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HomeMy WebLinkAboutAGENDA REPORT 1998 0916 CC REG ITEM 10L�� 54a -/3 ITEM 100too CTI'Y OF MOORPARK, CALIFORNIA City Council Meeting p� of 1 ((o•qg_ ACTION: CO n i-i A u rl to - I - qg CITY COUNCIL AGENDA REPORT BY: TO: The Honorable City Council FROM: John E. Nowak, Assistant City Manager DATE: 03 September 1998 (Council meeting of 09 -16- 98) SUBJECT: Consider Resolution No. 98- Establishing the City Council's Position in Opposition to Proposition 9 the "Utility Rate Reduction and Reform Act." Discussion: Proposition 9, the "Utility Rate Reduction and Reform Act" will appear on the November 3 ballot as a voter initiative. The measure, in part, would reverse elements of the electrical deregulation legislation adopted by the Legislature as AB 1890. Proposition 9 would do the following: (1) require a reduction in rates of 20% for residential and small commercial customers effective January 1, 1999; (2) eliminate all nuclear generation plants and associated costs from recoverable transition costs; (3) require all non - nuclear generation costs to be recovered from the competitive market and not customers; (4) not allow rate reduction bond repayments to be charged to any customers; and (5) all PUC decisions to be heard at the courts of appeals rather than directly by the California Supreme Court. The effect on local governments would primarily be two -fold: (1) The total revenue collected by utilities would decrease, thereby reducing local government revenues from franchise fees (estimated in tens of millions of dollars in next three years); and (2) the $7 billion in utility bonds already sold could go into default, causing the State to repay the bonds and potentially lower bond ratings for all governments in the State. There would be an offset reduction in utility costs to the City as a result of the required rate reduction, but would not match loss of franchise revenues. This issue is not addressed in the City Council's Legislative Program, and is therefore presented to Council for consideration. The attached resolution would state the Moorpark City Council's opposition to Proposition 9. Attached for the Council's information are: 000335 (1) The Attorney General's summary of the proposed measure. Proposition 9 Meeting of 16 September 1998 Page 02 (2) The Legislative Analyst's report on the proposed measure. (3) The League of California Cities position in opposition to the measure. Recommendation: The City Council adopt Resolution indicating its opposition to Proposition 9, the "Utility Rate Reduction and Reform Act ". Attachments 000336 RESOLUTION NO. A Resolution of the City Council of the City of Moorpark Stating Its Opposition to Proposition, the "Utility Rate Reduction and Reform Act." WHEREAS, Proposition 9 will appear on the ballot at the November 3, 1998 General Election; and WHEREAS, the Proposition would dismantle California's new competitive electricity market, eliminating customer choice and competitive electrical rates; and WHEREAS, the State Legislative Analyst and State Department of Finance have determined that the net impact of this proposition on local government would be revenue reduction potentially in the tens of millions of dollars annually through the fiscal year 2001- 02; and WHEREAS, the League of California Cities has adopted a position in opposition to the measure due to the negative impact it would have on cities, the uncertainty that would result in the municipal bond market, and the effects on the newly restructured electricity services market; 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, impairing community health and welfare and community quality of life; and NOW, THEREFORE, BE IT RESOLVED AS FOLLOWS: Section 1. The City Council of the City of Moorpark does herewith state its opposition to Proposition 9, the Utility Rate Reduction and Reform Act, scheduled to appear on the November 3, 1998 General Election on the basis of its potential for a negative financial impact on the City and the uncertainty that would be created with State financing. Section 2. The City Clerk is herewith directed to transmit copies of this resolution to the local news media. PASSED, APPROVED AND ADOPTED this 16th day of September 1998. Patrick Hunter, Mayor ATTEST: Deborah S. Traffenstedt, City Clerk 000337 Date: February 11, 1998 File No.: SA97RF0064 The Attorney General of California has prepared the following title and summary of the chief purpose and points of the proposed measure: ELECTRIC UTILITIES. ASSESSMENTS. BONDS. INITIATIVE STATUTE. Prohibits assessment of utility tax, bond payments or surcharges for payment of costs 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 estimate by Legislative Analyst and Director of Finance of fiscal impact on state )and local governments: 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 -99 through 2001 -02, in turn resulting in decline in the minimum funding guarantee under Proposition 98 for K -14 education by about $50 million after 2001 -02. The state would be required to offset a portion of local school district losses in property tares, resulting from downward assessments of nuclear facilities. Potential state liability for debt service on $7 billion in bonds previously issued may result from judicial interpretation of applicability of measure to those bonds. Additional workload may increase state administrative, judicial and legal costs of probably less than $5 million annually. 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. State and local governments would realize savings associated with lower utility rates, in the tens of millions of dollars annually. 000338 -5 4 9 J oint Legislative Budget Committee �•�•�f / -s CHAIR VICE CHAIR "TIKE THOiViPSON DENISE MORENO DUCHENY TE GOVERNMENT CODE SECTIONS 9140 -9143 ASSEMBLY M1IAURICE K. JOHANNESSEN PATRICK JOHNSTON TONY CARDENAS TIM LESLIE JISI CUNNEEN JACKO'CONNELL CALIFORNIA LEGISLATURE FREDKEELEI' RICHARD G. POLANCO CAROLE XfIGDEN JOHN VASCONCELLOS GARY G. MILLER CATHIE WRIGHT CHARLES S. POOCHIGIAN LEGISLATIVE ANALYST RODERICK WRIGHT ELIZABETH G. HILL 925 L STREET, SUITE 1000 SACRAMENTO, CALIFORNIA 95814 (916) 445 -4656 January 26, 1998 Hon. Daniel E. Lungren Attorney General 1300 I Street, 17' Floor Sacramento, California 95814 Attention: Ms. Michelle Olsen Dear Attorney General Lungren: FPO s AN 2 7 10 INITIATIVE COORDINATOR ATTORNEY GENERAL'S OFFICE 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. I -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 (IOUs) 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. 000333 1 Hon. Daniel E. Lungren 2 January 26, 1998 The major provisions that would be affected by this initiative include the following: Required Rate Redactions. The restructuring calls for no less that a 10 percent reduction of rates in effect on June 10, 1996 for residential and small commercial customers. This rate reduction is in effect through 2002. The Legislature also expressed intent that a cumulative rate reduction of 20 percent be achieved by April 1, 2002 for these customers. • Transition Cost Recovery. Restructuring also allows electric corporations to recover their "transition" costs. These are defined as electricity generation -re- lated 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 from charges to each customer beginning January 1, 1998 and continu- ing until the earlier 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 station that can con- tinue until December 31, 2003, and agreements with "qualifying " facilities (such as cogeneration facilities) that will continue until the agreements terminate. • Bonds. The restructuring legislation also called for the issuance of "rate reduc- tioin" bonds (with a limit of no 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 connection with some or all of the transition amounts would reduce rates of residential and small commercial customers. The bonds 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: 00040 Hon. Daniel E. Lungren 3 January 26, 1998 rT. • Required Rate Redicction. 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 Recovery. 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 not be recovered i`n 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 repay rate reduction 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 will 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 Reven:ces. 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. 000341 Hon. Daniel E. Lungren 4 January 26, 1998 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. • 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 ranging in the low tens of millions of dollars annually. With regard to tax receipts from the utilities' customers: • The reduction in transition payments would lower energy- related costs of busi- ness customers, leading to higher net incomes that would be subject to state cor- porate and personal income taxes. We estimate that these gains could be in 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 district 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 Infrastructure and Development Bank for the three major IOUs in California. Apparently, there are serious legal ques- tions whether the initiative's provisions would apply to these bonds. This is because the 000342 Hon. Daniel E. Lungren 5 January 26, 1998 't measure could interfere with a contractual arrangement already entered into with the bondholders. (The state and federal constitutions prohibit impairments of contracts.) If, however, the initiative'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 liability 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 could also require additional legal costs associated with cases before the courts of appeals. These costs would probably be less than $5 million annually. Sincerely, Elizabeth G. ill Legislative Analyst 6 . Craig L. Brown Director of Finance 00034-3 would also result in additional revenues to state and local governments from the trust funds called for under the compact - potentially in the tens of millions of dollars annually. Local Government Impacts - According to the Coalition Against Unregulated Gambling, "The initiative doesn't impose any tax on casino gambling operations. Exempts casino gambling operations from local and state building codes, zoning ordinances, health and welfare codes. environmental laws and collective bargaining laws." Proposition 9: Within the last few weeks, the League has received numerous inquiries about the specifics of Proposition 9, the Utility Rate Reduction and Reform Act. In response to those and future inquiries, we provide the following short summary and analysis of the key provisions of the measure. Background: 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 (i.e., PG &E or Southern California Edison) or may purchase their electricity from an Energy Services Provider. The existing IOUs continue to provide and maintain the distribution and transmission system. The Utility Rate Reduction and Reform Act, Proposition 9 on the November 1998 ballot, would make a number of changes to AB 1890. The following summarizes several key elements of the initiative, as they relate to AB 1890, Key Elements of AB 1890: Stranded Costs - AB 1890 permits the investor -owned utilities (and municipal utilities) to recover their "stranded" capital costs over through March 31, 2002. In general, these are costs approved previously by the Public Utilities Commission (PUC) and previously included in the rate base. That is, they are costs that electricity customers were already paying in their bills prior to January 1, 1998, based on criteria established by the PUC. The PUC will review the utilities' requests for a Competition Transition Charge (CTC) based upon criteria included in the bill. The CTC authorized by AB 1890 is nonbypassable, with a few specific exceptions. That is, all customers must pay the charge. Municipal utilities were authorized in AB 1890 to collect their version of the CTC if they meet specified criteria. Rate Reductions - AB 1890 froze all electricity rates at their June 1996 levels until January 1, 1998. At that time, residential and small commercial customers received a 10 percent rate reduction. It is expected that residential and small commercial customers will receive an additional 10 percent reduction in 2002. The first 10 percent rate reduction has been achieved by financing a portion of the residential and small commercial customer's share of the CTC paid to the investor -owned utilities through $6 billion in so- called rate reduction bonds issued by the State Infrastructure and Economic Development Bank to be repaid over ten years. Thus, the residential and small commercial customers' share of the CTC will be spread over a longer period of time (ten years) than the CTC paid by other users. #28 18 8/7/98 ooa,3144 Key Elements of Proposition 9: Transition Cost Recovery - The initiative would eliminate costs for nuclear generating plants (other than reasonable costs for decommissioning) from the CTC For non- nuclear generation sources, the IOU could not receive CTC unless it demonstrated to the PUC that these costs could not be recovered in the competitive market (with a fair rate of return). Rate Reduction - The measure would require at least a 20 percent rate reduction for residential and small commercial customers effective January 1, 1999, with no time limit on the reduction. Bonds: The measure would not permit IOUs to pass on the costs to repay reduction bonds through charges to customers. Local Government Impacts: It is difficult to clearly identify and quantify specific local government impacts. The Legislative Anfilyst's discussion identifies various fiscal impacts from changes in the CTC and bond repayment. The direct impacts include loss of franchise fee and utility users tax revenue, as a result of lower electricity prices. However, to the extent that cities have electricity accounts that would be eligible to receive the additional price reductions, they could save money, as could their residents and small businesses. Indirect impacts would result from the uncertainty the initiative would have on the new electricity services market, the potential disruption the new system would experience, as well as the indirect impact on the bond markets and municipal bonds. This latter impact could be significant. Reasons for League Opposition: The League opposes Proposition 9 because of the negative fiscal impacts it would have on cities, the uncertainty that would result in the municipal bond market as a result of questions about repayment of the $6 billion in rate reduction bonds, and the unsettling effects Proposition 9 would have on the newly restructured electricity services market. #28 . • .. • .. • .. • . , • .. • .. • .. • .. • .. • .e.- . • .. • .. • .. • . .............. 19 8/7/98 000345