BILL ANALYSIS
AB 2505
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Date of Hearing: March 22, 2004
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Sarah Reyes, Chair
AB 2505 (Maldonado) - As Introduced: February 19, 2004
SUBJECT : Public utilities: stocks and security transactions.
SUMMARY : Permits telephone companies that are regulated under a
"price cap" regulatory structure to issue stock or debt unless
the California Public Utilities Commission (PUC) can prove that
the stock issuance would not be in the public interest.
Specifically, this bill :
1)Provides that requirements for PUC approval of issuance by
utilities of financial instruments, including stocks, bonds
and notes do not apply to a telephone corporation that is
regulated under a price cap regulatory structure, as long as
the company doesn't pledge a plant or assets to secure the
financing.
2)Defines "price cap regulatory structure" as a system under
which rates are limited by a maximum price that may be charged
for a service, not by a rate base or rate of return regulatory
form.
3)Specifies that PUC shall continue to approve issuance of
financial instruments for telephone companies that are also
electric or gas public utilities.
4)Allows PUC to re impose PUC approval of stock and bond
issuance for telephone companies if PUC finds in proceeding
that it is required by the public interest.
EXISTING LAW
1)Authorizes PUC to review and approve stock and security
transactions of public utilities.
2)Allows PUC to waive review and approval if it finds that it is
in the public interest to do so.
FISCAL EFFECT : Unknown.
COMMENTS :
AB 2505
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Background: Utility rates have historically been based on the
cost of providing the service, plus a reasonable return on the
utility's investment - a process known as "cost-based
ratemaking." The cost of stock or debt is one of many costs
that are factored into that rate setting calculation.
Since 1989, the CPUC has altered that ratemaking process for
telephone corporations such as SBC, Verizon, and Roseville
Telephone Company to focus on prices paid by customers rather
than the costs or profits of the telephone company. Under this
approach, prices for telephone services are categorized in
monopoly, discretionary, and competitive categories. Prices for
monopoly services are set, prices for discretionary services are
allowed to vary between established bands, and prices for
competitive services are allowed to move as the telephone
corporation sees fit. This approach, known as the NRF or New
Regulatory Framework, gives the telephone corporation a benefit
when it can reduce its costs because its profits will go up.
Conversely, the utility suffers when its costs rise because it
isn't permitted to raise rates. Theoretically, this price-cap
form of ratemaking shields customers from poor financing
decisions that a utility might make because the increased costs
can't be recovered in rates.
In November 1996, Pacific Bell (now SBC) asked the CPUC for
broad authority to issue a variety of debt and preferred stock
for up to $1 billion at unspecified interest rates for
unspecified purposes. This request was approved by the CPUC in
February 1997 without a hearing after the CPUC found the
issuance of such securities wasn't adverse to the public
interest.
In April 2001, Verizon asked the CPUC to exempt it from a number
of regulations regarding the issuance of stock or debt,
including the requirement for prior approval. The CPUC denied
that request citing that Verizon had not demonstrated that
relieving it from those filing applications was in the public
interest. It should be noted that prior PUC approvals of
Verizon's financing requests reflected a difference of seven
weeks to three months between the filing of the application and
the decision. Verizon also cites that this delay has in the
past caused their financing related costs to increase since they
are competing with other non-regulated companies for the same
financing resources.
AB 2505
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The sponsors of the bill believe that exempting an incentive
based telephone corporation from PUC review parallels today's
paradigm and market forces while leaving in place the authority
to review the transactions of companies still under cost of
service regulations. Furthermore, the bill would specifically
allow the PUC to reimpose any or all of the filing requirements
if it finds through an evidentiary hearing that it is in the
public interest.
Previous iterations of the same issue: This bill is identical
to two previous bills that have been introduced and vetoed by
the Governor. The veto message on both AB 2669 Calderon,
Statutes of 2002 and AB 1082 Calderon, Statutes of 2000 read in
part:
"AB 1082 duplicates existing PUC procedures that allow the PUC
to exempt telephone companies on a case by case basis from
regulatory review of their financing proposals."
REGISTERED SUPPORT / OPPOSITION :
Support
Verizon (sponsor)
Opposition
California Public Utilities Commission Office of Ratepayer
Advocates
Analysis Prepared by : Daniel Kim / U. & C. / (916) 319-2083