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HomeMy WebLinkAboutItem 4.05 UtilityRateReduct&RefmAct '\. CITY CLERK File # D~~[Q]-[!t1[Q] . AGENDA STATEMENT CITY COUNCIL MEETING DATE: (September 1,1998) SUBJECT: Adoption of Resolution Opposing Proposition 9, the Utility Rate Reduction and Reform Act (prepared By: Sue Barnes, Management Assistant) EXIDBITS ATTACHED: 1. Letter from PG&E, to Mayor Houston requesting that the City of Dublin adopt a resolution opposing Proposition 9. 2. California Legislative Analyst's Sununary of Proposition 3. Proposed Resolution RECOMMENDATION:~ 1. }.eceive Staff Report 11 ^ r;Z' Adopt Resolution \l/V FINANCIAL STATEMENT: Approval of the measure by voters is expected to reduce general fund revenue to the City and may jeopardize State funding to local governments. . DESCRIPTION: In a letter dated August 4, 1998 Pacific Gas & Electric (PG&E) requested that the Mayor and City Council consider Proposition 9 on the upcoming State ballot. (Exhibit 1) The Mayor requested that the item be placed on the agenda for consideration by the City Council. In 1996, Governor Wilson signed AB 1890, which set into motion a system to restructure California's electric services industry. In 1997, the Governor also signed SB 477, which made several important changes to AB 1890, especially in the area of consumer protection. In the newly restructured electricity services system, users may continue to purchase their electricity from existing Investor-Owned Utilities, or may purchase their electricity from an Energy Services Provider. The existing utilities such as PG&E continue to provide and maintain the distribution and transmission system. The Utility Rate Reduction and Reform Act, Proposition 9, will be on the November 1998 ballot. This measure is an initiative which has received the required number of signatures to appear on the ballot. This proposition would make a number of changes to current law. The following outlines key financial elements included in existing law and the initiative: 1. Capital Costs - AB 1890 permitted the investor-owned utilities (and municipal utilities) to recover their "stranded" capital costs through March 31, 2002. In general, these are costs approved previously by the Public Utilities Commission (PUC), and are previously included in the rate base. Based upon criteria in the law, the PUC will review the utilities' requests for these charges. All customers must pay these charges, until 2002, when it is assumed the utility will have recovered the costs from rates. . ------------------------------------------------------------------- COPIES TO: Mike McGee, PG&E ITEM NO. 4.; HJcc-forms/agdastmt.doc . . 2. Rate Reductions - AB 1890 froze all electricity rates at their June 1996 levels until January I, 1998-. Beginning in 1998, residential and small commercial customers received a 10% rate reduction. It is expected that those same customers will receive an additional 1 0% reduction in 2002. . The first 10% rate reduction has been achieved by financing a portion of the residential and small commercial customer's share of the capital cost recovery charges paid to the investor-owned utilities. This was accomplished through $6 billion in so-called rate reduction bonds, issued by the State Infrastructure and Economic Development Bank, to be repaid over ten years. .. . Key Elements of Proposition 9: 1. Transition Cost Recove:ry - The initiative would eliminate costs for nuclear generating plants (oth:r than reasonable costs for decommissioning) from the capital recovery charges. For non-nuclear generation sources, the existing investor-owned utilities could not receive the capital charges unless they demonstrated to the PUC that these costs could not be recovered in the competitive market (with a fair rate of return). 2. Rate Reduction - The measure would require at least a 20% rate reduction for residential and small commercial customers effective January 1, 1999, with no time limit on the reduction. 3. Bonds - The measure would not permit existing investor-owned utilities to pass on the costs to repay reduction bonds through charges to customers. Direct impacts to local government include loss of franchise fees, as a result of lower electricity prices. According to the State Legislative Analyst's Office and the State Department of Finance, Proposition 9 would create a significant impact on the State Budget and may result in reductions in funding for local governments. The complete analysis is attached as Exhibit 2. . In addition, the initiative attempts to nullify $6 billion in bonds already sold. The state pledged in AB 1890 to "take no action to impair the bonds, unless it made adequate provisions for the bondholders." As a result, the State of California, and ultimately the taxpayers, would be likely liable to repay the bondholders. This measure could also adversely affect the ability of California local governments to sell their own bonds in the future, due to an increase in perceived risk associated with the California initiative process. Due to the nature of these issues, it is likely that litigation may result if the measure is approved by the voters. Based on information provided by PG&E, Staffhas prepared a draft resolution (Exhibit 3) identifying potential negative impacts of the passage of Proposition 9 on local governments. Recommendation: Staff recommends that the Council accept the staff report and adopt the resolution. . -A- . . .. I~ /01 Pacific Gas and Electric Company Mike McGee 24300 Clawiter Road Public Affairs Hayward. CA 94545 August 4, 1998 51O}S4.3344 Mayor Guy Houston City of Dublin ' 100 Civic Plaza P.O. Box 2340 Dublin, CA 94568 RECEiVED ~.Uf.:; I.~ .. 199B C\TY ut- UUl::)LiN Dear Mayor Housto On November 3, Proposition 9 will appear on the California statewide ballot. I am requesting that the City of Dublin adopt a resolution opposing the measure and invite you and your fellow council members also to join the coalition to oppose it. A copy of the initiative and a draft resolution as well as other pertinent materials are attached for your information and use. Proposition 9, opposed by a broad based coalition, including the League of California Cities, would hinder California's newly created competitive electric marketplace. Despite the fact that Californians overwhelmingly support customer choice and competition in the electric business, a small group succeeded in getting the initiative on the November ballot. The initiative is misguided, flawed and harmful to our customers. It makes promises that it can not keep. According to the State Legislative Analyst's Office and the State Department of Finance, Proposition 9 would create a $6 billion hole in the State Budget and may result in reductions in funding for local governments or additional taxes. Furthermore, the law firm of Orrick, Herrington & Sutcliff has issued a memorandum that if Proposition 9 passes, local governments could face additional hurdles in issuing their own bonds and possibly pay additional financing costs. These are just a few of the unintended consequences of Proposition 9. Please join me and a growing list of organizations and community leaders who are opposed to Proposition 9. If you have any question, please cal me at 510/784-3344. Thank you for your consideration. Very truly yours, J1~_ 10 ) //Mf<-C/ Mike McGee . Public Affairs Representative EXHIBIT 1 ( WE'RE OPPOSED TO PROPOSITION 9 /' -/ 1/ /" ,,-,' -' } . California Chamber of Commerce California School Boards Association California State Firefighters Association California Labor Federation, AFL-CIO California Organization of Police and Sheriffs California Black Chamber of Commerce California Municipal Utilities Association Association of California Water Agencies California Cooncil for Environmental and Economic Balance California School Employees Association California Small Business Association California Taxpayers' Association League of California Cities Peace Officers Research Association of California Planning and Conservation League California Health care Association California Teachers Association Monterey County Hispanic Chamber of Commerce California Large Energy Consumers Association California Business Roundtable Enron Independent Energy Producers Association Consulting Engineers and Land Surveyors of California California Forestry Association California Retailers Association California Farm Bureau Federation Americans for Competitive Telecommunications Simi Valley Chamber of Commerce Black Chamber of Orange County Antelope Valley Board of Trade n..........:.......~ OIA InO . . ~ American Association of Business Persons with Disabilities California Business Properties Association Orange County Taxpayers Association Los Angeles County Federation of Labor Consumers First Environmental Defense Fund Consumers Coalition of California Santa Clara County Hispanic Chamber of Commerce Oak Valley Union School District California City Economic Development Corporation California League of Food Processors Hanford Chamber of Commerce California Industrial Users Victor Valley African American Chamber of Commerce California's Investor~Owned Utilities City of California City Eureka Chamber of Commerce Monterey County Business Council Latino Chamber of Commerce of Santa Cruz County . Jefferson Union High School District New Energy Ventures South Bay Association Chambers of Commerce California Restaurant Association Sacramento Black Chamber of Commerce California Manufacturers Association Natural Resources Defense Council . . ### . n-.."":__..:I 0'" InD <, ,/ z~ '7. ., ./ WHY LOCAL GOVERNMENT SHOULD OPPOSE PROPOSITION 9 Proposition 9 would dismantle California's competitive electricity market just as it is getting underway- _ and eliminate customer choice and competitive electricity rates. In addition, while it is intended to reduce rates, provisions contained in Prop. 9 will actually increase costs for electricity customers and taxpayers and damage our state's economy. . Local government should be particularlv concerned about Prop. 9 for the following reasons: PROPOSITION 9 WOULD REDUCE FUNDING TO LOCAL GOVERNMENT. . According to the State Legislative Analyst and Department of Finance, "The net impact of the measure on state government revenues would be annual revenue reductions potentially in the range of $100 million per year from 1998-1999 through 2001-2002.... The net impact on local governments would be revenue reductions. potentially in the tens of millions of dollars annually from 1998-99 through 2001-02." (Actual text from the official fiscal impact summary for the initiative prepared by the Legislative Analyst and Department of Finance). + In addition, because the initiative attempts to nullify $6 billion in bonds already sold, and the state pledged in AB 1890 to "take no action to impair the bonds, unless it made adequate provisions for the bondholders" (section 841 (c)), the State of California is likely liable to repay the bondholders. As a result, the State Director of Finance has concluded that: "Planning/or a budget contingency of potentially [$7] billion could directly effect even' program in the state budget and would require a major budget adjustment effort." That is why the California School Boards Association and the California Organization of Police and Sheriffs oppose Prop. 9. . PROPOSITION 9 WOULD INCREASE THE COST OF FINANCING LOCAL BONDS. + According to the prestigious law firm Orrick, Herrington & Sutcliffe, passage of Prop. 9 could set a very dangerous precedent, threatening the validity of other bonds sold in California. If initiatives can be passed that overturn obligations made by the state and local governments and invalidate and impair collection of bonds already sold, the ability of state and local governments to secure low-cost financing for local education bonds, local infrastructure bonds and other types of bonds would be in jeopardy. As a result, Prop. 9 could adversely affect the ability of California local governments to sell their own bonds due to an increase in perceived risk associated with the California initiative process. PROPOSITION 9 \VOULD CREATE CHAOS IN THE EMERGING COMPETITIVE ELECTRICITI' MARKET. . Dozens oflocal governments have signed contracts, or are in the process of exploring potential cost-saving opportunities associated with the emerging c~mpetitive marketplace. Due to poor . drafting and the fact that Prop. 9 attempts to nullify previously sold bonds, the initiative will undoubtedly result in years oflitigation and eliminate any opportunity for lower electricity rates. ### ~if1 Electric Utilities. Assessments. Bonds. Initiative Statute. Official Title and Summary Prepared by the Attorney General ELECTRIC UTILITIES. ASSESSMENTS. BONDS. INITIATIVE STA'I:UTE. . Pr-ohibits assessment of utility tax, bond payments or surcharges for payment oCcosts of nuclear power plants/related assets. . . Limits authority of electric companies to recover costs for non-nuclear generation plants. . Prohibits issuance of rate reduction bonds and assessments on customers for payment of bond principal, interest, and related costs. . Provides judicial review of Public Utilities Commission decisions relating to electric restructuring and financing costs by writ of mandate. .' . . May provide up to 20% electricity rate reduction for residential and' small commercial customers of investor-owned utilities by January 1, 1999. . . . Restricts customer information dissemination. Summary of Legislative Analyst's Estimate of Net State and Local Government Fiscal Impact: ' . State government net revenue reductions potentially in the high tens of millions of dollars annually through 2001-02. . Local government net revenue reductions potentially in the tens of millions of dollars annually through 2001-02. .. State and local government savings in utility costs, potentially in the. tens of millions of dollars annually through 2001-02. ~alysis by the Legislati~e Analyst. BACKGROUND . ends no later than December 31, 2001. There are some In 1996 and 1997, the state significantly changed the way the exceptions to this time line, such as (1) certain costs related to electricity industry is regulated in California. New state laws the San Dnofre nuclear power plants in San Diego County, deregulated the generation of electricity-that is, its actual which can be recovered until December 31, 2003; and (2) costs production. (They did not, however,. deregulate the related to contracts to purchase electricity from certain transmission or distribution of electrical power.) These new renewable generation facilities (for example, windmills and laws also set up statewide entities to ensure the availability of solar power) and cogene;I'ation facilities, which can be recovered power and the reliability of the statewide electrical system. over the life of the contracts. - Before deregulation, private utilities were able to recover the Required Rate Reduction. The restructuring laws costs of generating electricity through the rates they charged to require a 10 percent reduction in electricity rates that were in their customers, as long as the California Public Utilities effect on June 10, 1996 for residential and small commercial Commission (PUe) approved these costs as "reasonable." Under customers of the private utilities. This rate reduction was deregulation, the prices that customers pay for electricity will effective January I, 1998 and continues until the earlier of not be set by government-approved rates, but will -be March 31, 2002, or such time as transition costs have been fully determined in the competitive market. . The state's "restructuring" of the electricity industry recovered. The Legislature also expressed its intent, but did not primarily affects the state's private electric utilities. There are require, that a cumulative rate reduction of 20 percent be three major private electricity utilities in. California: Pacific achieved by April 1, 2002 for these customers. Gas & Electric, San Diego Gas & Electrie, and Southern Bonds. The restructuring laws also called for the issuance California Edison. of "rate reduction" bonds. Before the bonds could be sold, the There are three main provisions of the restructuring la~s PUC was required to find that issuance of the bonds would help that would be affected by this measure. . provide the 10 percent rate reduction for residential and small Transition Cost,Recovery. Restructuring allows private commercial customers. The restructuring laws also declare that electric utilities to recover their "transition" costs through (1) the bonds are not to be an obligation of the state or any of its . _ChargeS to customers. These "transition" cOfts (also referred political subdivisions and (2) the state will not limit or alter the s "stranded" costs) are defined as the costs of existing power provisions relating to transition charges and the bond nts that are unprofitable in a competitive energy market. arrangements. ' The PUC was required to approve the amount of transition In November and December 1997, a total of $6 billion worth costs the utility companies could recover through surcharges. of such bonds were sold by a special purpose trust authorized by The transition cost recovery period began January I, 1998 and the state. The bonds are to be paid off through additional EXHIBIT 2 charges on the electricity b~lls of .r~~idential and small commercial customers of the pnvate utIhtIes. , PROPOSAL This initiative measure modifies the provisions of current law discussed above in the following manner: . Transition Cost Recovery. The measure. would not allow private electric utilities to charge customers for the . transition costs for nuclear power plants (other than reasonable decommissioning costs). In addition, befor~ ~he private utilities could charge customers for the transItIon costs of non-nuclear generation (other than costs associated with renewable electricity generation facilities) the utilities would be required to demonstrate to thePUe that these costs could not be recovered in the competitive market (with a fair rate of return). ' '. . Required Rate Reduction. The measure would reqUIre at least a 20 percent rate reduction (rather than the 10 percent reduction required i?- current law) on the to~al electricity bill for residentIal and small commerclal customers compared to the rates for these customers on . June 10, 1996. The rate reduction would begin January 1, 1999. (The measure is unclear as to how long this rate reduction would last.) . Bonds. The measure would not allow the utilities to charge customers for the cost.s of repaying the ::ate reduction bonds. Legal questIons have been ralsed regarding the application ofthe measure's provisions to these bonds. For instance, the measure could be interpreted as interfering with a contractual arrangement already entered into with the bondholders. (The state and federal constitutions prohibit impairments of contracts.) At this time it is not clear whether the measure would have any impact on the repayment of these bonds or, if it did, what the impact would be. . The measure also requires certain pue decisions relating to electric restructuring and the financing of transition costs be referred to the courts of appeal, rather than directly to the California Supreme Court. FISCAL EFFECT The measure has several provisions that probably would be challenged in the courts. How these issues are ultimately resolved by the courts could significantly affect the fiscal impact of the measure. However, as written, the measure could ' result in significant. impacts on state and local government revenues and expendItures. In estimating the measure's fiscal impacts, a key assumption is the level of stranded assets currently eligible for cost recovery by the utilities but that would not be eligible for recovery under this measure. In order to estimate the potenti~l impacts, we have assumed that stranded costs affected ~y. tP.1S, measure would approximate the value of the utIhtIes nuclear-related stranded costs-about $10 billion. State and Local Tax Revenues Impacts on Utilities. With regard to taxes paid by the utilities: · The elim'ination of transition costs currently collected by the utilities (through billings to customers) would reduce the income to these utilities, which is currently subject to the state bank and corporation tax. This would result in {; / ./ 1 " reductions in state tax revenues, potentially up to $~ million annually through 2001-02. In addition, beca~ many local governments levy utility fees based on billings, their revenues would also decline-perhaps by tens of millions of dollars statewide per year through 2001-02. If the inability to recover stranded costs led to an early shutdown of any nuclear plant, there would be further reductions in corporate income taxes. . The measure could also result in a reduction in property tax valuations of nuclear facilities because of the inability of a private utility to recov~r its stranded costs. Af:1y such reductions would result m unknown losses m local property taxes-potentially in the low tens of millions of dollars annually. Impacts on Utility Customers. With regard to taxes paid by the utilities' customers: , . Customers receiving utility rate reductions would have more discretionary income available to ~ave or spend on other goods and services. This could result in state and local governments receiving more revenues from the sales tax. This additional revenue could total in the high tens of millions of dollars annually through 2001-02, of which about three-fourths would go to state government and the remainder to local governments. . The reduction in transition cost payments would lower the energy-related costs of business c,:stomers, leading to higher net incomes that would be subject to state corporate and personal income taxes. We estimate tp.at.this co~ld result In more tax revenue to the state total1Og m the h1e tens of millions of dollars per year through 2001-02. Summary of Revenue Effects. The net impact of these changes on state government revenues would be 8;nnual revenue reductions potentially in the high tens of milhons of dollars annually 'through 2001-02. The ~et impact. on. local governments would be revenue reductIons, potentIally 10 the tens of millions of dollars annually through 2001-02. State and Local El..-penditures State Spending on S~hools. The f!1easure could ~ffe~t . state spending on schools 10 two ways. Flrst, the reductlOn lU state revenues (discussed above) could reduce the amounts the state would have to pay schools in future years. This could result in state savings-potentially up to half the amount of the annual state revenue losses. Second, the state would also be required to offset any local school district losses of property - taxes that resulted from any reduction in the property values of nuclear facilities. This would increase state spending on schools. Utility Cost Savings. T~e state .and local go,:,~rnments would realize savings assoclated wlth lower u11hty rates resulting from elimination of transition costs related to nuclear power plants. The savings could be in the tens of millions of dollars annually. . State Administrative Costs. The measure could result m additional workload for the pue and the courts. This would involve activities such as hearings regarding rate reductio.ns and related fair rate of return. The measure could also reqUIre additionalle<Tal costs associated with cases before the courts of appeal. The~e costs would probably be less than $5 millio. annually. . For the text of Proposition 9 see page 118 . . . RESOLUTION NO. - 98 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF DUBLIN -- t'r~ i#_~/ . /1 / * * * * * * * * * OPPOSING PROPOSITION 9 DUE TO POTENTIAL NEGA TIVE IMPACTS ON LOCAL GOVERNMENT WHEREAS, the State Legislative Analyst and Department of Finance have determined that the net impact of this proposition on local governments would be revenue reductions potentially in the tens of millions of dollars annually through 2001-02; and WHEREAS, the proposition could create a .$6 billion hole in the state budget, resulting in significant reductions in funding to local government and critical services such as police and fire, impairing community health and welfare, public safety and community quality oflife; and WHEREAS, the precedence set by disallowing payment on rate reduction bonds could impair the ability of state and local governments to secure low-cost financing for local infrastructure bonds and other types of bonds; and WHEREAS, the proposition could create more bureaucracy and red tape and cost California taxpayers billions of dollars in lawsuits; and WHEREAS, passage of this measure could exacerbate the financial problems experienced through unfunded state mandates; and WHEREAS, this proposition jeopardizes the state's economic recovery by creating uncertainty for California-based companies, as well as those considering relocating to our state; and WHEREAS, the League of California Cities voted to oppose the initiative. NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Dublin opposes Proposition 9, based upon significant potential negative impacts on local government. PASSED, APPROVED AND ADOPTED this 1st day of September, 1998. AYES: NOES: ABSENT: ABST AIN: Mayor ATTEST: City Clerk F :as\bames\prop9res.doc K2/G/9-1-98/resprop9. doc EXHIBIT 3