BILL ANALYSIS 1 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE DEBRA BOWEN, CHAIRWOMAN AB 1082 - Calderon Hearing Date: June 13, 2000 A As Amended: June 6, 2000 FISCAL B 1 0 8 2 DESCRIPTION Current law requires a utility that wants to issue stock or debt to obtain prior approval from the California Public Utilities Commission (CPUC), but the CPUC may waive this requirement if it finds it's in the public interest. This bill turns current law around by permitting telephone companies that are regulated under a "price cap" regulatory structure to issue stock or debt unless the CPUC finds such an issuance isn't in the public interest. BACKGROUND Utility rates have historically been set by basing them on the cost of providing the service, plus a reasonable return on the utility's investment - a process known as "cost-of-service" ratemaking. The cost of stock or debt is one of many costs that are factored into that rate setting calculation. The ratesetting process for Pacific Bell and GTE doesn't use cost-of-service ratemaking, but rather sets rates for these two utilities via price caps. Under this process, prices are initially set according to traditional cost-of-service ratemaking, but the prices are ceilings that allow the utility to lower prices if it sees fit. This approach gives the utility 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 one of these utilities 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 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 hearings after the CPUC found the issuance of such securities wasn't adverse to the public interest. QUESTIONS 1.In light of the fact that the authority sought by this bill could be granted by the CPUC and the sponsor has chosen not to ask the CPUC for such authority, is it appropriate to change the law? 2.Is it appropriate to essentially "reverse the burden" as this bill does by effectively changing the process from one in which stock and debt issuance requires approval by the CPUC to one where stock and debt issuance is permitted unless the CPUC acts to preclude it? 3.Does this reversal change the process from one where the utility wanting the benefit has to affirmatively seek it to one where consumers or the CPUC who fear debt or stock issuance could lead to rate increases have to initiate a process to stop it? COMMENTS 1)Why Not Just Go To The CPUC? The regulatory flexibility the sponsor, GTE, seeks with this bill is already available from the CPUC and was generally provided to Pacific Bell in 1997. However, GTE has chosen not to ask the CPUC for the ability to issue debt or stock and has instead opted to seek this legislative authorization. Given the fact that the CPUC has the statutory authority to deal with this issue and has a track record of approving similar requests, the committee may wish to consider whether the existing regulatory procedure should be turned around by a party that simply chooses not to even try using the existing process. 2)Are Rate Hikes Possible? Under the price cap system of ratemaking, the consumer is supposedly insulated against rate hikes because according to the system, if the utility's costs exceed the cap, the utility can't raise rates above the cap to recoup those costs. However, there are at least two instances where poor financing decisions could lead to rate hikes despite the existence of a price cap. The first is that under the price cap system, a utility is free to reduce rates. To the extent rates are below the price cap and the utility incurs additional expenses from a poor financing decision, it would be free to raise rates up to the cap. The second exception would be if a utility were to encounter significant financial difficulties that threaten its viability. Under such circumstances, the CPUC would be forced to bail out the company because, at least in the case of GTE, its residential phone customers won't have any other company to provide them with local telephone service and the CPUC has an obligation to uphold the universal phone service mandate. It could be argued that ratepayer risk is mitigated by a provision in the bill that permits the CPUC to reimpose the financing pre-approval requirement if it finds such pre-approval is in the public interest. Because the CPUC is required to audit telephone corporations every three years and requires annual earnings information to be disclosed as a part of that process, the CPUC should have ample warning prior to such a disaster occurring. 3)Technically Speaking . Page 3, Line 34 of the bill should include a reference to Public Utilities Code Section 830. ASSEMBLY VOTES Assembly Utilities & Commerce Committee(11-0) Assembly Appropriations Committee (21-0) Assembly Floor (72-6) POSITIONS Sponsor: GTE California Incorporated Support: California Telephone Association Office of Ratepayer Advocates Oppose: None on file. Randy Chinn AB 1082 Analysis Hearing Date: June 13, 2000