BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 2303|
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THIRD READING
Bill No: AB 2303
Author: Leno (D)
Amended: 6/17/04 in Senate
Vote: 21
SENATE ENERGY, U.&C. COMMITTEE : 5-2, 6/8/04
AYES: Alarcon, Dunn, Murray, Sher, Vasconcellos
NOES: Morrow, Battin
NO VOTE RECORDED: Bowen, McClintock
SENATE APPROPRIATIONS COMMITTEE : 7-3, 8/4/04
AYES: Alpert, Bowen, Escutia, Karnette, Machado, Murray,
Speier
NOES: Battin, Aanestad, Ashburn
NO VOTE RECORDED: Burton, Johnson, Poochigian
ASSEMBLY FLOOR : 55-22, 5/17/04 - See last page for vote
SUBJECT : Public utilities: corporate taxation:
insolvency
SOURCE : The Utility Reform Network
DIGEST : This bill requires insolvent public utilities to
pay executive bonuses out of shareholder dividends rather
than recovering the costs in rates.
ANALYSIS : Under existing law, the Public Utilities
Commission (PUC) regulates public utilities and determines
just and reasonable rates.
CONTINUED
AB 2303
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This bill provides that any bonus paid to an officer of an
insolvent public utility shall be borne by the utility's
shareholders and may not be recovered from rates. The bill
requires the PUC to audit insolvent public utilities to
ensure compliance with this provision.
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
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.
AB 2303
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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.
Only certain bonuses affected - and only at certain times.
This bill 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. 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.
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.
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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
Increased costs are unknown and depend on the number of
public utilities that file for bankruptcy protection.
AB 2303
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According to PUC staff, PG&E is the only public utility
that has filed for bankruptcy protection in the last ten
years. The costs of conducting an audit could range from
$100,000 to $250,000.
The Public Utilities' Reimbursement Account revenues are
derived from an annual fee imposed on public utilities.
Therefore, any increased costs to the PUC should be
recovered from fee revenues.
SUPPORT : (Verified 8/9/04)
The Utility Reform Network (source)
Engineers and Scientists of California
Greenlining Institute
Office of Ratepayer Advocates
ASSEMBLY FLOOR :
AYES: Berg, Bermudez, Bogh, Calderon, Chan, Chavez, Chu,
Cohn, Corbett, Correa, Diaz, Dutra, Dymally, Firebaugh,
Frommer, Garcia, Goldberg, Hancock, Jerome Horton,
Shirley Horton, Jackson, Kehoe, Koretz, La Suer, Laird,
Leno, Levine, Lieber, Longville, Lowenthal, Maddox,
Maldonado, Matthews, Montanez, Mullin, Nakanishi, Nakano,
Nation, Negrete McLeod, Oropeza, Parra, Pavley, Reyes,
Ridley-Thomas, Salinas, Simitian, Spitzer, Steinberg,
Vargas, Wesson, Wiggins, Wolk, Wyland, Yee, Nunez
NOES: Aghazarian, Bates, Benoit, Campbell, Cogdill, Cox,
Daucher, Dutton, Harman, Haynes, Houston, Keene, La
Malfa, Leslie, Maze, McCarthy, Mountjoy, Pacheco,
Plescia, Runner, Samuelian, Strickland
NO VOTE RECORDED: Canciamilla, Liu, Richman
NC:nl 8/9/04 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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