11 COMM FDTN BYLAWS 06-03-96
HomeMy WebLinkAbout09 ELEC UTIL NO. 9 09-08-98AGENDA
SEPTEMBER 8, 1998
NO. 9
9-8-98
lnter-'COm
TO:
FROM'
SUBJECT:
WILLIAM A. HUSTON, CITY MANAGER
VALERIE CRABILL, CHIEF DEPUTY CITY CLERK
1998 ELECTRIC UTILITY PROPOSITION NO. 9
SUMMARY: The Southern California Edison Company has requeSted the CitY of. Tustin join
with the State League of California Cities in Opposing the 1998 EleCtric Utility Proposition 9.
RECOMMENDATION'
Adopt Resolution No. 98-78 opposing the 1998 EleCtric Utility Proposition No. 9 and direct
staff to forward this resolution to the League of California Cities and other organizations
deemed appropriate.
FISCAL IMPACT:
None associated with this action.. How'ever, passage of Proposition 9 could potentially
result in significant loss of revenue for the City due to reductions in electrical franchise fees
and property tax revenue.
BACKGROUND:
Assembly Bill 1890, adopted unanimously by the State legislature in 1996, allowed
consumers to choose their electricity provider beginning in 1998, mandated that small
business and residential customers of investor-owned utilities receive a 10% rate
reduction, provided the potential for even lower electricity rates, and created the basis for
the. transition to a fully competitive electricity market by 2002..During the four-year
transition period, utilitieS were given the opportunity to recover costs that were approved
by regulators under the previoUs monopoly structure.
Proposition 9 has been placed on the November 1998 ballot and, if passed, will modify
certain aspects of Assembly Bill 1890. In general, the proposition would modify the Public
Utilities Code related to' (1) reduction of residential and small commercial electricity
rates, and (2) assets that investor-owned utilities can recover through charges to
customers.
The State League of California Cities unanimously voted against Proposition 9 because of
the harmful effects it Would have on future funding to local governments, negative impacts
on the municipal bond market, and the uncertainty upon the emerging competitive
electricity market.
Electric Utility Proposition r-
Page 2, 9.8.98
Attached is a request from Klm Barone, Southern California Edison Company, representing
CARES (Californians for Affordable and Reliable Electric Services), requesting the City Council
adopt a resolution opposing Propositio. n 9.
Key elements of Proposition 9 that would effect local and State tax revenues from utilities' are:
· State Revenue Loss: Electric restructuring allowed electric corporations to recover their
"transition" costs. Proposition 9 would eliminate costs for nuclear generation plants and
all associated costs from recoverable transition costs. The elimination of transition costs
collected by utilities would result in a reduction of income subject to state tax. This
would result in reductions in state tax revenues, potentially in the range of $200 million
per year for fiscal years 1998-99 through 2001-02.
Reduction in Local Revenue from Franchise Fees: Loss of utility receipts associated with
recovery of transition costs would result~ in a reductiOn in local government utility fees
(franchise fees and utility user tax) in the tens of millions of dollars per year from 1998-
99'through 2001-02. Tustin's potential.loss would be approximately $100,000 annually
from 20% reduction in Southern California Edison franchise fees.
Local Property Tax Losses: Proposition 9 could also result in a reduction in property tax
valuations of nuclear facilities. The reductions, could result in unknown losses in local
property taxes, potentially ranging in the Iow tens of millions of dollars annually.
Municipal Bonds: Proposition 9 is designed to eliminate the financial means for repaying
more than $6 billion of bonds issued through the State; and by impairing the collection of
fees to pay for the bonds already sold, Proposition 9 may adversely affect the ability of
cities to sell their own bonds due to an increase in perceived risk associated with the
State's initiative process.
It should be noted that the State Attorney General's opinion states that cities, along with
annual revenue reductions in the tens of millions of dollars, Will also realize savings in the tens
of millions of dollars annually associated with lower utility rates.
Because the. State Legislative Analyst and state Department of Finance have expressed
opinions (attached) that Proposition 9 could jeopardize funding to local governments and
schools, and because there has been insufficient time to accurately and thoroughly evaluate
the effectiveness of Assembly Bill 1.890, staff recommends adoption of Resolution 98-78. as
requested by the Southern California Edison Company and the CARES coalition. Klm Barone,
Edison Company, will be present on September 8th to respond to any questions the City
Council may have regarding Proposition 9.
Valerie Crabill
Chief Deputy City Clerk
Ill SOU]HER\ C&LIfORNIA
EDISON
..\:: L-".3150\' I.Wl'filq.X'A TIO \ t1:" Company
July 29, 1998
Kim Barone
Region Manager
Public Affairs
Mr. William Huston
City Manager
City of Tustin
300 Centennial Way
Tustin, CA 92780
Dear M~ugton:j
As City Manager, I know you will be interested in an upcoming November ballot measure, the
1998 Electric Utility Proposition (Proposition 9). On July 24, the State League of California
Cities took an unanimous vote to oppose Proposition 9. On behalf of Californians for Affordable
and Reliable Electric Services (CARES), I would like to request that your City join the State
League in opposing Proposition 9.
A coalition of interested parties known' as Californians for Affordable and Reliable Electric
Services (CARES) has come together to oppose this proposition which seeks to dismantle
California's new competitive electricity marketplace. CARES is made up of business, labor,
consumer, utility, education, public safety, and environmental groups. This coalition believes
that the proposition will effectively end customer choice and competitive electric rates for all
Californians and exposes the State of Cali/brnia to a $6 billion liability. By repealing major
provisions of the new law, the proposition creates an uncertain clim~/te for local governments and
school districts that have signed contracts and those still exploring their options.
On behalf of the CARES coalition, I am requesting that your City Council consider passage of a
resolution opposing Proposition 9 at your earliest convenience. I have also forwarded
information to members of city council for their consideration.
I have enclosed background material for your review in addition to a proposed draft resolution.
If you have any questions, or would like additional information, please contact me at (714) 973-
5548. Thank you for your continuing interest in this important matter.
Sincerely,
KBicn
1325 S. Grand Ave. Bldg. t3
- Santa Aha, CA 92705
714-.¢,..-~_ 8
Fax 714-973-5752
CHAI'P.
"'"[";E 'tHOMPSON
_
SE,',,'ATE
MAURICE K. $OHANNESSEN
PATRICK $OHNSTON
TIM LESLIE
JACK O'CONNELL
RICHARD 0. POLANCO
JOHN VASCONCELLOS
CATHIE WRIGHT
Joix
Legislative Budget Co.
.nittee
GOVERNNIENT CODE SECTIONS 9140-9143
CALIFORNIA LEGISLATURE
LEGISLATI~'E ANALYST
ELIZABETH G. HILL
VICE CHAIR
DENISE 5IORENO DUCHENy
ASSEY, IBLy
TONY CARDE:4..\ 5
JIM CUN:;EE:/
FRED KEELEY
CAROLE ,~IIGDE:;
GARY G.
CHARLES S. POOCHIG',..\:;
RODERICK WRIGHT
925 L STREET. SUITE ICCq
SACR.-~NI ENTO. CALIFORNIA 95814
(916) 4-15-4656
Hon. Daniel E. Lungren
Attorney .Generhi ' ..
1300 1 Street, 17~ Floor
Sacramento, California 95814
Jenuary 26, 1998
IN,il~;,: COORDINATOR
ATTORNEY G_N_RAL'5 OFFICE
Attention: Ms. Michelle Olsen
Dear Attorney General Lungren:
Pursuant to Elections Code Section 9005, we have reviewed the proposed initiative
entitled "The Utility Rate Reduction and Reform Act" (File No. SA 97 RF 0064, Amend-
ment No. l-S). The measure modifies certain aspects of recent legislation that altered the
manner in which the electricity industry is regulated in California. In general, the mea-
sure would modify the Public Utilities Code related to (1) reduction of residential and
small commercial electricity rates and (2) assets that investor-owned utilities ClOUs) can
recover through charges to electric utility customers. As Section 9005 directs, our re-
view addresses the potential effects of the measure on state and local government reve-
nues and costs.
Background
In 1996 the Legislature enacted Chapter 854, Statutes of 1996 (AB 1890, Brulte), pro-
viding for a restructuring of the electricity industry in California. (Chapter 275, Statutes
of 1997 [SB 477, Peace] modified some of the provisions of Chapter 854.) These mea-
sures are aimed at creating a more competitive electricity market.
Hon. Daniel E. Lungren
~anuary 26, 1998
The major provLsions that would be affected by this initiative include the following:
Required Rate Reductions. The restructuring calls for no less that a 10 percent
reduction of rates in effect on J'une 10, 1996 for residential and small commercial
customers. This rate reduction is in effect through 2002./he Le~slature also
expressed intent that a cumulative rate reduction of 20 percent be achieved by
April 1, 2002 for these customers.
Transition Cost Recovend. ReStructuring also allows electric corporations to
recover their "transition" costs. These are defined as electrici,"y generation-re-
late;:i assets and obligations approved by the California Public Utilities Commis-
sion (PUC) and being collected in PUC-approved rates on December 20, 1995 that
may become uneconomical in a competitive generation market (also referred to
as "stranded" costs). Transition costs must be approved by the PUC and are to be
recovered ikom .c. harges to each customer beginning J'anua~' 1, 1998 and continu-
ing until the earli~'r of March 2002 or whenever the transition costs are fully re-
covered. There are some exceptions to this time line--such as the incremental
cost incentive plans for the San Onofre nuclear generating sta,'ion that can con-
tinue until December 31, 2003, and agreements with "qualifying" facilities (such
as cogeneration facilities) that ',viii continue until the agreements terminate.
Bonds. The restructuring legislation also called for the issuance of "rate reduc-
tion'' bonds (with a limit of Ko'more than $10 billion in outstanding bonds at any
time) by the California Infrastructure and Economic Development Bank or a
special purpose trust authorized by the bank. The bonds can be issued if the PUC
finds that issuance of the bonds in connedtion with some or all of the transition
amounts would reduce rates of residential and small commercial customers. The
bon, ds would be paid off through assessments charged to the residential and
small commercial customers.
The legislation also stipulates that (1) the bonds are not to be an obligation of the
state or any political subdivision of the state and (2) the state will not limit or alter the
provisions relating to transition charges and the bond arrangements.
Proposal
This measure would modify the provisions of current law discussed above in the
following manner:
Hon. Daniel E. Lungren 3
January 26, 1998
Required Rate Reduction. The measure would require at least a 20 percent reduc-
tion in the rates in effect on June 10, 1996 for residential and small commercial
customers. The rate reduction would begin January 1, 1999 and there is no time
limit on the reduction.
Transition Cost Recover. The measure would eliminate costs for nuclear gener-
ation plants (other than reasonable decommissioning costs) and all associated
costs from recoverable transition costs. In addition, for non-nuclear generation
costs (other than qualifying facilities) the electric corporations would be required
to demonstrate to the PUC that these costs could r~ot be recovered in the compet-
itive market (with a fair rate of return) before they could be recovered from cus-
tomers.
· Bonds. The measure would not allow electric corporations to pass on the costs to
.- repa. y rate t4duct!.o.n bonds through charges to any customer.
.
The measure would also subject certain PUC decisions relating to electric restructur-
ing and financing of transition costs to the courts of appeal rather than directly to the
California Supreme Court.
Fiscal Effect
If allowed to operate as its provisions dictate, the measure could result in major
impacts on state and local government revenues and costs. The initiative, however,
raises serious legal issues that would most likely have to be litigated in the courts. For.
example, the measure's prohibition on cost recovery of nuclear-related assets could be
challenged as precluding a fair rate of return on property. (In such a case, most of the
fiscal impacts discussed below would not occur.)
With regard to estimates on the measure's fiscal impact, a key assumption is the
level of stranded assets that would be eliminated by this initiative. This determination
,,viii be made by the PUC as knowledge on electricity Prices and operations is gained
under the restructured system. In order to estimate the potential impacts, we have as-
sumed that stranded costs will approximate the utilities' nuclear-related assets--an
amount in excess of $10 billion.
State and Local Tax Revenues. With regard to revenues from utilities:
The elimination of transition costs collected by utilities would result in a reduc-
tion in income which is currently subject to the state bank and corporation tax.
Hon. Daniel E. Lungren 4 ~anuary 26, 1998
This would result in reductions in state tax revenues, potentially in the range
5200 million per year for fiscal years 1998-99 through 2001-02.
The loss of utility receipts associated with recovery of transition costs would
result in a reduction in local government utility fees in the tens of millions of
dollars'per year from 1998-99 through 2001-02.
· The measure could also result in a reduction in property tax valuations of nu-
clear facilities. The reductions would result in unknown losses in local property
taxes, potentially ran~ng in the low tens of millions of .dollars arunually.
With regard to tax receipts from the utilities' customers:
The reduction in transition payments would lower energ-y-related costs of busi-
ness-customers, leading to higher net incomes that would be subject to state cor-
porate and personii'i income taxes. We estimate that these gains could be irt the
high tens of millions of dollars per year from 1998-99 through 2001-02.
Customers experiencing utility rate reductions would have more discretionary
income available for saving or spending on other goods and services. This would
result in annual increases of state and local sales tax receipts, potentially in the
tens of millions of dollars annually from 1998-99 through 2001-02. Of this total,
about three-fourths would go to state government and the remainder would be
allocated to local governments.
The net impact of these changes on state government revenues would be annual reve-
nue reductions, potentially in the range of $100 million per year from 1998-99 through
2001-02. Under Proposition 98, the minimum funding guarantee for K-14 education
could decline by about one-half of the amount of annual revenue reductions. The state
would also be required to offset any local school distridt losses in property taxes (typi-
cally about one-half the total loss) that resulted from downward assessments of nuclear
facilities.
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.
Bonds. A.total of $7 billion in bonds have already been sold (through the State Trea-
surer) by a special trust under the authorization of the h'drastructure and Development
Bank for the three major IOUs in Califomia. Apparently, there are serious legal ques-
tions whether the initiative's provisions would apply to these bonds. This is because the
Hon. Daniel E. Lungren 5 January 26, 1998
measure could inte.rfere with a contractual arrangement already entered into with the
bondholders. (The state and federal constitutions prohibit impairments of contracts.) If,
however, the initiat-ive's provisions were found to be legal, several scenarios are possi-
ble. Under certain situations, a court could find that the state faces debt service liabilis,
related to bonds already sold.
Utility Cost Savings. The state and local governments would realize a savings asso-
ciated with lower utility rates resulting from elimination of the transition costs related
to nuclear generation plants. The savings.could be in the tens of millions of dollars an-
nually.
State Administrative Costs. The measure could result in additional workload for
the PUC and the courts. This would involve activities such as hearings regarding rate
reductions and related fair rate of return, and coul'd also require additional legal costs
associated with ca$~s-before the courts of appeals. These costs would probably be less
't~han $5 mil}i0n annually.'"-'-'-
Sincerely,
,-~ Elizabeth~G. lClill
~'"'~egislative Analyst
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RESOLUTION NO. 98-78
A RESOLUTION OF THE CITY COUNCIL
TUSTIN, CALIFORNIA, OPPOSING THE
UTILITY PROPOSITION NO. 9
OF THE CITY~bF
1998 ELECTRIC
WHEREAS, the 1998 Electric Utility Proposition would dismantle
California's new competitive electricity market, eliminating customer choice and
competitive electricity rates; and
WHEREAS, the State Legislative Analyst and Department of Finance have
determined that the net impact of Proposition 9 on local governments would be
revenue reductions potentially in the tens of millions of dollars annually through
2001-02; and
WHEREAS, Proposition 9 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 of life; and
WHEREAS, the precedence set by disallowing payment on rate reduction
bonds could impair the ability of state and local governments to secure Iow-cost
financing for local infrastructure bonds an other types of bonds; and
WHEREAS, Proposition 9 serves onlY to 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, Proposition 9 jeopardizes the State's economic recovery by
creating uncertainty for California-based companies, as well as those
considering 'relocating to our State;
NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of
Tustin, California, hereby opposes the 1998 Electric Utility Proposition 9 and
requests this resolution be forwarded to the League of California Cities and other
individuals and organizations deemed appropriate.
PASSED AND ADOPTED by the City Council of the City of Tustin at a
regular meeting held on the 8th day of September, 1998.
THOMAS R. SALTARELLI, MAYOR
PAMELA STOKER, CITY CLERK