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