BILL ANALYSIS
SB 429
Page A
Date of Hearing: July 7, 2003
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Sarah Reyes, Chair
SB 429 (Morrow) - As Amended: April 30, 2003
SENATE VOTE : 27-3
SUBJECT : Public Utilities: acquisition or control.
SUMMARY : Requires holding companies to assure the financial
health of subsidiary public utilities and specifically grants
the Public Utilities Commission (PUC) jurisdiction to enforce
these provision against holding companies. Specifically, this
bill :
1)Authorizes PUC to enforce any condition agreed to by a public
utility as part of an application to merge, acquire, or
control any public utility or an application to issue stocks
and stock certificates, or other evidence of interest or
ownership, or bonds, notes, or other evidence of indebtedness.
2)States that PUC's power to enforce this provision applies to
the public utility and to any corporation holding a
controlling interest in the utility.
3)Requires that a corporation holding a controlling interest in
an electrical or gas corporation, must:
a) Give first priority to the capital requirements of the
utility necessary to meet the utility's obligation to
serve.
b) Infuse sufficient capital into the utility to enable the
utility to perform its obligation to serve.
c) Maintain a balanced capital structure in the utility and
may not transfer retained earnings to the controlling
interest when doing so would decrease the utility's net
equity.
4)Requires that the divided policy of a electric corporation or
gas corporation controlled by a parent company must be set by
the public utility's board of directors as if the utility was
a stand alone company.
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EXISTING LAW :
1)Requires approval from PUC before a corporation may merge,
acquire, or control a public utility doing business in
California.
2)Requires a public utility to obtain PUC approval prior to
issuing stock or debt payable over a term longer than one
year.
3)Prohibits a public utility from selling, leasing, assigning,
or mortgaging any property necessary or useful in the
performance of its duties to the public without prior approval
from PUC.
FISCAL EFFECT : Unknown.
COMMENTS :
Existing law requires PUC to authorize the formation of a
utility holding company if the holding company will control a
public utility doing business in California. In the late 1980's
and early 1990's, all three investor owned utilities (IOU's) in
California sought and obtained authorization of PUC to establish
holding companies. In authorizing the creation of the holding
companies, PUC imposed conditions that:
1)Each holding company give "first priority" to the capital
requirement necessary to meet the public utility's obligation
to serve.
2)Each utility maintain a balanced capital structure in the
utility and may not transfer retained earnings to the
controlling interest when doing so would decrease the
utility's net equity.
3)The divided policy of a electric corporation or gas
corporation controlled by a parent company must be set by the
public utility's board of directors as if the utility was a
stand alone company. <1>
All the provision were based on an overriding requirement that
---------------------------
<1> See PUC Decisions D.88-01-063 (SCE), D.96-11-017 (PG&E) and
D98-03-073 (SDG&E/Sempra).
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the creation of a holding company result in "rate payer
indifference" -- a ratepayer should not be placed in a better or
worse position as a result of the creation of the holding
company. These conditions reflect concern by 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.
This measure codifies these provision plus an addition explicit
requirement that the holding company infuse capital into the
utility as need by the utility to meet its obligation to serve.
What is a holding Company?
A holding a company is corporation that is formed for the
expressed purpose of controlling other corporations by ownership
of a majority of their voting stock shares. In the case of the
three IOU's in California and their respective holding
companies, the holding companies own 100% of the common stock of
the utility. Investors can only buy stock in the holding
company.
All three California holding companies were created to separate
both the legal and rate making positions of unregulated
enterprises from the regulated public utility. This separation
was intended to protect the ratepayers from any risks associated
with the new enterprises.
In the case of Pacific Gas and Electric (PG&E), the holding
company is know as Pacific Gas and Electric Corporation, which
owns 100% of the shares in Pacific Gas and Electric Company (the
regulated utility), and National Energy Group (a merchant
generator and natural gas pipeline company).
For Southern California Edison (SCE), the holding company is
Edison International, which owns Southern California Edison (the
regulated utility), Edison Mission Energy (a merchant generator)
and several other unregulated companies.
In San Diego, San Diego Gas and Electric (SDG&E) (the regulated
utility) is owned by Sempra Energy which also owns Southern
California Gas Company (also a regulated utility), Sempra Energy
Solutions (an energy service provider), Sempra Energy Resources
(a merchant generator), Sempra Energy International (a merchant
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generator and infrastructure provider), Sempra Energy Trading (a
commodities trading company), Sempra Communications (a fiber
optics company), and Sempra Financial (a financing firm).
Cause of the problem
During the energy crisis in 2000 and 2001, wholesale electric
costs skyrocketed, causing severe financial difficulties for
PG&E and SCE as they were forced to cover these costs under a
retail rate freeze which was implemented as a part of
California's deregulation statutes. IOU's were not able to
cover their costs and the state was forced to step in and buy
power on their behalf. PG&E filed for Chapter 11 bankruptcy
protection, while SCE threatened a bankruptcy filing and pursued
a negotiated financial settlement both legislatively and at PUC,
where they were eventually successful. While the financial
position of the utilities deteriorated, the holding companies'
finances remained relatively stable.
In 2001, PUC opened an investigation to determine whether
transfers of money to the utilities' holding companies and the
failure of the holding companies to infuse capital into the
public utilities to help the utilities meet their operating
capital needs violated PUC conditions in the holding company
formation decisions.<2> To date, PUC has made no determination
that any utility or holding company violated the first priority
condition.
However, PUC issued a decision that it may order the holding
companies to provide the necessary capital to pay the utility's
cost of electricity.<3> The utilities have appealed this
decision to the California Court of Appeals. The focus of the
appeal is, what is the scope of "capital" required under the
first priority decision. PUC argues that first priority
condition requires the holding companies to infuse all types of
capital into the subsidiary utility, including both equity
capital -- capital used to finance investment level projects
such as new infrastructure, and operational capital -- money
needed to finance ordinary operating expenses.
The utilities and their holding companies assert that the "first
priority" condition only requires the holding company to give
"first priority" to any equity capital needs of their utility
---------------------------
<2> I.01-04-002.
<3> D.02-01-039.
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subsidiaries before making investments in their non-utility
subsidiaries. Operational expenses are to be recovered in
rates; the wholesale costs of purchasing and delivering
electricity should be covered by retail rates and not by the
shareholders.
First Priority of what Capital?
This bill codifies PUC interpretation of the first priority
condition by requiring a holding company to infuse sufficient
capital of any type to enable the utility to meet its obligation
to serve.
Supporters of this bill argue the intent of the first priority
language was always to apply to all types of capital. They
contend that the broad interoperation is necessary to protect
ratepayers by insuring that the holding companies reinforce
their utility subsidiaries in bad times. This would be
consistent with the principle of ratepayer disinterest in
assuring that the holding company cannot be used to shield
operational cash from the utility.
IOUs argue that the first priority language in the holding
company decisions was to apply only to equity capital. The
conditions were not intended to apply to operating capital.
Operating cost have always been recovered from the ratepayer.
If this measure were to be enacted PUC would have the authority
to force the holding company to transfer money to the utility
even in cases where the instability at the utility was the
result of an inadequate rate base.
Additionally, while the holding companies are entitled to a
return on their investment of equity capital in the utility,
there is no provision to allow for shareholders to be paid back
any infusion of operational costs or earn any return on use of
that capital.
Power to Enforce Holding Company Decisions
The holding companies have also challenged the authority to the
PUC to enforce the first priority conditions. They argue that
PUC has no authority over the holding companies since the
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holding companies do not fall into the definition of a public
utility. According to the holding companies, the initial
holding company decisions constitute contracts between PUC and
the holding companies. As a contractual matter, the issue
should be litigated in court and not at PUC. This issue is
currently being decided by a California Court of Appeals.
This bill explicitly grants PUC the power to enforce provision
in the holding company agreements against both the utility and
the holding company. Under the California Constitution, the
Legislature has plenary power to confer additional jurisdiction
and authority upon PUC.
Under provision in all three holding company agreements PUC
imposed and the holding companies agreed to all of the provision
incorporated in this bill with the exception of the requirement
to infuse operating capital from the holding company to the
utility. Presumably since these terms were already agreed to by
each of the holding companies they should not be opposed to
clarifying PUC power to enforce the provisions agreed to in the
holding company decisions.
Impacts on investment
The holding companies contend that a requirement that they
transfer operating capital to the utility will result in a
downgrade of their credit ratings and will limit their access to
capital markets to make needed infrastructure investments.
Investors may be unwilling to loan money to the holding
companies if capital held by the holding company, which may have
been generated by or intend for use by, unregulated subsidiaries
is forever subject to demands by PUC that it be transferred to
the utility. Investors will not provide money to a company
where there is little assurance of recovering the investment or
earning a return on that money. According to a recent Lehman
Brothers analysis, this measure "appears to be a short-sighted
land grab that will inevitably raise uncertainty and therefore
result in higher debt and equity capital costs?"
IOUs also fear that these bill would allow PUC to avoid the
politically unpopular decision to raise rates when needed to
cover increased costs, and instead force the holding company and
the shareholders to transfer money to the utility to cover the
utilities current revenue needs.
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REGISTERED SUPPORT / OPPOSITION :
Support
California Public Utilities Commission
Office of Ratepayer Advocates (ORA)
The Utility Reform Network (TURN)
Coalition for California Utility Employees (CUE)
Opposition
Asian Business Coalition
AABE Southern California Chapter
Carpinteria Valley Chamber of Commerce
City of Lindsay
California Black Chamber of Commerce
Consumer Coalition of California
Coalition for California Utility Employees (CUE)
Economic Council of Pass Area Communities
Economic Development Corporation serving Tulare County
Greater Antelope Valley Economic Alliance
Hall & Company
Inland Empire Manufacturer's Council
Kings County Economic Development Corporation
Los Angeles County Federation of Labor, AFL-CIO
Ojai Valley Chamber of Commerce & Visitors Center
Orange County Taxpayers Association
Pacific Gas & Electric
Palmdale Chamber of Commerce
Ridgecrest Chamber of Commerce
Sempra Energy
Southern California Edison
The Coalition of California Utility Employees (CUE)
Tulare Chamber of Commerce
Verizon
Visalia Chamber of Commerce
YMCA of Corona-Norco
2 individuals
Analysis Prepared by : Edward Randolph / U. & C. / (916)
319-2083