminatory access to the acquired public rights of way and support structures to communications and cable television companies. This bill requires that if a new MUD or municipal utility is formed, its customers are responsible for a proportionate share of electric power contracts DWR entered into on their behalf. That arrangement can by modified by the mutual agreement of DWR and the MUD. BACKGROUND Interest in municipalizing electric utility service has grown as the troubles of the investor-owned utilities (IOUs) have continued to mount. Recently, the Yolo County LAFCO denied an application to form a proposed municipal utility district (MUD) in Davis. The San Francisco LAFCO forwarded an application to form a new MUD to the San Francisco Board of Supervisors without taking any formal action. About 25% of California's electricity customers are served by municipal utilities. The most recently-formed MUDs are the Lassen MUD in the mid-1980's, Trinity Public Utility District in the 1970's, and the Sacramento Municipal Utility District (SMUD) in the 1940's. Customers of the states largest municipal utilities, SMUD and the Los Angeles Department of Water & Power (LADWP), have done better relative to customers of the three IOUs in terms of avoiding significant rate increases. However, the primary reason some MUDs have fared better than their IOU counterparts recently is because they own or control a significant amount of power generation, thus keeping electric rates down. New MUDs, formed either under existing law or under this measure, won't have such advantages. As part of the state's efforts to keep electricity prices affordable, the Department of Water Resources (DWR) has been negotiating long-term electric contracts. In order to finance these contracts, DWR has established a retail relationship with customers of Pacific Gas & Electric (PG&E), Southern California Edison (SCE) and San Diego Gas & Electric (SDG&E), pursuant to AB 1X (Keeley), Chapter 4, Statutes of 2001. Those customers are liable to DWR for the power that it supplies, even if those customers later choose to purchase power elsewhere . COMMENTS 1.April 24 Amendments . When this bill was heard in this committee on April 17, there was a great deal of discussion about how the creation of new MUDs would affect DWR and the power it's buying on behalf of investor-owned utility customers, as well has how the bill would affect the operations of telecommunications and cable television corporations. Relative to the concerns affecting DWR, the author has taken two amendments that were requested by the committee at the prior hearing and those amendments are reflected in the current version of the bill. The first, on Page 5, Lines 20-34, adds a new section to the Government Code to ensure that if a MUD is formed, it's customers are responsible for a proportionate share of electric power contracts DWR entered into on their behalf. That arrangement can by modified by the mutual agreement of DWR and the MUD. The second, on Page 6, Lines 9-13, adds back a section of existing law that was deleted in a prior version of this bill. This section requires the CPUC to review, as a part of a report its required to undertake in connection with a proposal to create a MUD, whether the creation of the MUD will substantially impair the ability of the IOU to provide adequate service at reasonable rates to the remaining IOU service customers. 2.Getting Into The Telephone & Cable Business, Too? During the April 17 hearing on the bill, there was a concern that while the bill was designed to make it easier for cities to get into the energy business, a collateral effect was to allow MUDs to get into the cable and telecommunications businesses to compete with the incumbent providers. Despite a number of meetings between the author, interested parties, and committee staff, a consensus on how to resolve the issues brought up during the last hearing hasn't been reached. There are two main issues. The first is the rate which the newly created MUD or municipal utility charges cable and telecommunications companies for use of their poles. The second is how a newly created MUD or municipal utility may compete with cable and telephone corporations, if at all. 3.Pole Attachments . Current law limits the price the IOUs can charge cable corporations to attach infrastructure to utility poles, but no such limitation applies to equipment attached by telecommunications corporations. Current law doesn't limit what MUDs charge to permit a cable or telecommunications company to attach infrastructure to their poles. This bill limits the amount a MUD formed under this bill can charge for pole attachments to the existing cost, plus any Consumer Price Index (CPI) increase over the next five years. That effectively continues an existing (similar, though not identical) protection for cable companies and creates a new, currently non-existent protection for telecommunications companies. Depending on what the fees currently imposed by the IOUs are, this provision of the bill may unnecessarily tie the hands of a newly-created MUD board in a way they aren't tied now should a MUD be created. Furthermore, if the fees can't rise to the level of providing the actual service, this provision creates a cross subsidy should the MUD be required to recover any potential losses from electricity customers through their rates. 4.Cross Subsidization & The Level Playing Field . This bill doesn't change the rights of MUDs relative to their ability to get into the cable television or telecommunications businesses, but it does make it easier (by reducing the vote threshold, eliminating LAFCO review, and creating a conclusive presumption on eminent domain proceedings) for them to do so. The only limitation imposed by this bill is the cap on the amount a MUD could charge for a pole attachment. Should a MUD want to get into the cable or telecommunications businesses, it could leverage its ownership of the poles and rights of way to disadvantage the incumbent cable or telecommunications provider, either through higher prices for attachments or discriminatory attachment practices. A MUD could also cross subsidize its cable and telecommunications business from revenues from other municipal enterprises. Furthermore, a city or county wouldn't have to pay a cable franchise fee to itself if it wanted to get into the cable business, could deny requests from cable and telecommunications companies for permits to upgrade equipment, and could deny requests to lay underground cable to new housing or business developments. As noted above, any city wanting to create a MUD under existing law already enjoys these advantages - these aren't advantages created by this bill. However, the opponents argue that under existing law, the LAFCO review process, the two-thirds vote requirement and the restriction on the use of eminent domain gives those businesses that may be affected by the creation of a MUD more opportunities to debate its merits. The proponents argue that plenty of opportunity to influence public debate still exists, both before the city or county agencies that have to approve of a decision to create a MUD, the voters who have to approve the creation of any MUD, and the court which will have to set a value on the property that may be taken through the exercise of eminent domain. During the last committee hearing on this bill, there was some discussion relative to requiring any MUD formed pursuant to this bill to provide nondiscriminatory access to its acquired poles and rights of way. Amendments to accomplish that goal, however, haven't been placed into the measure. 5.Eminent Domain . Existing law generally provides that when a public entity initiates an eminent domain action within its jurisdictional boundaries, the entity's resolution of necessity is a conclusive determination. Private property owners whose property is taken by eminent domain can't dispute the finding that the taking is "necessary" - they can only challenge only the appropriate valuation of the property taken. When such an action is brought against a electric, gas, or water utility property, the resolution isn't conclusive, but instead is presumed to be true, and the utility property owner is allowed to rebut that presumption in court. This bill deletes the rebuttable presumption regarding the taking by eminent domain, of gas or electricity property, leaving gas and electric property owners with only the ability to challenge the valuation of the property taken but not the finding that the taking was "necessary" (identical to the rights of private property owners). As a result, only water utility property owners would retain the "rebuttable presumption" relative to whether the condemnation under eminent domain was "necessary." 6.Make Some New Findings - Judge & Jury . While the bill deletes the rebuttable presumption as it pertains to exercising the power of eminent domain and eliminates LAFCO review, it does - on Page 4, Lines 16-29 - create a new set of findings that a public entity seeking to exercise the power of eminent domain must make before moving ahead. That list includes: 1) The projected costs to the public entity; 2) The ability of the public entity to provide power to its customers; 3) The financial condition of the public entity; 4) Any other possible side-effects of the taking, including the impacts on local telecommunications services. However, these are findings made by the public entity seeking to create the MUD - they aren't findings that are required to be verified by anyone (LAFCO or the CPUC) prior to a measure going on the ballot. The findings mandated by this bill don't require independent third party verification, they merely give the project proponent the ability to formally agree with itself as to the benefits of its proposal. 7.Related Legislation . AB 1443 (Alquist), which is pending in the Assembly Utilities & Commerce Committee, changes the rebuttable presumption to a conclusive presumption within Santa Clara County only. AB 47X (Wiggins), which is pending in the Assembly Energy Costs & Availability Committee, changes the rebuttable presumption to a conclusive presumption. 10. Return To Sender . . . Address Known . The Senate Rules Committee has asked that this bill be returned to its possession should it pass this committee. SENATE VOTES Senate Local Government Committee (4-2) POSITIONS Sponsor: Author Support: California Contract Cities Association California Municipal Utilities Association California Public Interest Research Group City of Cerritos City of Chino Hills City of Covina City of Dana Point City of Fontana City of Ontario City of Pomona City of Rancho Cucamonga City of San Bernardino Corona City Council East Bay Municipal Utility District Gray Panthers Independent Cities Association League of California Cities Sacramento Municipal Utility District The San Francisco Bay Guardian 7 Individuals Oppose: California Association of Local Agency Formation Commission Coalition of California Utility Employees Pacific Gas and Electric Company San Mateo Local Agency Formation Commission Sempra Energy Southern California Edison Verizon Yolo County Local Agency Formation Commission Randy Chinn SB 23X Analysis Hearing Date: May 1, 2001