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Nonpartisan In Depth Analysis of

Proposition 9

ELECTRIC UTILITIES. ASSESSMENTS. BONDS.

Initiative Statute

THE QUESTION

Should private electric utility companies be prohibited from using tax, bond and surcharge assessments to pay for the cost of nuclear power plants and also be limited in how they recover costs for non-nuclear power plants? Should they be prohibited from issuing rate reduction bonds and assessing customers for payment of bond costs? Should a 20 percent rate reduction be required in residential and business customers' rates?

PROVISIONS

  • Private electric companies would not be allowed to pay for the costs of nuclear power plants or related assets through utility taxes, assessing ratepayers for bond payments, or imposing surcharges to cover the costs.

  • Private electric companies would also be prohibited from charging their customers for the costs of non- nuclear power plants except when adequately justified through public hearing with the Public Utilities Commission (PUC). This provision does not apply to costs associated with renewable non-nuclear electricity generating facilities.

  • Private electric companies would be prohibited from issuing rate reduction bonds and assessing their customers for payments of bond principal, interest or related costs.

  • Actions of the PUC could be subject to a review by the court of appeals. The court would be empowered to determine whether a decision, finding or determination of the PUC is supported by "substantial evidence."

  • Private electric companies must provide up to 20 percent rate reductions for residential and small commercial customers.

  • Prohibits private electric companies from providing information about residential or small commercial customers to any third party without the "express written consent of the customer."

BACKGROUND

In 1996 the California Legislature restructured the laws governing the electricity industry to deregulate the production of electricity, but not its transmission or distribution. Prices that consumers pay for electricity are no longer set by the PUC, but will be determined by the competitive market. Outside private utility companies, in addition to the three already in California (Pacific Gas and Electric, San Diego Gas and Electric and Southern California Edison), now have an incentive to enter the California market.

Proposition 9 makes three changes in the restructured laws or deregulation:

  • Cost Recovery. A "stranded" or "transition" cost is a debt which is the result of investment in nuclear power plants which "are unprofitable in a competitive energy market." Diablo Canyon is an example of a nuclear power plant with "stranded" costs. The current law (passed in 1996/7) permits utility companies to recover these costs through surcharges. These surcharges can only be applied between January 1998 and December 2001. Recovery costs for the San Onofre nuclear power plant can be recovered until December 2003. Surcharges for the purchase of electricity from renewable generation facilities can be recovered over the life of each contract.

    Proposition 9 would prohibit private utility companies from surcharging customers for "stranded" or "transition" costs associated with nuclear power plants. The private utility companies would also be required to demonstrate an inability to recover costs for non-nuclear electricity generation to the PUC before charging customers recovery fees.

  • Rate Reduction. The 1996 "restructuring" required a 10 percent reduction in electrical rates. It is intended as a balance for the surcharges to be applied and is effective until March 2002 or the "stranded" or "transition" costs have been recovered, whichever comes first. Customers impacted by this restructuring are the residential and small commercial business customer.

    Proposition 9 requires a 20 percent reduction in utility rates. This 20 percent reduction, effective January 1999, is to be on the total electricity bill for residential and small business customers and is based on the established rates on June 10, 1996. There is no time limit for the rate reduction.

  • Bonds. "Rate reduction" bonds were issued under the 1996 "restructuring" laws. After PUC review, private utility companies sold bonds totaling $6 billion to finance the rate reduction plan enacted by the Legislature. The utility companies recover costs for the bonds through charges to the residential and small business customers. The state is not responsible and will not "limit or alter the provisions relating to transition charges and bond arrangements."

    Proposition 9 prohibits the utility companies from charging customers to repay the bonds. It is unclear what the legal consequences of bond repayment will be to the utilities and/or to the state if this measure passes.

FISCAL EFFECT

The fiscal impact of Proposition 9 is likely to be affected by several provisions which would probably be challenged in the courts, according to the Legislative Analyst. As the measure is written, the Legislative Analyst believes that it could result in significant impacts on revenues and expenditures of state and local governments.

  • Tax Revenue Loss. The fiscal impact of Proposition 9 is based on the revenue that is collected by state and local government from the utility companies in the form of taxes and fees. The Legislative Analyst presumes that the utility companies would be unable to collect revenue from customers to offset the approximately $10 billion described as "stranded" costs. Reduced revenues will mean that utility companies will pay fewer taxes. Taxes paid by utility companies come in two general forms: (1) state bank and corporation taxes; and (2) local utility fees which are based on utility company revenues. The Legislative Analyst believes that the state could lose up to $200 million annually through 2001-2002. The Legislative Analyst also estimates that local governmental agencies could lose tens of millions of dollars annually throughout the state. There is also a potential loss in locally collected property taxes. The impact of that is dependent on the utility! ! companies' ability to maintain the value of their property, i.e., nuclear power plants, in light of their inability to recover "stranded" costs.

  • Impact on Utility Customers and Tax Revenue Increases. Utility customers paying less on their utility bills will have more discretionary money to spend. This spending will generate more sales tax revenue for state and local governments. The Legislative Analyst estimates that increases could total in the high tens of millions annually through 2001-2002.

    Small businesses paying less for energy costs will show higher profits which in turn would be subject to state corporate and personal income taxes. It is estimated that the state could increase its tax revenues in the high tens of millions per year through 2001-2002.

  • State and Local Spending. State expenses to administer the measure are estimated at less than $5 million annually. Expenses would include court costs for the required hearings and the additional workload required for the PUC.

    State spending on schools could be reduced because lower state revenues could reduce the Prop. 98- required amount of the state budget for schools. The state, however, would have to offset any losses sustained by local school districts if fewer property taxes are collected.

    State and local governments should save money as a result of lower utility rates. The Legislative Analyst estimates tens of millions of dollars annually could be saved.

In summary, the fiscal impact of Proposition 9 is estimated to result in losses to state and local governments in the high tens of millions and low tens of millions, respectively. This impact is estimated annually through 2001-2002.

A YES vote means that private utility companies will be prohibited from charging customers for costs related to nuclear power plants and from assessing residential and small commercial customers fees to repay bonds sold to finance rate reductions. A total 20 percent rate reduction will be mandated.

A NO vote means that private utilities can charge their customers for costs related to nuclear power plants and can assess their residential and small commercial customers fees to repay bonds sold to finance rate reductions.

SUPPORTERS SAY

  • Consumers should not have to pay the bad debts utility companies have created as the result of poor investments in nuclear plants.

  • Borrowing money to finance rate reductions is bad business—Proposition 9 bans this practice.

  • Proposition 9 creates a total rate reduction of 20 percent for consumers.

OPPONENTS SAY

  • Proposition 9 will jeopardize electric rates and reliability and ultimately force higher electric rates.

  • Proposition 9 will give taxpayers the liability for six billion dollars in previously sold bonds.

  • Proposition 9 will cut funding for schools.

SUPPORTERS AND OPPONENTS

Official ballot arguments in favor are signed by Harvey Rosenfield, Co-Chair, Californians against Utility Taxes (CUT); Nettie Hoge, Executive Director, The Utility Reform Network (TURN); and Harry M. Snyder, Senior Advocate, Consumers Union, Publisher of Consumer Reports.

Official ballot arguments in opposition are signed by Larry McCarthy, President, California Taxpayers Association; Jerry Meral, Executive Director, Planning and Conservation League; and Allan Zaremberg, President, California Chamber of Commerce.

For more information:
Supporters: www.nonukebailout.org, 310-392-0522
Opponents: www.NOonProp9.org, 916-341-1025


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Last updated: September 13, 1998
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