BILL ANALYSIS                                                                                                                                                                                                                   1
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             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

                                                                       
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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), 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