BILL ANALYSIS 1
1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 2505 - Maldonado
Hearing Date: June 8, 2004
A
As Introduced: February 19, 2004 FISCAL
B
2
5
0
5
DESCRIPTION
Current law requires a utility that wants to issue stock
or debt to obtain prior approval from the California Public
Utilities Commission (CPUC). The CPUC may waive this
requirement if it finds doing so is in the public interest.
This bill flips the current law process and exempts most
large telephone corporations from the prior approval
requirement for the issuance of stock or debt, but allows
the CPUC to reimpose the requirement if it finds doing so
is in the public interest.
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 the 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
separated into 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 (although if
prices are set below the caps, the utility could raise
prices up to the cap).
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. However, the CPUC did grant
Verizon an exemption from the CPUC's competitive bidding
rule requiring the issuance of debt to be subject to
competitive bid. This exemption was granted because
Verizon was able to demonstrate the exemption enabled it to
issue debt on advantageous terms.
COMMENTS
1.Do/Should Customers Care About Utility Costs? Part of
the rationale for this bill is NRF regulation makes
customers indifferent to utility costs. If a utility
makes a bad decision and issues unnecessary or
unnecessarily costly debt or equity, the consequences of
that decision are born entirely by the utility. Should
the CPUC elect to impose more traditional regulation,
wherein changes in utility costs directly effect utility
rates, the exemption from the pre-approval requirement
would be inapplicable.
2.Going From "No Unless We Say Yes" to "Yes Unless We Say
No." Under current law, the CPUC can exempt most large
telephone corporations from the prior approval
requirement for the issuance of stock or debt. As noted
in the background section above, the sponsor of this
measure, Verizon, asked the CPUC for such an exemption in
April 2001 but was denied.
This measure overrides the CPUC decision and flips the
current system 180 degrees by making these exemptions the
"rule" instead of the "exception." However, it still
gives the CPUC the ability to override the exemption
created by this bill if it finds doing so is in the
public interest.
3.Third Time the Charm? This bill is nearly identical to
AB 1082 (Calderon) of 2000 and AB 2669 (Maldonado) of
2002, both of which passed the Legislature with
overwhelming support but were vetoed by former Governor
Gray Davis. The veto message for AB 2669 reads in part:
"I am returning Assembly Bill 2669 without my
signature. This measure allows telephone
companies that are regulated under the New
Regulatory Framework, know as the "price cap"
regulatory structure, to issue stock or debt
without California Public Utilities Commission
(PUC) approval unless the PUC can prove that such
an issuance would not be in the public interest.
As I indicated in my veto of AB 1082 (Calderon,
2000), there is no need to duplicate existing PUC
procedures that allow the PUC to exempt telephone
companies on a case-by-case basis from regulatory
review of their financing proposals. For this
reason, I am vetoing this measure. "
ASSEMBLY VOTES
Assembly Floor (71-0)
Assembly Appropriations Committee (18-1)
Assembly Utilities and Commerce Committee(12-0)
POSITIONS
Sponsor:
Verizon
Support:
California Telephone Association
SBC
Oppose:
Office of Ratepayer Advocates (ORA)
Randy Chinn
AB 2505 Analysis
Hearing Date: June 8, 2004