BILL ANALYSIS 1
1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 2505 - Maldonado Hearing
Date: June 22, 2004 A
As Introduced: February 19, 2004 FISCAL
B
2
5
0
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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."
4.Play It Again . This bill was heard by the committee on
June 8 and was defeated on a 2-0 vote (five votes were
needed for passage).
PRIOR VOTES
Senate Energy, Utilities & Communications Committee
(2-0) (failed passage)
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 22, 2004