California Law
California Public Utilities Law
- Public Utilities Law
Public Utilities Law
Although most businesses in the United States are subject to many government regulations, public utilities are perhaps the most heavily regulated. This chapter gives a brief overview of the reasons and procedures for regulation of public utilities in America and in California.
Public Utilities Defined
Public utilities are companies that provide services commonly considered so essential and important to the public welfare as to be subject to substantial government regulation. Examples include common carrier transportation (buses, airlines, railroads, motor freight carriers, pipelines, etc.); radio, television, telegraph and local and long-distance telephone companies, including cable and fiber optics; electricity and natural gas; and water and sanitation treatment facilities. In Canada and most European countries public utilities are state-owned and state-operated. Government ownership and operation of utilities in the United States exists primarily at the local level. For example, cities, towns, and counties often own and operate their own sewage disposal and water supply systems. Two of the largest publicly owned utilities are the Tennessee Valley Authority headquartered on the Tennessee River, and the Bonneville Power Administration in Oregon. The largest public utility until its breakup in the 1980s was the American Telephone and Telegraph Corporation (AT&T). In the United States today most public utilities are privately owned and are operated under close government regulation.
Justification for Regulation
The traditional justification for substantial government regulation of a private business providing public utility services is two-fold. Public utilities frequently are monopolistic, and they provide services that are in the public interest.
Monopolistic Tendencies of Public Utilities
Public utilities often are referred to as "natural monopolies", meaning that due to the nature of the service provided, economic and other considerations dictate that the larger the business and the less competition, the more efficiently the service can be provided. In effect, the market provides room for only one supplier, or at most a relatively small number of suppliers to provide the service efficiently.
One of the economic conditions at play is that public utilities require tremendous capital investment. On average, a public utility will require six times the investment per dollar of sale than the average manufacturing firm. This is due to a variety of factors, including the extensive distribution network required; the inability to store the product (in the case of electricity) and the resulting need to have both substantial generating capacity to meet peak demands and the ability to absorb the costs of excess capacity during off-peak times; the need to build to anticipate future demands without including the costs of construction in rates; and the additional costs of meeting safety and environmental laws. It would be inordinately expensive and inefficient for several smaller companies to each invest the necessary capital to start a public utility that would only serve a small number of customers.
Another economic consideration is the wide diversity of markets for the types of services commonly provided, and the potential for price discrimination. For example, some large industries can produce their own electricity while most residential customers cannot. Thus, absent regulation, an electrical company could charge the large industry less than the residential customer despite the fact that costs to produce the electricity are the same for both. Also, the operation of a utility has wide-reaching effects, beyond those typical of traditional business concerns. For example, a significant power outage can cause millions of dollars of damage; pollution from a coal burning plant, a natural gas leak, or a nuclear melt-down have potentially life-threatening effects.
In addition to these economic considerations, there are also physical and technological considerations that may limit the number of providers of services. For example, there are only a certain number of electrical conduits the city streets can accommodate. Because of these conditions, the provision of utilities creates a natural tendency for monopolies, and monopolistic pricing practices. The monopolistic nature of utilities becomes a public policy concern calling for government intervention due to the nature of the services provided.
Nature of Services Provided
Public utilities by definition provide goods or services deemed essential to the public welfare. The legal concept of public utilities can be traced to early English common law. In the late 1600's, Sir Matthew Hale, an English judge, successfully argued that certain businesses such as ferryboats, docks, and warehouses were public necessities, and therefore were required to charge reasonable rates and maintain adequate service for all customers. These types of businesses were said to be "affected with a public interest." Because of the inherent danger to the public welfare of potentially monopolistic control over essential public services, government regulation has for more than a century been applied to public utilities.
History and Development of Regulation in the United States
The idea of businesses with a public interest was incorporated from the English common law into American law. At first, utility regulation in the United States was handled by the courts on a case-by-case basis, with early attempts to regulate public utilities directed at the railroads. Abuses were particularly widespread following the Civil War when Eastern business owners were able to exploit Midwestern farmers due to monopoly of the railroads. In the landmark case,
State regulatory commissions began to develop in the 1830s and increased in number and power during the Granger movement of the 1870s. Like the courts and legislatures, the earliest commissions attempted to regulate railroads. The first modern state public utility commissions were established in Wisconsin, New York, and Georgia in 1907. These commissions combined legislative, judicial and administrative authorities and made possible more comprehensive and flexible regulation of public utilities. The number of state commissions grew rapidly after 1907 and by 1920 more than two-thirds of the states had created regulatory commissions.
The first federal commission with regulatory powers was the Interstate Commerce Commission, established in 1887. Federal regulation was expanded again in the 1930s when much of the regulatory responsibility shifted from the states to the federal government. In 1935 the Federal Power Commission, now the Federal Energy Regulatory Commission, was empowered to regulate interstate sales of electricity, and in 1938 was expanded to govern the regulation of interstate natural gas sales. The Federal Communications Commission was established in 1934 with broad powers to regulate interstate radio and television broadcasting, and telephone and telegraph services. During this time Congress gave the Interstate Commerce Commission broader powers, first adding regulation of the motor carrier industry and later regulation of inland waterways. The Securities and Exchange Commission was created in 1935 to deal with abuses by holding companies, particularly in the electrical industry.
California began regulating public utilities in 1853. With the coming of the railroads, California passed a law making it illegal to charge more than 20 cents per mile for transporting passengers. In 1873 the State Board of Transportation Commissioners was created with limited jurisdiction to regulate the railroads. The Railroad Commission was established by constitutional amendment in 1911. The name was changed in 1946 to the Public Utilities Commission. The Commission initially was given broad powers to regulate railroads and private utility companies. The Commission does not regulate municipal or district-owned energy utilities, or mutual water companies.
There are three classes of utilities in California. The first class are the investor-owned and operated utilities, like Pacific Gas and Electric Company. The majority of investor-owned public utilities in California serve large metropolitan areas with high population concentrations. The California Public Utilities Commission, as it is now known, regulates all investor-owned and operated electric, natural gas, telecommunications, water and transportation companies in California. The Commission regulates approximately 58,000 transportation and 655 utility companies. In addition, the Commission has safety oversight responsibilities for electric cooperatives, freight transportation, railroads, and distribution of gas and propane in mobile home parks. The second class of utilities are the mutual water companies or cooperatives. These are privately owned organizations established to provide water at cost to members of the company or cooperative. These are not regulated by the California Public Utilities Commission, but are governed by their own boards. The final class of utilities in California are the municipal and district utilities, governed by local elected officials.
Public utilities fall between free enterprise and government enterprise. Because they provide essential services, public utilities must meet certain requirements and are subject to government regulation. Whereas a wholly private business can let the market determine its customer base, a public utility is obligated to provide service to all potential customers in its jurisdiction who apply for and are willing and able to pay for the service. The public utility also must operate in a safe and adequate manner. The public utility must serve all customers on equal terms. Finally, the public utility must have rates that are just and reasonable.
In exchange for these considerations, the public utility enjoys certain rights not otherwise available in the general business community. The public utility has full or partial protection from competition within a designated geographic area; in essence the company has a government-enforced monopoly within the specified area. In addition, the public utility is assured that it can charge rates that cover its operating costs and yield the company a reasonable profit. Finally, the public utility has the power of eminent domain, that is, it can force the sale of private property needed to carry out utility operations.
The primary responsibilities of the California Public Utilities Commission are setting rates and standards for quality and safety, reviewing plans for expansion or contraction of service, and establishing accounting and financial procedures. The California Public Utilities Commission operates in a quasi-judicial capacity. Commissioners sit as judges, reviewing evidence on a case-by-case basis. They respond to consumer complaints, as well as to recommendations by public utilities managers, interested parties, and commission staff members.
As part of its administrative process the California Public Utilities Commission conducts Public Participation Hearings before making decisions on major utility rate changes or issues that will affect many consumers. The purpose of these Public Participation Hearings is to provide consumers and other affected by the change a forum in which to address the Commission on the decision-making process. In 1995 the Commission held 13 Public Participation Hearings across the state to obtain public comment on universal telephone service. In 1996, the Commission added a new forum for public comment, Town Hall Meetings. The Town Hall Meetings are not limited to specific rate changes, but provide a forum for consumers to discuss any issue related to the California Public Utility Commission. The Commission encourages public participation in the administrative process. Consumers and business owners are encouraged to write letters, attend and speak at Public Participation Hearings, attend and participate in workshops, join organizations that provide information to the commission, and when appropriate become parties to proceedings through the intervenor program.
In California every decision and order of the Public Utilities Commission is subject to judicial review. A party may challenge a decision of the Commission as legally wrong, or may request a review due to changed circumstances. To challenge a decision of the Commission as legally wrong, a party must first ask the Commission to review its decision. If the Commission declines the request for a rehearing, the party may appeal to the California Supreme Court within 30 days of the denial. The California Supreme Court is the only court in the state that may review decisions of the California Public Utilities Commission. In addition to a request for rehearing, a party also may petition the Commission to modify a decision based on a change of circumstances, rather than based on legal error. These decisions also may be reviewed by the California Supreme Court.
Utilities are governed by federal, state, and/or local regulatory agencies. In most instances, the federal government regulates the transmission of goods and services between states or regions, while the state and/or local agencies regulate the flow of goods and services within the state. In some instances, however, the distinction also is made between retail and wholesale pricing. For example, the Federal Energy Regulatory Commission regulates the wholesale rates of electricity, while the state and local agencies regulate the retail rates.
The primary involvement at the state or local level is the setting of rates for the sale of utility service within the agency's jurisdiction. Rate setting involves complex analysis. If the rate is set too high it will be injurious to the public interest, whereas if it is too low the utility will not be able to attract the capital investment necessary to operate efficiently. The regulatory agency must devise a formula that permits the utility to earn a fair rate of return on capital while ensuring reasonable prices to consumers. The Division of Ratepayer Advocates is an independent division within the California Public Utilities Commission charged with making recommendations to the Commission and representing the long-term interests of utility ratepayers. While individuals and groups are encouraged to participate in the proceedings of the Commission, the Division of Ratepayer Advocates ensures that the interests of ratepayers are represented before the Commission
There are typically two steps in setting public utility rates, setting revenue requirements, and allocating costs and determining prices.
The regulatory agency first determines the total revenue requirements of the utility--the amount of revenue necessary to meet costs and provide a fair profit. In determining the revenue requirements, the agency considers the operating expenses, depreciation of the physical plant, and taxes, plus a fair return on the investment. Simply establishing the revenue requirements, however, is no guarantee that the utility actually will receive this amount of revenue. Rather, the revenue requirement represents the total revenue that the utility will have the opportunity to earn. If usage is lower than anticipated, revenues naturally will be less.
The agency's next step is to allocate the revenue requirements among the various services provided and among the various classes of customers, and to set the price or rate structure for each class of service. In addition to setting prices that will generate sufficient revenue, the agency must ensure that the pricing structure is non-discriminatory. That is, customers who are similarly situated should be charged the same for the same service. Any variance in the pricing structure must be justified by some rationale other than the personal identity of the consumer. For example, one method of pricing, typically used by electrical and gas companies, is to base fees in part on peak versus off-peak usage, charging higher fees for service provided during peak use times. An alternative method of pricing electrical charges is the "declining block" method, in which prices decrease for subsequent blocks of service. This method results in lower prices for greater use of the service. Another method, typically used by telephone companies, is to charge a fixed monthly fee for basic services and additional fees for extra services (i.e. directory assistance, special features). A fourth method of pricing, typically used by railroad companies, is the "value-of-service" method. With this method the price reflects the degree of the monopoly in the particular market. In effect, the consumer is charged what the market will bear. Although there will be some discrimination in each of these pricing methods, each relies on factors other than the identity of the consumer for the variance in price.
By the mid-1970s, public opinion in the United States shifted toward the belief that public utilities could operate more efficiently if they were subject to less regulation. The result was a gradual rollback of many regulations. In 1976 and 1980 Congress passed legislation granting railroad companies greater freedom in pricing and greater flexibility in abandoning unprofitable routes. With the Airline Deregulation Act of 1978 Congress phased out federal control of fares and service routes in the passenger airline industry. The Motor Carrier Act of 1980 allowed trucking firms greater freedom in setting rates, thereby increasing competition. By 1990, deregulation in the natural gas industry led to the elimination of price controls on all natural gas sold in the United States.
The United States regulatory system has been the subject of much debate in recent years. There are those who contend that the present forms of regulation represent good practice and good economic sense. Others argue that regulators have become captives of the utilities they are supposed to regulate and that the public interest is not being properly protected. This has at times led to greater participation in the rate-making process by public interest groups and to proposals for other reforms. There is also a growing group calling for even greater rollback of regulation. These critics charge that due to changes in market forces the need for extensive government regulation has passed. Although much regulation has been rolled back in recent years, it appears that some form of administrative regulation of public utilities will remain part of American economic landscape for many years. With the continued debate and ever-changing economic conditions, however, the regulation of public utilities remains a fluid and ever-changing area of law.
The California Public Utilities Commission regulates privately owned and operated electric, natural gas, telecommunications, water, and transportation utilities in the state, including gas, electricity, telephone, sewer, and water services. The main office of the Commission is 505 Van Ness Avenue, San Francisco, CA, 94102, (415) 703-1282. The Commission is required by state law to submit an annual workplan to the Legislature identifying the proceedings and decisions that may be considered by the Commission during the calendar year. Copies of the workplan are available by contacting the Commission. The Commission has a home page on the Internet that includes the daily calendar, the meeting agenda, news releases, biographies of current Commissioners, Consumer Advisories, Public Advisor materials, and copies of decisions. The home page can be accessed at http://www.cpuc.ca.gov, gopher.cpuc.ca.gov, or ftp.cpuc.ca.gov. For information and assistance accessing the home page contact Kale Williams at (415) 703-3251. The information also is available on-line at ComPUCall at (415) 703-1297. For assistance with the on-line service call (415) 703-1767 during business hours.
The Commission's Office of the Public Advisor provides procedural information and advice to ratepayers who wish to participate in the Commission's proceedings. The Public Advisor's office in northern California is at 505 Van Ness Avenue, Room 5303, San Francisco, CA, 94102, (415) 703-2074. The e-mail address is public.advisor@cpuc.ca.gov. The Public Advisor's Office in southern California is located at 107 South Broadway, Room 5109, Los Angeles, CA, 90012, (213) 897-3544. Some of the publications of the Public Advisor's Office are available on the Internet at gopher.cpuc.ca.gov.publications.
The Consumer Affairs Branch of the Public Affairs Division of the Commission investigates complaints and responds to public inquiries. The Consumer Affairs Branch is located at the San Francisco office, and has a toll-free number, (800) 649-7570.
The News Bureaus of the California Public Utilities Commission provide several publications free of charge, including a handbook on how public utilities are regulated in California. The News Bureaus can be reached in San Francisco at (415) 703-2669 and in Los Angeles at (213) 897-4225.
The California Public Utilities Commission also maintains field offices in Los Angeles, Sacramento, San Bernardino, San Diego, and San Francisco. For information on contacting the nearest office, call the Consumer Affairs branch at (800) 649-7570.
In the United States, a number of federal commissions regulate utilities that provide services across state boundaries. For example, the Interstate Commerce Commission regulates trade practices of companies that transport goods and passengers by train, motor vehicle, or boat. The Federal Energy Regulatory Commission regulates natural gas and petroleum pipelines, hydroelectric power plants, and wholesale prices for electric power and natural gas. The Federal Communications Commission controls radio and television broadcasting as well as telephone and telegraph services. The Securities and Exchange Commission regulates the finance and corporate structures of utility companies.
Federal Communications Commission
Federal Energy Regulatory Commission
Interstate Commerce Commission
Securities and Exchange Commission
Other federal regulatory commissions include the Federal Aviation Administration, which makes regulations concerning safety in the airline industry; and the Nuclear Regulatory Commission, which regulates the production of nuclear energy for civilian use. All 50 states, plus the District of Columbia, also have their own regulatory commissions.
Public Utilities Regulation in California
Unique Rights and Responsibilities
Regulatory Scheme
Federal Versus State or Local Regulation
Rate Setting
Setting Revenue Requirements
Allocating Costs and Determining Prices
Deregulation
Resources
State Resources
Federal Resources
1919 M Street N.W.
Washington, DC 20554
(202) 418-0260
Fax: (202) 418-2812
825 North Capitol Street N.E.
Washington, DC 20426
(202) 208-1088
Fax: (202) 208-2106
Interstate Commerce Commission Building
12th Street and Constitution Avenue
Washington, DC 20423
(202) 927-6050
Fax: (202) 927-6107
450 Fifth Street N.W.
Washington, DC 20549
(202) 942-8088
Fax: (202) 272-7050