BILL ANALYSIS
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THIRD READING
Bill No: AB 1082
Author: Calderon (D)
Amended: 6/20/00 in Senate
Vote: 21
SENATE ENERGY, U.&C. COMMITTEE : 9-0, 6/13/00
AYES: Bowen, Alarcon, Brulte, Kelley, Mountjoy, Murray,
Peace, Solis, Speier
NOT VOTING: Hughes, Vasconcellos
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
ASSEMBLY FLOOR VOTE NOT RELEVANT
SUBJECT : Public utilities: stocks and security
transactions
SOURCE : GTE California Incorporated
DIGEST : This bill permits telephone companies that are
regulated under a "price cap" regulatory structure to issue
stock or debt unless the California Public Utilities
Commission finds such an issuance isn't in the public
interest.
ANALYSIS : 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.
CONTINUED
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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.
The bill specifies, however, that this article shall
continue to apply to any telephone corporation that is also
an electric or gas corporation that is a public utility, as
defined.
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 rate setting 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.
Comments
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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, should the
existing regulatory procedure be turned around by a party
that simply chooses not to even try using the existing
process?
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
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ample warning prior to such a disaster occurring.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 6/26/00)
GTE California Incorporated (source)
California Telephone Association
Office of Ratepayer Advocates
ARGUMENTS IN SUPPORT : GTE argues this bill "would amend
PUC 829 to exempt an incentive-based telephone corporation
from CPUC review so that it parallels today's paradigm and
market while leaving in place the authority to review the
transactions of companies still under cost-of-service
regulations."
NC:kb 6/28/00 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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