BILL ANALYSIS                                                                                                                                                                                                              1
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                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
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                                      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