BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 429|
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THIRD READING
Bill No: SB 429
Author: Morrow (R)
Amended: 4/30/03
Vote: 21
SENATE ENERGY, U.&C. COMMITTEE : 7-0, 4/22/03
AYES: Bowen, Morrow, Alarcon, Dunn, McClintock, Murray,
Sher
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
SUBJECT : Public utilities: acquisition or control
SOURCE : Author
DIGEST : This bill codifies the effect of the State
Public Utility Commission's (PUC) holding company
decisions, designed to ensure that the utility always meets
its statutory obligation to serve its customers. This bill
makes it clear the PUC has the power to enforce the
provisions of its decisions.
ANALYSIS :
Current law:
1.Provides the State Public Utilities Commission (PUC) with
broad authority to regulate public utilities and to do
everything necessary and convenient in exercising that
authority.
CONTINUED
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2.Authorizes the PUC to levy penalties against utility
holding companies when it finds the holding company's
utility subsidiary has made an imprudent payment to, or
received a less than reasonable payment from, the holding
company or any of its affiliates.
This bill:
1.Authorizes the PUC to enforce any condition agreed to by
a public utility as part of (1) an application to merge,
acquire, or control a public utility, or (2) an
application to issue stock and stock certificates, or
other evidence of interest or ownership, or other
evidence of indebtedness.
2.Provides that the power to enforce applies to the utility
and the corporation or person holding a controlling
interest in the public utility.
3.Requires the capital requirements of the electric or gas
corporation, as determined by the PUC, to be given first
priority for any holding company approved to have a
controlling interest in an electric or gas corporation.
4.States that the above provisions are declaratory of
existing law.
5.Requires the PUC, when it determines capital is required
to meet the electric or gas corporation's obligation to
serve, to order the holding company to infuse sufficient
capital of any type it deems necessary into the utility.
6.Provides that any holding company approved to have a
controlling interest in an electrical or gas corporation,
is required to maintain a balanced capital structure in
the utility and provides that retained earnings are not
to be transferred to the controlling interest when doing
so would decrease the utility's net equity, as specified.
7.Requires that any dividend policy of the utility be set
aside by the utility's board of directors as though the
utility is a stand alone electrical or gas corporation.
Background
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Formation of the Holding Companies . Since the mid-1980's,
California's investor-owned energy utilities (IOUs) have
sought to form holding companies for purposes of
diversification. The holding companies become the sole
owner of the utilities and often times use utility profits
to fund other ventures. In its simplest form, for example,
Pacific Gas & Electric (PG&E) Corporation is a holding
company with two separate divisions, PG&E Company and PG&E
National Energy Group. Investors can only buy stock in
PG&E Corporation.
The PUC has to approve all holding company requests before
such a company can be created. The first to apply was the
San Diego Gas and Electric Company (SDG&E) in 1985. SDG&E
was concerned its monopoly position was eroding, and,
consequently, it feared the company was losing its
traditional status as a safe investment. To maintain its
ability to attract investors, SDG&E believed it needed to
seek new lines of business outside of its utility
operations. Forming a holding company would facilitate the
integration of non-utility ventures into the corporation by
providing improved access to financing and establishing a
clear separation between utility and non-utility
operations. The company argued this wouldn't adversely
effect the public interest because it would have no effect
upon its utility operations or service to customers.
Formation of the holding company was hotly debated at PUC.
The entity now known as the Office of Ratepayer Advocates
argued a holding company was not necessary for SDG&E to
diversify, that it could jeopardize future PUC oversight,
that it would complicate proper regulatory oversight, and
that a holding company would provide no benefits to
ratepayers. Utility Consumer Action Network, a San
Diego-based consumer group, argued a holding company would
divert company resources and management from SDG&E's
utility operations, which would inevitably create conflicts
of interest between the needs of the utility and its
corporate siblings. In the end, the PUC agreed to permit
the formation of the holding company, subject to numerous
conditions. Those conditions included a financial
requirement, which is at the heart of this bill, known as
the "first priority" condition:
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"The capital requirements of the utility, as determined
to be necessary to meet its obligation to serve, shall
be given first priority by the Board of Directors of
the holding company and SDG&E."
This condition, and others, reflect concern by the PUC that
diversification through a holding company could have
adverse consequences to utility ratepayers, so the
conditions were designed to ensure the financial health of
the utility remains paramount. SDG&E agreed to this
condition, though it ultimately suspended its pursuit of a
holding company because of disagreements over other
conditions the PUC sought to attach to the request.
The PUC's SDG&E holding company decision was the basis for
later holding company decisions for all three major IOUs.
Each of these decisions contain many conditions virtually
identical to those found in the original SDG&E decision
discussed above, including the first priority condition.
The PUC's concerns about the financial health of the
utility in a holding company structure has been consistent,
as has the holding company's acceptance of these
conditions.
California's Energy Crisis . In late 2000 and early 2001,
California's energy crisis was in full bloom. Wholesale
electric costs were skyrocketing, causing the utilities
severe financial difficulties as they labored to cover
these costs after agreeing to a retail rate freeze as a
part of California's deregulation statutes.
IOUs weren't able to buy power, causing the state to step
in first with a $400 million emergency appropriation to
cover less than two weeks worth of power purchases, then
later with a directive to require the State Department of
Water Resources to temporarily assume power buying
responsibilities on behalf of California's electricity
customers. The PUC raised electric rates by over 40
percent to help cover the ongoing cost of power. PG&E
filed for Chapter 11 bankruptcy protection, while Southern
California Edison (SCE) threatened a bankruptcy filing and
pursued a negotiated financial settlement both
legislatively and at the PUC, where they were eventually
successful.
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While the financial position of the utilities became
precarious, the utility holding companies managed to stay
out of harms way. Both PG&E Corporation and Edison
International, the holding companies for PG&E and SCE, used
a technique known as "ring fencing" to shield the holding
company assets, making them unavailable to help the
utility. In April 2001, the PUC initiated an investigation
into whether PG&E Corporation, Sempra Energy, and Edison
International complied with the conditions contained in the
decisions which allowed their creation, including the first
priority condition.
The holding companies have objected to the PUC's
investigation, arguing the PUC has no jurisdiction over the
holding companies because the holding companies aren't
public utilities. They also contend the term "capital"
means equity capital, not operating capital, which is what
the IOUs needed during the energy crisis. While the
holding companies failed to inject additional operating
funds into their utilities during the energy crisis, there
was no failure to provide adequate equity capital. Hence,
the holding companies argue they weren't in violation of
the first priority condition, according to the holding
companies.
In January 2002, the PUC found there was no basis for
limiting the meaning of capital to equity capital in any of
the holding company decisions. The holding companies
challenged this decision to the Appellate Court in December
2002, but hearings on the issue have yet to be held.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
SUPPORT : (Verified 5/21/03)
California Utility Employees
Office of Ratepayer Advocates
State Public Utilities Commission
Utility Consumer Action Network
The Utility Reform Network
OPPOSITION : (Verified 5/21/03)
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Pacific Gas & Electric
Sempra Energy
Southern California Edison
NC:mel 5/21/03 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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