BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 2303
                                                                  Page  1

          Date of Hearing:  April 19, 2004

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                Rudy Bermudez, Chair

                     AB 2303 (Leno) - As Amended:  April 16, 2004

          2/3 vote.  Fiscal Committee.

           SUBJECT  :  Franchise Tax:  Executive Compensation Deduction

           SUMMARY  :  Provides that no deduction may be claimed by a public  
          utility for any bonus paid to an executive officer during the  
          period that the utility is insolvent, and requires that any  
          expense resulting from a bonus paid to an executive officer of  
          an insolvent utility be borne by the shareholders of that  
          utility rather than being recovered through rates.   
          Specifically,  this bill  :  

          1)Provides that any expense resulting from a bonus paid to an  
            executive officer of an insolvent utility shall be borne by  
            the shareholders of the utility, and that no expense resulting  
            from the payment of a bonus by an insolvent utility may be  
            recovered in rates.  For purposes of this bill, insolvent  
            means that the utility has ceased to pay its debts in the  
            ordinary course of business, the utility cannot pay its debts  
            as they become due, or the utility's liabilities exceed the  
            utility's assets.

          2)States that notwithstanding any other provision of the tax  
            code, no deduction shall be allowed for the costs paid or  
            incurred during the taxable year by a public utility for any  
            bonus paid to an executive officer during the period that the  
            utility is insolvent.

          3)Defines an executive officer as any person who performs  
            policymaking functions and is employed by the utility, and  
            includes the president, secretary, treasurer, and any vice  
            president in charge of a principal business unit, division, or  
            function of the utility.

          4)Provides that this bill's provisions do not apply to any bonus  
            that is part of a standard employee compensation contract.

           EXISTING LAW  generally allows businesses to deduct their  








                                                                  AB 2303
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          ordinary and necessary business expenses.  Ordinary and  
          necessary business expenses generally include wages and  
          compensation paid to employees.  However, both California and  
          the federal government deny businesses a deduction for  
          compensation in excess of $1 million per year that is paid by a  
          publicly held corporation to the corporation's chief executive  
          officer or any of the corporation's other four highest paid  
          officers.

           FISCAL EFFECT  :  An estimate from the Franchise Tax Board (FTB)  
          is pending.  By denying a corporate tax deduction, this bill has  
          the potential to raise state revenue by an unknown amount. 

           COMMENTS  :   

          1)This bill was heard and passed by the Utilities and Commerce  
            Committee on April 12, 2004 by a vote of 7-4.  Because the  
            Utilities and Commerce Committee has already analyzed the  
            provisions of this bill that fall within that committee's  
            jurisdiction, this analysis will focus on the tax-related  
            provision of the bill.

           2)Background  :  This bill arose from a December 31, 2003  
            announcement by Pacific Gas & Electric (PG&E) that it would  
            pay over $85 million in stock retention bonuses to 17 current  
            and former senior executives while the company was still  
            officially under Chapter 11 bankruptcy protection.  These  
            retention bonuses were part of a program established in  
            January 2001, shortly before the company filed for bankruptcy  
            at the height of the energy crisis.  PG&E claims that the  
            bonuses will be funded by reducing shareholder dividends.  The  
            California Public Utilities Commission (CPUC) is currently  
            conducting an investigation to determine to what extent, if  
            any, these bonuses will be paid through rates.  Under  
            CPUC-established rules, all investor-owned utilities,  
            including PG&E, may recover all reasonable operating costs  
            through rates.  Operating costs generally include salaries and  
            bonuses if the CPUC finds that such expenses are reasonable.  

          3)According to information provided by the author's office, PG&E  
            is not alone among companies who requested significant  
            retention bonuses for their executives while in bankruptcy  
            proceedings.  Enron, WorldCom, United Airlines, and Conseco  
            have also done so within the past few years. 









                                                                  AB 2303
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           4)Suggested Amendments  :

             a)   As currently written, this bill denies a deduction for  
               the costs paid or incurred by a public utility for any  
               bonus paid to an executive officer during the period in  
               which the utility is insolvent.  Because FTB would have no  
               way of knowing when, nor for how long a public utility  
               meets this bill's definition of "insolvent", this bill  
               requires an amendment intended to provide FTB with that  
               information.  

             b)   This Committee may also wish to ask this bill's author  
               to accept an amendment denying a deduction for a bonus paid  
               during any taxable year in which a public utility is  
               insolvent; use of the word "period" is unclear and could  
               lead to disputes between taxpayers and FTB. 

             c)   Finally, this bill states that its provisions do not  
               apply to any bonus that is part of a standard employee  
               compensation contract.  An amendment to clarify what is  
               meant by the term "standard employee compensation contract"  
               would also help clarify this bill's application and reduce  
               the possibility of disputes between taxpayers and FTB. 

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          None on file

           Opposition 
           
          None on file
           
          Analysis Prepared by  :  Eileen Roush / REV. & TAX. / (916)  
          319-2098