HomeMy WebLinkAbout05 - City Position on Proposition Nine (November 1998 Ballot)Newport Beach City Councii
AGENDA ITEM 5
September 28, 1998 Council Meeting
TO: MAYOR AND CITY COUNCIL
FROM: DENNIS DANNER, ACTING CITY MANAGER
BY: DAVE KIFF, ASSISTANT TO THE CITY MANAGER
SUBJECT: CITY- POSITION ON PROPOSITION NINE (NOVEMBER 1998 BALLOT)
ISSUE:
Should the City Council adopt a formal position regarding Proposition 9
(Electric Utilities) on the November 3, 1998 ballot?
BACKGROUND:
From time to time, residents and /or advocacy groups ask the City Council to take a
formal position on a ballot measure in order to express the City's opinion. In February of
each year, the City adopts a "Legislative Platform" that describes the broad policy
guidelines that the City will follow in adopting positions on legislation. The Platform also
allows the Mayor to issue letters in support of or in opposition to various proposals that
reflect the Platform without getting formal City Council approval on a letter -by -letter
basis.
In August 1998, Southern California Edison, on behalf of the "No on 9" coalition, asked
the City to take a position in opposition to Proposition 9 (the Utility Rate Reduction
and Reform Act), now set for the November 3, 1998 General Election ballot. If the City
Council agreed to such an action, it would join the League of California Cities, the
Orange County Division of the League of California Cities, and about 50 other cities that
have gone "on record" as opposing Proposition 9 (see Attachment A for an abbreviated
list of Proposition 9's proponents and opponents).
DISCUSSION:
This Report addresses the following issues relating to Proposition Nine:
I — What was Electricity Restructuring in California?
11— What is the Motivation Behind Proposition 9?
III — Proposition 9's Potential Impacts to the State of California
IV — Proposition 9's Potential Impacts to Local Governments
V — What about the Status of the Rate Reduction Bonds?
VI — What Supporters Say
VII — What Opponents Say
VIII — City Staff's Conclusion
Newport Beach City Council
Agenda Item _
Pate 2
I — What was Electricity Restructuring in California?
In 1996, the State Legislature approved AB 1890 (Brulte), a bill that provided for the
restructuring of California's electricity industry. The bill was later amended by SB 477
(1997, Peace). Both bills were approved with the expectation that they would create a
more competitive electricity market. Generally, here is what the legislation did:
• Allowed ratepayers to choose their electricity provider effective January 1, 1998;
• Directed a 10% rate reduction to residential and small commercial ratepayers relative to
the rates in place in June 1996;
• Allowed investor -owned utilities (Southern California Edison [SCE], Pacific Gas & Electric
[PG &E], and San Diego Gas & Electric [SDG &E]) to recover "stranded costs" (like the
costs of nuclear power plants) via a "transition charge" paid by ratepayers for the period
of January 1998 through March 2002; and
• Set up a "power exchange" to help develop the electricity market.
To recover the stranded costs and to finance the rate reduction, the legislation
authorized utilities to sell "rate reduction bonds" ( "RRBs ") through an "infrastructure
bank" called the California Infrastructure and Economic Development Bank, a public
agency of the State. "Transition charges" paid by ratepayers would provide the revenue
stream to repay the RRBs. The legislation declared that "the State shall take no action
to alter the rights" of the RRB bondholders — bond counsel and others refer to this latter
declaration as the "adequate provision pledge" by the State of California.
In November and December 1997, the Infrastructure Bank sold about $6 billion in RRBs
to finance the rate reductions. In January 1998, SCE, PG &E, and SDG &E began to
collect the transition charges necessary to finance the RRBs. Also in January 1998,
residential and small business customers began to see the rate reductions on bills. The
power exchange is now in operation.
II — What is the Motivation Behind Proposition 9?
The Utility Reform Network (TURN) and Californians Against Utility Taxes (CUT)
opposed several of AB 1890's provisions as the Legislature debated the bill. When they
were unsuccessful in their attempts to modify AB 1890 and to convince the California
Public Utilities Commission (CPUC) to implement restructuring in the manner that TURN
and CUT preferred, they decided to gather signatures for a ballot measure that would do
the following:
• Prohibit utilities from recovering "sunk" nuclear plant costs via the transition charges,
utility taxes, assessments or any other customer -paid fee;
• Limit recovery of non - nuclear plant costs via transition charges to only those costs
deemed appropriate by the CPUC;
• Prohibit the collection of any charge or fee used to repay the RRBs;
• Finance a 20% rate reduction for residential and small commercial ratepayers (another
10% on top of the AB 1890 reduction) via the disallowance of the transition charges;
and
• Add to the authority of the CPUC over utilities' actions relating to the recovery of sunk
costs via transition and other charges.
TURN and CUT argue that deregulation was really a "$28 billion bailout" for SCE, PG &E,
and SDG &E that applied a new tax to the ratepayer. Of this tax, TURN and CUT argue
that:
Agenda Item
3
• 40% pays off "bad investments" that utility companies entered into voluntarily like
nuclear power;
• 20% pays off non nuclear stranded assets that "are old and can't compete in the
marketplace - such as old coal power plants;" and that
• 40% is used to subsidize qualifying facilities" that generate electricity from solar, wind
and geothermal sources.
III — Proposition 9's Potential Impacts to the State of California
Ms. Elizabeth Hill, the nonpartisan Legislative Analyst to the State Legislature, reviewed
Proposition 9 and issued several comments in her analysis dated January 26, 1998. Hill
notes that Proposition 9:
• "Raises serious legal issues that would most likely have to be litigated in the courts;"
• May involve stranded nuclear - related utility -owned assets in excess of $10 billion;
• Would reduce utilities' income, leading to a related reduction in the state's bank and
corporation tax collections (about a $200 million reduction statewide from FY 1998 -99
through FY 2001 -02). However, a corresponding increase in ratepayers' discretionary
income may generate additional State revenue via income taxes in the "high tens of
millions of dollars per year";
• May reduce the property tax valuations of nuclear facilities. Such a reduction may cause
school districts to lose property tax revenue. If so, Proposition 98 requires the State to
backfill these lost dollars.
• May obligate the State to reimburse bondholders for already- issued RRBs (see below);
• Will likely "net out" as revenue reductions to the State in the range of $100 million
annually for the period of FY 1998 -99 to FY 2001 -02.2
IV — Proposition 9's Potential Impacts to Local Governments
As to the measure's impacts on local governments in California, Ms. Hill also determined
that Proposition 9:
• May lead to greater discretionary income in the hands of ratepayers (including cities that
purchase electricity), leading to increases in state and local sales taxes, possibly in the
tens of millions of dollars;
• Would reduce the utility tax receipts of those local governments that levy a utility users tax
(the City of Newport Beach does not levy a utility users tax);
• May reduce the property tax valuations of nuclear facilities (San Onofre Nuclear
Generating Station south of San Clemente is the closest facility to the City).
• Will likely "net out" as revenue reductions to local governments in the tens of millions of
dollars for the period of FY 1998 -99 to FY 2001 -02. CITY STAFF NOTE: Such
reductions will likely be borne by cities with Utility Users Taxes and /or nuclear facilities
within their boundaries (neither of which applies to Newport Beach).
V — What about the Status of the Rate Reduction Bonds?
As implied above, Hill also notes that "serious legal questions exist" as to whether
Proposition 9 would apply to the RRBs given the adequate provision pledge and that the
measure could "interfere with a contractual arrangement already entered into with the
' Source: Proposition 9's proponents' website at www.nonul(eballout.com
' Letter from Ms. Hill and State Director of Finance Craig Brown to Attorney General Lungren dated January 26, 1998
regarding Hill's review of ?he Utility Rate Reduction and Reform Ate'
Agenda Item _
Page 4
bondholders." She notes that "a court could find that the state faces debt service liability
related to bonds already sold" (about $7 billion).
Hill does not directly say that the State will be responsible for the already- issued RRBs if
Proposition 9 passes. However, a study completed by Metropolitan West Financial and
Strategic Services on behalf of Proposition 9's opponents concludes that the State
pledge made upon issuance of the $7 billion in RRBs means that bondholders must be
paid principal plus interest on the Bonds and that the State "would be required to honor
its statutory and contractual ... pledge by making immediate payment to the bondholders
... of between $5.7 billion and $7.3 billion that would be payable in the 1999 -2000 Fiscal
Year." The Met West Study continues,
"If the State were to renege on its adequate provision pledge to RRB bondholders,
there would be grave fiscal repercussions not only for the State, but for local
agencies in California as well. We believe investors would impose interest rate
penalties on future sales bonds and notes... Under a worst case scenario, the State
could be denied access to the capital markets for a short period of time..."3
VI — What Supporters Say
Supporters of Proposition 9, who include TURN, CUT, the California League of Women
Voters, Ralph Nader, the Consumer Federation of America, Consumers Union, Mothers
for Peace, Cal -PIRG, and Independent Power Providers say that Proposition 9:
• Repeals a "bailout" for SCE, PG &E, and SDG &E that was unfair to the consumer and let
"forgave" the utilities' "corporate mismanagement" regarding nuclear power;
• Gives a genuine 20% rate cut to ratepayers as opposed to the "rate hike" that resulted
with AB 1890 and the transition charges; and
• Will not obligate the State to backfill the RRBs given that the measure specifically dictates
that the RRBs become the responsibility of the utility companies.
VII — What Opponents Say
Opponents of Proposition 9, who include at least nine other Orange County cities, the
League of California Cities, the California State Association of Counties, the Southern
California Association of Governments, investor -owned utilities, some municipal utilities
(like the City of Anaheim), the Orange County Water District, the California Chamber of
Commerce, more than 50 cities, and the California Taxpayers' Association say that
Proposition 9:
• Does not guarantee the 20% rate reductions;
• Would "destroy customer choice" of electricity providers;
• Would result in the closure of nuclear power plants — plants that provide "nearly 20 %" of
the state's power supply.
• Would leave taxpayers 'holding the bag" for $6 billion in already- issued bonds (RRBs);
• Would force default on the RRBs, leading to increased borrowing costs for the State and
local governments; and
• Would create more red tape and trigger "years of lawsuits and litigation."
' Source: "Proposition 9 — Budget Impact for State and Local Governments in California," prepared by Metropolitan West
Financial and Strategic Services, August 1998.
' Source: Proposition 9's opponents' website at www.noonoroo9.om
Agenda Item
Please see Attachment C for the full text of Proposition 9 plus the arguments in support
of and in opposition to the measure as submitted to the Secretary of State.
VIII — Stafr's Conclusion
Given that the City does not have a utility users tax or a nuclear facility within its
boundaries, the net effects of Proposition 9 are not likely to be significant UNLESS, as
opponents say, the State is obligated to repay the already- issued RRBs.
If this occurs, the State may be forced to cut services and /or increase revenues to make
the RRB bondholders whole. As the City saw in 1991 -92 and 1992 -93, the State is not
above taking local property taxes to address its deficits. Such an action may occur
again should Proposition 9 pass. Further, staff agrees that any State inaction to cover
the RRBs may lead to increased borrowing costs for the City should the bond market
react negatively to any hesitation by the State of California to support the "adequate
provision pledge" contained in AB 1890.
RECOMMENDED ACTION:
Adopt Resolution 98 -_ (Attachment B) stating the City's formal opposition to
Proposition 9 (the Utility Rate Reduction and Reform Act) on the November 3, 1998
ballot.
ATTACHMENTS:
Attachment A — List of Selected Proponents of and Opponents to Proposition 9
Attachment B — Resolution 98-
Attachment C — Text of Proposition 9, Arguments In Favor of Proposition 9, and
Arguments in Opposition to Proposition 9.
Agenda Item
Attachment A
List of Selected Proponents of and Opponents to Proposition 9
Proponents of Proposition 9
Californians Against Utility Taxes
The Utility Reform Network
Public Media Center
Foundation for Taxpayer and Consumer Rights
The Oaks Project
Ralph Nader
League of Women Voters
Consumers' Union
CAL -PIRG
Consumer Federation of America
Nuclear Information Resource Services
US -PIRG
Public Citizen
Mothers for Peace
Safe Energy Communications Council
Bonnie Raitt
Public Citizen
Independent Power Providers
Opponents to Proposition 9
California Taxpayers Association
Orange County Taxpayers Association
National Tax Limitation Committee
Planning and Conservation League
National Resources Defense Council
Environmental Defense Fund
California Labor Federation AFL -CIO
League of California Cities
League of California Cities, Orange County
Division
California State Association of Counties
Southern California Association of Governments
Regional Council of Rural Counties
Association of California Water Agencies
orange County Water District
Orange County Department of Education
Southern California Water Committee
Santa Margarita Water District
0
More than 50 cities, including the Orange County
cities of Buena Park, Irvine, Laguna Hills, Lake
Forest, La Palma, Mission Viejo, Seal Beach,
Tustin, Villa Park, and Westminster
California State Firefighters Association
California Professional Firefighters Association
Peace Officers Research Association of
California
California Organization of Police and Sheriffs
California Democratic Party
California Republican Assembly
California Farm Bureau Federation
California Chamber of Commerce
Investor -Owned Utilities — PG &E, SCE, SDG &E
California Municipal Utilities Association
(membership includes City of Anaheim)
Enron
Agenda Item
Attachment B
RESOLUTION 98-
A RESOLUTION OF THE CITY OF NEWPORT BEACH
STATING THE CITY'S OPPOSITION TO PROPOSITION 9
ON THE NOVEMBER 1998 GENERAL ELECTION BALLOT
IN THE STATE OF CALIFORNIA
WHEREAS, the California State Legislature passed Assembly Bill 1890 in 1996 which
"deregulated" the electricity industry in California; and
WHEREAS, the measure directed a 10% reduction in electricity rates from 1996 levels
while funding this rate reduction in part by Rate Reduction Bonds (RRBs); and
WHEREAS, the California Infrastructure and Economic Development Bank, a public
agency of the State, issued about $7.2 billion in Rate Reduction Bonds to finance the
rate reductions directed by AB 1890; and
WHEREAS, Proposition 9 is a measure on the November 1998 General Election Ballot;
and
WHEREAS, if the voters of the State were to approve Proposition 9, its passage calls
into question the funding source for the already- issued Rate Reduction Bonds; and
WHEREAS, given the State's "adequate provision pledge" adopted as a part of AB
1890, the pledge may obligate the State of California to use General Fund and other
revenue sources, including those traditionally reserved for local governments, to "call" or
refund the Rate Reduction Bonds; and
WHEREAS, such an action may seriously impair the ability of the State and local
governments to provide services to the residents of the State of California and its cities;
now, therefore be it
RESOLVED by the City Council of the City of Newport Beach that the City opposes
Proposition 9 on the November 3, 1998 General Election Ballot in the State of California.
ADOPTED this 28" day of September, 1998
MAYOR
ATTEST:
CITY CLERK
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CA Secretary of State - Vote98 - Argument in ...
Proposition 9 1 Analysis I Proposition 9 1 Rebuttal to Argument in Favor
Electric Utilities. Assessments. Bonds.
Initiative Statute.
. —b ..lent in Favor of Proposition 9
Page 1 of 2
For years, Californians have been forced to buy electricity from giant utility monopolies
that charge some of the highest electric rates in the nation. That was supposed to change
when federal policy opened the way for all states to break up the utility monopolies that
control electricity and allow consumers to choose competing suppliers. But California's
biggest utility companies- -SoCal Edison, PG &E and San Diego Gas & Electric- -afraid
of losing their protected markets and guaranteed profits, spent millions on lobbyists and
campaign contributions to cut a special deal with the politicians in Sacramento.
What they got stands out as one of the worst cases of legislative pandering in California
history. Instead of opening California to competition, consumer choice, and lower rates,
the State Legislature gave the giant utilities special advantages that wipe out any real
competition and block residential consumers and small businesses from genuine rate
reductions.
As part of the deal, the utilities were allowed to freeze the price of electricity for
residential and small business users at recent high levels. The giant utilities also got
their money - losing investments in nuclear power paid off as part of a disguised $28
billion tax on consumers' electricity bills - -an outrageous act of corporate welfare
costing average ratepayers close to $1000 (much more if you have air conditioning).
Thanks to the giant utilities, consumers are paying a high price for "deregulation" but
get none of the benefits.
Adding insult to injury, the Legislature sugarcoated the $28 billion utility bailout tax
with a phony 10% reduction. The utility companies were allowed to borrow billions to
finance the rate cut. But consumers will have to pay the borrowed money back, with
interest, every month for ten years! It's right on your bill. Your monthly financing
charge (called "TTA" on your bill) is greater than the rate cut. It's not a genuine rate
reduction. It's a rip -off. Californians deserve better.
That's why taxpayers, consumer advocates, small businesses and environmentalists,
along with nearly 500,000 California voters, have placed Proposition 9 on the ballot.
Prop. 9 will:
• Block the $28 billion utility bailout tax on consumers and small businesses
• Provide an immediate rate cut of 20%
• Open California to real competition and consumer choice
• Allow a competitive market to set rates (which a California Energy Commission
study estimates will drop as much as 32 %!)
• Protect individual privacy by banning the sale of customer information without
http : / /vote98.ss.ca.govNoterGuide /Propositions /9yesarg.htm 9/21/98
CA Secretary of State - Vote98 - Argument in ...
Page 2 of 2
permission
Make sure consumers have the information they need to choose the best electric
supplier while maintaining a safe and reliable electric system.
Proposition 9 is a carefully and responsibly crafted initiative, written by utility experts
and consumer advocates. It has already passed a court challenge by the giant utilities
and their allies. They're spending millions to confuse and frighten voters. Don't be
fooled. Get the facts. Read your electricity bill. Talk to your friends. Decide for
yourself. Prop 9 deserves your support. Vote YES on Prop 9.
HARVEY ROSENFIELD
Co- Chair, Californians against Utility Taxes (CUT)
NETTIE HOGE
Executive Director, The Utility Reform Network (TURN)
HARRY M.SNYDER
Senior Advocate, Consumers Union, Publisher of Consumer Reports
Proposition 9 1 Analysis I Proposition 9 1 Rebuttal to Argument in Favor
http : / /vote98.ss.ca.govNoterGuide /Propositions /9yesarg.htm 9/21/98
CA Secretary of State - Vote98 - Argument Aga...
Page 1 of 2
Proposition 9 1 Rebuttal to Argument in Favor I Proposition 9 1 Rebuttal to Argument Against
Electric Utilities. Assessments. Bonds.
Initiative Statute.
tent against Proposition 9
Proposition 9 is bad for Califomia - -bad for consumers, for taxpayers, for our economy,
for our schools, for our environment and for our communities.
Vote No on Proposition 9 because it would hit taxpayers with liability for over $6
billion in bond payments.
Vote No on Proposition 9 because it would undermine California's stable, affordable
competitive electric system, eliminating consumer choice and driving "clean energy"
electric service providers out of California.
Vote No on Proposition 9 because it would ultimately force higher electric rates on
consumers and businesses.
Vote No on Proposition 9 because it would cut funding for our schools by hundreds of
millions of dollars.
Vote No on Proposition 9 because it would threaten California's economy by
jeopardizing state and local bond ratings.
Proposition 9 can't deliver on its promises. Proponents focused on only part of a very
complex program to bring new competition to California's electricity marketplace.
Proposition 9 is so poorly written that it would cost taxpayers millions of dollars in
useless bureaucratic red tape, attorney fees and lawsuits.
Many of your fellow Californians are voting No on Proposition 9 because it won't work
and is too costly.
The California Schools Boards Association wams: "California schools can't afford a hit
on the state budget. Kids and our schools will be hurt by this Proposition. Our kids
deserve better."
Jerry Meral, Executive Director of The Planning and Conservation League, says:
"Proposition 9 would deal a serious blow to clean, environmentally safe power and
energy conservation. Protect the California environment by voting NO."
The California Taxpayers Association says: "Proposition 9 would make taxpayers liable
for $6 billion in bond debts, creating a gaping hole in the state budget and raising the
serious threat of tax increases. VOTE NO."
The State Department of Finance warns: "Planning for a budget contingency of
potentially [$6] billion could directly affect every program in the state budget ..."
http : / /vot698.ss.ca.govNoterGuide /Propositions /9noarg.htm 9/21/98
CA Secretary of State - Vote98 - Argument Aga...
Betty Jo Toccoli, Chair of the California Small Business Roundtable says: "Small
businesses want to be able to lower their utility costs by choosing the lowest -cost
electric company. Proposition 9 will force us back to monopoly suppliers and
significantly higher electric bills."
The real savings for Californians will come when true competition reduces electric
rates. But Proposition 9 would pull the plug on competition just as it is getting
underway in California.
Page 2 of 2
Proposition 9 promises too much, too fast and forces taxpayers to pay for its mistakes.
When something sounds too good to be true, it usually is. Proposition 9 was written to
sound appealing, but it is a serious mistake we cannot afford.
Vote No on Proposition 9.
LARRY McCARTHY
President, California Taxpayers Association
JERRY MERAL
Executive Director, Planning & Conservation League
ALLAN ZAREMBERG
President, California Chamber of Commerce
Proposition 9 1 Rebuttal to Argument in Favor I Proposition 9 1 Rebuttal to Argument Against j
http : / /vote9g.ss.ca.govNoterGuide /Propositions /9noarg.htm 9/21/98