BILL ANALYSIS
AB 2505
Page 1
ASSEMBLY THIRD READING
AB 2505 (Maldonado)
Introduced February 19, 2004
Majority vote
UTILITIES AND COMMERCE 12-0 APPROPRIATIONS 18-1
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|Ayes:|Reyes, Bogh, Calderon, |Ayes:|Chu, Runner, Bates, Berg, |
| |Campbell, Canciamilla, | |Calderon, Corbett, |
| |Diaz, Jerome Horton, La | |Correa, Firebaugh, |
| |Malfa, Levine, | |Haynes, Keene, Leno, |
| |Ridley-Thomas, | |Nation, |
| |Strickland, Wesson | |Negrete McLeod, Oropeza, |
| | | |Pavley, Ridley-Thomas, |
| | | |Wiggins, Yee |
| | | | |
|-----+--------------------------+-----+--------------------------|
| | |Nays:|Goldberg |
| | | | |
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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 reimpose PUC approval of stock and bond issuance
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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 : Potential minor savings to the PUC from avoided
reviews of company financing transactions.
COMMENTS :
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, PUC 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 New Regulatory
Framework (NRF) 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 PUC 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 PUC in February 1997
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without a hearing after PUC found the issuance of such
securities wasn't adverse to the public interest.
In April 2001, Verizon, the sponsor of this bill, asked PUC to
exempt it from a number of regulations regarding the issuance of
stock or debt, including the requirement for prior approval.
PUC 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.
Verizon believes 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, this bill would specifically allow
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) of
2002, and AB 1082 (Calderon) of 2000 read in part:
"AB 1082 duplicates existing PUC procedures that allow PUC to
exempt telephone companies on a case by case basis from
regulatory review of their financing proposals."
Analysis Prepared by : Daniel Kim / U. & C. / (916) 319-2083
FN: 0004869