BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 57 - Wright Hearing Date:
July 10, 2001 A
As Amended: July 9, 2001 FISCAL B
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DESCRIPTION
Existing law requires that charges demanded or received by an
investor-owned utility (IOU) be just and reasonable and assigns
responsibility for ensuring the reasonableness of such charges
to the California Public Utilities Commission (CPUC).
This bill generally prevents the CPUC from reviewing the
reasonableness of power procurement by an IOU and requires
customers to pay a pro-rata share of IOU procurement
obligations. Specifically, this bill:
1.Declares certain benefits of long-term purchases and the
intent of the Legislature to provide guidance for power
procurement by an IOU, direct the CPUC to establish
reasonableness standards for procurement, require the CPUC to
provide procurement incentives at the request of an IOU, and
eliminate the need for CPUC review of IOU procurement
contracts, practices, and related expenses.
2.Requires the CPUC to implement an "incentive mechanism" for
IOU procurement at least 180 days prior to an IOU resuming
procurement responsibility (i.e. from the Department of Water
Resources (DWR). DWR's authority to purchase power sunsets
January 1, 2003, so the deadline for CPUC implementation is
likely to be July 2002.). If the CPUC doesn't meet this
deadline, all IOU purchases are deemed reasonable and
recoverable in rates until an incentive mechanism is finally
implemented.
3.Requires the CPUC to deem reasonable without review, and
include in customer rates, the following IOU expenses:
a. Long-term contracts (longer than one month) purchased
from:
i. The lowest third of bids from a bidding
process soliciting at least 15 suppliers and receiving
at least 3 bids.
ii. Electricity exchanges or brokerage services.
iii. The Independent System Operator, DWR,
California Consumer Power and Conservation Financing
Authority, or any other market or exchange recognized
by the CPUC.
An IOU may enter a long-term contract through any other
mechanism not listed above. Such contracts are subject to
gains and losses pursuant to the incentive mechanism.
b. Contracts entered into pursuant to a CPUC-approved
procurement plan.
c. Any short-term purchases, until such time as the CPUC
adopts a benchmark to allow short-term purchases to be
subject to the incentive mechanism.
d. Financial and other contracts (gas or electricity-based)
entered into to hedge price risk, if the CPUC does not
adopt a process to allow such transactions at least 180
days prior to an IOU resuming procurement responsibility
from DWR.
e. Any transaction with a "renewable energy developer" for
renewable energy which is less than 115% of the lowest bid
in a bidding process.
f. Any transaction at "market based rates" if the price is
less than the incremental cost of the IOU's existing
resources.
g. Ancillary and related services, imbalance energy,
congestion charges, unaccounted-for energy charges,
neutrality adjustment charges, and grid management charges
until such time as the CPUC adopts a benchmark to allow
these purchases to be subject to the incentive mechanism.
h. Staffing and administrative costs associated with
procurement and risk management.
i. Costs of meeting credit and collateral requirements.
1.Requires the CPUC to adopt rates to ensure that customers
remain responsible for, and pay, a pro-rata share of contracts
procured to serve them (i.e. non-bypassable charge to cover
stranded contracts).
BACKGROUND
Existing law requires that charges demanded or received by
public utilities be just and reasonable and assigns
responsibility for ensuring the reasonableness of such charges
to the CPUC.
This authority is a foundation of utility regulation, dating
back to the establishment of the CPUC's predecessor, the
Railroad Commission, in 1909. The power to review expenses that
are recoverable from utility ratepayers was judged necessary to
protect the public from the exercise of monopoly powers.
When the electric market was deregulated, the CPUC required IOUs
to buy and sell from the Power Exchange (PX), which initially
offered only day-ahead and hour-ahead markets. In 1999, the PX
began facilitating forward contract transactions in its block
forward market. Purchases from the PX were deemed "per se
reasonable" by the CPUC.
In 2000, the CPUC began to authorize IOUs to purchase power
through privately-negotiated bilateral contracts. By August
2000, the CPUC had authorized bilateral contracts equivalent to
the average power purchase needs (net short) of each IOU. The
average net short requirement is substantially less than the
peak net short requirement during periods of high demand. The
CPUC indicated that contracts for a price more than 5% above the
average of comparable transactions would be subject to
reasonableness review.
Since the adoption of this standard, the CPUC has proposed price
benchmarks twice for forward contracts which, if met, would
exempt the IOU from subsequent reasonableness review. Each
time, the general price benchmark for a five-year, 7-by-24
contract has been proposed to be six cents per kilowatt hour.
Specific price benchmarks have been criticized for creating a
target that no seller would go below. The CPUC has not adopted
a specific price benchmark.
As a result of current market conditions, long-term power
purchase contracts have been viewed as an attractive way to
stabilize volatile and high prices. After-the-fact review of
the reasonableness of these contracts by the CPUC has been
viewed by IOUs as a deterrent to entering such contracts.
CPUC review of contracts presents the possibility that recovery
of certain contract expenses will be disallowed if the contract
is judged to be an unreasonable deal (e.g. unjust price or
inappropriate conduct). On the other hand, it has been thought
that, after the end of the rate freeze, if the contract is a
great deal, the IOU gets no reward beyond recovery of its costs.
The IOUs have noted that these circumstances place all the
downside risk on them and create a clear disincentive to enter
into long-term contracts. The competing argument is that if
IOUs are permitted to pass their power purchase costs on to
their customers unconditionally, they have little incentive to
negotiate the best deal.
Use of forward contracts by IOUs has been very limited. None of
the IOUs have forward contracted to the level authorized by the
CPUC. Since the passage of AB 1X (Keeley), Chapter 4, Statutes
of 2001, the net short requirements of IOUs have been procured
by DWR.
COMMENTS
1)Ratepayers take 100% of the risk. The proposition that IOU
procurement should not be regulated may make sense if IOUs are
held to an alternative performance standard via competition
for customers. If customers have choices, they can respond to
poor IOU procurement performance by leaving for another
supplier.
However, in the absence of robust competition, most customers
will be bound to IOU service, regardless of its value. Under
this bill, the CPUC is prevented from reviewing power
purchases not only for reasonableness of price, but also for
reasonableness of conduct. Power costs resulting from
affiliate abuse, self-dealing, quid pro quo arrangements with
non-affiliates, fraud or any other inappropriate activity
could be passed through to ratepayers without exception. This
bill places all the risk on ratepayers, but doesn't give
ratepayers any mechanism to manage that risk.
2)Ratepayers take contract obligations with them. Existing law
authorizes the CPUC to suspend direct access during the time
that DWR is supplying power to prevent customers from escaping
from contract obligations entered on their behalf. This bill
may continue a similar circumstance indefinitely under the
aegis of the IOUs.
Subdivision (m) requires the adoption of rates to ensure that
customers remain responsible for, and pay, a pro-rata share of
contracts procured to serve them. In practice, this means an
exit fee for departing customers to cover any stranded
contract costs. If all procurement costs are deemed
recoverable from IOU ratepayers, it is appropriate as a matter
of fairness to prevent certain customers from bypassing those
costs, but the result will hamper customers' access to
alternatives to IOU service.
By removing the reference to "bundled service" customers, the
July 9 amendments to the bill potentially extend IOU contract
obligations to existing direct access customers as well.
Because direct access customers taking transmission and
distribution service from an IOU are "existing customers,"
this bill could be interpreted to extend IOU power procurement
obligations to them, as well as ordinary bundled service
customers.
3)Trigger could delay IOU resumption of net short
responsibility. This bill requires the CPUC to adopt an
incentive mechanism for IOU procurement and a process to allow
hedging contracts at least 180 days prior to an IOU resuming
procurement responsibility from DWR. If the CPUC fails, all
purchases and hedges are deemed reasonable.
With these consequences, it is unlikely that the state would
attempt to return net short procurement to an IOU less than
180 days after the CPUC rules are adopted. DWR's authority to
purchase power sunsets January 1, 2003, so the deadline for
CPUC implementation is likely to be July 2002. Under this
timeline, the CPUC would have only six months after this bill
went into effect to adopt the rules. It is unclear why the
rules have to be adopted a full six months prior to IOU
resumption of net short procurement.
It also appears that the bill gives IOUs both the incentive
and ability to delay final implementation by the CPUC. If the
default is absolutely no reasonableness review, IOUs would
stand to benefit from delaying CPUC action. The standards
that the bill requires are ill-defined and could be the
subject of protracted litigation at the CPUC.
By saying "adopt these standards or else," this bill puts a
gun to the CPUC's head and effectively puts the IOUs' fingers
on the trigger. At a minimum, any delay in the adoption of
the standards attributable to an IOU challenge should not
result in stripping the CPUC of its authority.
4)Conceding the question of reasonableness? By deeming
contracts reasonable regardless of price, this bill accepts
the proposition that whatever price the market yields is
reasonable . In other venues, the state has argued that the
market participants are unlawfully charging unreasonable
prices. The author and committee may wish to consider what
effect, if any, a legislative determination of reasonableness
will have on the state's pursuit of remedies for prices it has
otherwise argued are unreasonable.
5)Bill's construction may complicate implementation. This bill
may be easier to understand and implement if it simply listed
the types of transactions that the CPUC would be entitled to
review, rather than listing numerous, ill-defined transactions
which the CPUC is prevented from reviewing.
6)Related legislation. This bill is similar to SB 997 (Morrow).
SB 997 was heard in this committee on April 24, put over and
issued a rule waiver so it could be heard again pending
negotiations.
ASSEMBLY VOTES (Prior Version)
Assembly Floor (65-0)
Assembly Appropriations (14-0)
Assembly Utilities and Commerce Committee
(14-0)
POSITIONS
Sponsor:
Author
Support:
Association of California Water Agencies
Pacific Gas and Electric Company
Sempra Energy
Oppose:
The Foundation of Taxpayer and Consumer Rights
The Utility Reform Network (TURN)
Utility Consumers Action Network (UCAN)
Lawrence Lingbloom
AB 57 Analysis
Hearing Date: July 10, 2001