BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 2303 - Leno Hearing
Date: June 8, 2004 A
As Amended: April 21, 2004 FISCAL
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DESCRIPTION
Current law requires all public utility rates and charges
to be "just and reasonable."
This bill prohibits the cost of any bonus paid to an
executive of an insolvent utility from being recovered in
utility rates. A bonus that is part of a standard employee
compensation contract is not subject to the prohibition.
BACKGROUND
In 2001, Pacific Gas & Electric (PG&E) Corporation, the
parent holding company of PG&E Company, the utility,
implemented various executive retention mechanisms to key
personnel of the holding company and its subsidiaries.
These mechanisms included lump-sum cash payments and/or the
granting of three million shares of restricted stock. Half
of the restricted stock vested at the end of 2003, while
the other half vested when certain performance measures
were met.
By the end of 2003, the full cost of the executive
retention mechanisms was disclosed. That year, $84.5
million in bonuses were granted to 17 executives of the
holding company, the utility, and its unregulated
affiliates. Robert Glynn, Chief Executive Officer of the
holding company, received a bonus of $15,907,702 in
addition to his salary. Gordon Smith, Chief Executive
Officer of the utility, received a bonus of $9,279,504 in
addition to his salary. Fifteen other executives, some
with National Energy Group (NEG), PG&E's bankrupt energy
development subsidiary, and others who were no longer with
NEG, received bonuses of at least $2.5 million. Moreover,
the full cost of this executive retention mechanism was
$179 million over three years.
COMMENTS
1.Who Is Paying? From a ratepayer point of view, the
question is whether these bonuses are financed through
utility rates, or whether stockholders bear the cost of
the bonuses. In the PG&E case, the company has indicated
that none of the compensation came from ratepayers.
Instead, all of the compensation was paid for by
investors who took lower earnings as a result of the
bonus payments, which pushed the utility's expense costs
higher.
Assuming PG&E's statement is true, then ratepayers should
be indifferent to the level of executive compensation and
any judgement as to whether the compensation packages
were reasonable is in the hands of the utility's
investors. From an investor point of view, it could be
argued that it was more than fair to award $179 million
in bonuses to 17 utility executives given the utility
holding company stock price has more than tripled since
the beginning of 2002. However, those investors who have
held PG&E stock for a longer period of time and watched
the stock price merely return to its 2000 levels while
the dividend was suspended for several years may not feel
the same way.
2.Only Certain Bonuses Affected - And Only At Certain
Times . This measure prevents bonuses paid to an
executive of an insolvent utility from being financed
through utility rates. However, bonuses paid to
executives that are part of a standard employee
compensation contract can be paid for out of utility
rates, even if the utility is insolvent or has filed for
bankruptcy protection. The author and committee may wish
to consider whether allowing ratepayers to be required to
pay for executive bonuses as part of a standard employee
contract is appropriate when a utility is in bankruptcy.
Furthermore, because the bill only applies to insolvent
utilities, it would allow ratepayers to be required to
finance bonuses paid to utility executives at all other
times. The author and committee may wish to consider
whether solvent utilities should be permitted to require
ratepayers to finance their bonus programs.
Finally, the bill is limited to executive bonuses,
meaning bonuses paid to non-executives, even when a
utility is in bankruptcy, would be allowed to be paid for
by ratepayers. The author and committee may wish to
consider whether this is appropriate.
3.Limited Applicability . This bill attempts to inoculate
ratepayers from the cost of executive retention bonuses,
such as those paid to the PG&E executives, when a utility
is insolvent or has filed for bankruptcy protection.
Because the bill is prospective, because PG&E says it met
the test of this bill, and because there is no utility in
bankruptcy or facing bankruptcy at the moment, it's
likely the provisions of this bill won't be used for some
time, if ever, considering the infrequency with which
California utilities file for bankruptcy.
4.Implementation Difficulties . While the intent of the
bill is clear, the bill's provisions will be difficult to
implement for a number of reasons, the largest of which
is the fact that rates for most utilities are no longer
based on their costs. The trend in California utility
regulation over the past ten years has been to move away
from the traditional method of basing the utility rates
on the actual cost of providing service, plus a fair
profit. Accompanying that trend is a substantial
decrease in the auditing of utilities. Consequently,
it's much tougher to assure a specific cost isn't paid
for by utility customers. This bill hands responsibility
for implementing the measure over to the CPUC. To assure
the provisions of this bill are followed, the author and
committee may wish to consider adding a provision
requiring the CPUC to perform an audit to ensure the
bonuses prohibited by this bill are indeed not paid for
by ratepayers.
5.Technically Speaking . The author and committee may wish
to consider replacing the term "utility" with "public
utility" throughout the bill. "Public utility" is the
term used in the statutes to represent companies such as
PG&E, Southern California Edison, and SBC.
Furthermore, the term "insolvent" is used in the bill and
appears to refer to companies that have filed for
bankruptcy protection. The author and committee may wish
to consider using a more objective standard, such as
"public utilities that have filed for bankruptcy
protection in federal bankruptcy court," instead of
"insolvent."
ASSEMBLY VOTES
Assembly Floor (55-22)
Assembly Appropriations Committee(16-5)
Assembly Revenue and Taxation Committee(6-0)
Assembly Utilities and Commerce Committee(7-4)
POSITIONS
Sponsor:
The Utility Reform Network (TURN)
Support:
Engineers & Scientists of California
Greenlining Institute
Office of Ratepayer Advocates
Oppose:
None on file
Randy Chinn
AB 2303 Analysis
Hearing Date: June 8, 2004