|Electric Utilities. Assessments. Bonds.|
In 1996 and 1997, the state significantly changed the way the electricity industry is regulated in California. New state laws deregulated the generation of electricity--that is, its actual production. (They did not, however, deregulate the transmission or distribution of electrical power.) These new laws also set up statewide entities to ensure the availability of power and the reliability of the statewide electrical system.
Before deregulation, private utilities were able to recover the costs of generating electricity through the rates they charged to their customers, as long as the California Public Utilities Commission (PUC) approved these costs as "reasonable." Under deregulation, the prices that customers pay for electricity will not be set by government-approved rates, but will be determined in the competitive market.
The state's "restructuring" of the electricity industry primarily affects the state's private electric utilities. There are three major private electricity utilities in California: Pacific Gas & Electric, San Diego Gas & Electric, and Southern California Edison.
There are three main provisions of the restructuring laws that would be affected by this measure.
Transition Cost Recovery. Restructuring allows private electric utilities to recover their "transition" costs through surcharges to customers. These "transition" costs (also referred to as "stranded" costs) are defined as the costs of existing power plants that are unprofitable in a competitive energy market. The PUC was required to approve the amount of transition costs the utility companies could recover through surcharges. The transition cost recovery period began January 1, 1998 and ends no later than December 31, 2001. There are some exceptions to this time line, such as (1) certain costs related to the San Onofre nuclear power plants in San Diego County, which can be recovered until December 31, 2003; and (2) costs related to contracts to purchase electricity from certain renewable generation facilities (for example, windmills and solar power) and cogeneration facilities, which can be recovered over the life of the contracts.
Required Rate Reduction. The restructuring laws require a 10 percent reduction in electricity rates that were in effect on June 10, 1996 for residential and small commercial customers of the private utilities. This rate reduction was effective January 1, 1998 and continues until the earlier of March 31, 2002, or such time as transition costs have been fully recovered. The Legislature also expressed its intent, but did not require, that a cumulative rate reduction of 20 percent be achieved by April 1, 2002 for these customers.
Bonds. The restructuring laws also called for the issuance of "rate reduction" bonds. Before the bonds could be sold, the PUC was required to find that issuance of the bonds would help provide the 10 percent rate reduction for residential and small commercial customers. The restructuring laws also declare that (1) the bonds are not to be an obligation of the state or any of its political subdivisions and (2) the state will not limit or alter the provisions relating to transition charges and the bond arrangements.
In November and December 1997, a total of $6 billion worth of such bonds were sold by a special purpose trust authorized by the state. The bonds are to be paid off through additionalcharges on the electricity bills of residential and small commercial customers of the private utilities.
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, before the 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 the PUC 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 in current law) on the total electricity bill for residential and small commercial 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 costs of repaying the rate reduction bonds. Legal questions have been raised regarding the application of the 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 PUC 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.
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 potential impacts, we have assumed that stranded costs affected by this measure would approximate the value of the utilities' nuclear-related stranded costs--about $10 billion.
State and Local Tax Revenues
Impacts on Utilities. With regard to taxes paid by the utilities:
- The elimination 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 reductions in state tax revenues, potentially up to $200 million annually through 2001-02. In addition, because 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 recover its stranded costs. Any such reductions would result in unknown losses in 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 save 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 customers, leading to higher net incomes that would be subject to state corporate and personal income taxes. We estimate that this could result in more tax revenue to the state totaling in the high 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 annual revenue reductions, potentially in the high tens of millions of dollars annually through 2001-02. The net impact on local governments would be revenue reductions, potentially in the tens of millions of dollars annually through 2001-02.
State and Local Expenditures
State Spending on Schools. The measure could affect state spending on schools in two ways. First, the reduction in 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. The state and local governments would realize savings associated with lower utility 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 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. The measure could also require additional legal costs associated with cases before the courts of appeal. These costs would probably be less than $5 million annually.