BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 57 - Wright Hearing Date:
May 21, 2002 A
As Amended: May 15, 2002 FISCAL B
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DESCRIPTION
Existing law requires that rates demanded or received by an
investor-owned utility (IOU) be just and reasonable and assigns
responsibility for ensuring the reasonableness of such rates to
the California Public Utilities Commission (CPUC).
Existing law (AB 1X (Keeley), Chapter 4, Statutes of 2001)
authorizes the Department of Water Resources (DWR) to procure
the "net short" requirements of electric utilities. Pursuant to
AB 1X, DWR is prohibited from contracting for electricity after
December 31, 2002. DWR may continue to administer pre-existing
contracts and sell electricity after that date.
This bill establishes a process under which an IOU may be
assured that its electricity procurement expenses will be
recoverable in customer rates, if that procurement is conducted
consistent with a CPUC-approved procurement plan.
Specifically, this bill :
1.Requires the CPUC to allocate electricity provided by DWR
among the IOUs.
2.Requires each IOU to file - and the CPUC to review and accept,
modify, or reject - a procurement plan specifying the date the
IOU intends to resume procurement and enabling the IOU to
fulfill its obligation to serve its customers at just and
reasonable rates, eliminating the need for after-the-fact
reasonableness reviews (with specified exceptions), and
ensuring timely recovery of prospective procurement costs.
3.Requires the procurement plan to be based on one or more of
the following reasonableness standards:
a. An approved competitive bid-based procurement
process.
b. A performance-based incentive mechanism that shares
procurement risks and rewards between an IOU and its
customers.
c. Objective standards and review to determine the
recoverability of procurement transactions prior to their
execution.
4.Requires the CPUC to establish balancing accounts for each IOU
to track the differences between recorded revenues and
procurement costs incurred, and to review the account
semiannually, and adjust rates or issue refunds to promptly
amortize the accounts. Until January 1, 2006, adjustment is
required whenever an account is under- or over-collected by
more than five percent of the IOU's actual recorded generation
revenues for the prior calendar year.
5.Requires the CPUC to provide for periodic review and
modification of procurement plans.
6.Authorizes the CPUC to contract out for risk management and
strategy advisors.
7.Requires the CPUC, prior to its approval of any divestiture of
generation assets owned by an IOU, to determine the impact of
the divestiture on the IOU's procurement rates and allows
approval only if the CPUC determines the divestiture will
result in net ratepayer benefits. Generally makes procurement
necessitated by future generation asset divestiture ineligible
unless its cost is less than the recent historical cost of the
divested assets.
8.Allows an IOU with less than 500,000 retail customers to apply
for an exemption from these provisions.
9.Appropriates $600,000 to the CPUC from the Utility
Reimbursement Account.
10. Is an urgency bill.
BACKGROUND
Existing law requires that rates demanded or received by public
utilities be just and reasonable and assigns responsibility for
ensuring the reasonableness of rates 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.
As a result of market conditions during the energy crisis,
long-term, bilateral contracts were 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.
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 then indicated that contracts for a price more than 5%
above the average of comparable transactions would be subject to
reasonableness review.
After the adoption of this standard, the CPUC twice proposed
price benchmarks 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 was 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 never adopted a
specific price benchmark.
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 the ability to recover
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.
The use of forward contracts by IOUs has been very limited -
none of the IOUs forward contracted to the level authorized by
the CPUC. Since the passage of AB 1X, the net short
requirements of each IOU has been procured by DWR. Pursuant to
AB 1X, DWR is prohibited from contracting for electricity after
December 31, 2002. DWR is allowed to continue to administer
pre-existing contracts and sell electricity after that date.
COMMENTS
1)Does the schedule work? Assuming the objective is that IOUs
will resume procurement no later than January 1, 2003, the
schedule outlined in this bill (with the restoration of the
language described in Comment 4) leaves little margin for
error. First, the CPUC must divide DWR-procured power among
the IOUs so each knows how much more power they'll need to
procure. Under the best-case scenario, this controversial
task could be complete by the time the bill is enacted. Next,
each IOU has 60 days to file a procurement plan, including a
proposed commencement date for procurement. Then, the CPUC
needs a certain amount of time to review and approve the
plans. Finally, CPUC approval must be at least 90 days prior
to the proposed commencement date.
Under this schedule, assuming allocation of DWR power is
complete by the time the bill is enacted, the bill is passed
and signed by June 5, and the CPUC approves the plans only 60
days after they are filed, the proposed schedule would
conclude, with IOU procurement commencement, on January 1,
2003, in the nick of time. Of the 210 days preceding the
commencement date, 150 are allocated to IOUs for preparation
of plans and notice.
The CPUC has initiated a procurement rulemaking consistent
with this bill, anticipating its enactment. Under the current
schedule in that proceeding, and the schedule in this bill, it
appears unlikely that the January 1, 2003 goal will be met.
Overlaying the procedural schedule are other uncertainties
affecting IOUs' resumption of procurement, such as
creditworthiness and bankruptcy.
The author and the committee may wish to consider whether this
schedule is achievable, whether adjusting the deadlines in the
bill can make it achievable, and what happens if it is not
achieved.
2)Balances and triggers. This bill requires the CPUC to
establish balancing accounts for each IOU to track the
differences between recorded revenues and procurement costs
incurred, to review the account semiannually, and to adjust
rates or issue refunds to "promptly amortize" the accounts.
Until January 1, 2006, adjustment is required whenever an
account is under- or over-collected by more than five percent
of the IOU's actual recorded generation revenues for the prior
calendar year. This provision is intended to assure creditors
that IOUs won't be required to carry excessive procurement
debt during a "rehabilitation" period (or retain excessive
procurement profit). By way of example, five percent of
Southern California Edison's 2001 recorded generation revenues
is approximately $325 million.
If applied to current rates and power costs, this mechanism
may well lead to refunds or rate decreases. However, in the
future, it could compel the CPUC to increase rates. It is
unclear whether the bill, when the five percent threshold is
exceeded, would require the account balance to be amortized to
zero, or just to under five percent. The author and committee
may wish to consider amending the bill to clarify this
provision.
3)Related legislation affecting IOU procurement practices. SB
532 (Sher) establishes a "Renewable Portfolio Standard" for
retail electricity suppliers which would require IOUs to
procure renewable power, or credits, sufficient to meet the
bill's objective of achieving a level of renewable power
equivalent to 20 percent of statewide of electricity
consumption by 2010. SB 532 failed passage on a 7-3 vote in
the Assembly Utilities and Commerce Committee on September 6,
2001 and is pending reconsideration.
SB 1885 (Bowen) requires an IOU, as a part of its obligation
to serve the public, to obtain adequate supplies of
electricity to meet the needs of its customers. This bill
finds that because of extraordinary circumstances, DWR was
temporarily charged with acquiring adequate electricity
supplies, and that the public interest is served by returning
the electric supply obligation to the utilities as soon as
possible. SB 1885 is pending on the Senate Floor.
Procurement for IOU customers will also be affected by the
pending sunset of DWR's power purchasing authority. While AB
57 addresses the IOUs' needs with respect to resuming
procurement, the important matter of how DWR will transition
out of its procurement role remains to be addressed.
4)Prior hearing. This bill was heard, and approved on a 5-3
vote, by this committee on July 10, 2001. The bill since has
been completely rewritten pursuant to a consensus-based
negotiation between IOUs, the CPUC, consumer groups, the
author's office, members of this committee and others.
5)Technical amendment. The May 15 amendments to the bill strike
critical requirements and deadlines for IOUs to file, and for
the CPUC to adopt, procurement plans. According to the
author's office, striking this language was a technical error.
The author and the committee may wish to consider restoring
these requirements as follows:
On page 4, line 8, after "plan." insert:
Each electrical corporation shall file a proposed procurement
plan with the commission not later than 60 days after the
commission specifies the allocation of electricity. The
proposed procurement plan shall specify the date the
electrical corporation intends to resume procurement of
electricity for its retail customers, consistent with its
obligation to serve, which shall be referred to for purposes
of this subdivision as the "proposed commencement date." The
commission shall review and adopt a procurement plan as
specified in subdivisions (b), (c), and (d) no later than 90
days prior to the proposed commencement date.
(These deadlines would need to be revised if the committee
desires to adjust the schedule per Comment 1.)
ASSEMBLY VOTES (Prior Version)
Assembly Floor (65-0)
Assembly Appropriations (14-0)
Assembly Utilities and Commerce Committee
(14-0)
POSITIONS
Sponsor:
Author
Support:
California Public Utilities Commission
Coalition of California Utility Employees
Independent Energy Producers Association
Pacific Gas and Electric Company
Oppose:
None on file
Lawrence Lingbloom
AB 57 Analysis
Hearing Date: May 21, 2002