BILL ANALYSIS
------------------------------------------------------------
|SENATE RULES COMMITTEE | AB 57|
|Office of Senate Floor Analyses | |
|1020 N Street, Suite 524 | |
|(916) 445-6614 Fax: (916) | |
|327-4478 | |
------------------------------------------------------------
THIRD READING
Bill No: AB 57
Author: Wright (D), et al
Amended: 6/24/02 in Senate
Vote: 27 - Urgency
SENATE ENERGY, U.&C. COMMITTEE : 7-0, 6/11/02
AYES: Bowen, Morrow, Alarcon, Battin, Murray, Sher, Speier
SENATE APPROPRIATIONS COMMITTEE : 10-0, 9/13/01
AYES: Alpert, Battin, Bowen, Burton, Johannessen, Johnson,
Karnette, McPherson, Murray, Poochigian
ASSEMBLY FLOOR : Not relevant
SUBJECT : Electrical corporations: procurement plans
SOURCE : Author
DIGEST : This bill establishes a process under which an
investor-owned utility may be assured that its electricity
procurement expenses will be recoverable, as specified.
Senate Floor Amendments of 6/24/02 correct an amendment
adopted in the Senate Energy, Utilities and Communications
Committee.
This bill was recently amended to address procurement of
renewable electricity resources. Those amendments were
intended to require each electrical corporation, in its
procurement plan, to show that it will procure renewable
electricity until a 20 percent renewable resources
CONTINUED
AB 57
Page
2
portfolio is achieved.
However, read literally, those amendments articulate
renewable procurement standards which are substantially
less than those in pending legislation to establish a
renewable portfolio standard (SB 32 [Sher]), and which
would require little, if any, additional renewable
procurement.
These amendments fix the critical defects in the prior
amendments by requiring that the procurement plan show that
the electrical corporation will increase its existing level
of renewable electricity resources by one percent per year
of electricity sold (rather than procured).
ANALYSIS : 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 State Public Utilities
Commission (PUC).
Existing law, AB 1X (Kelley), Chapter 4, Statutes of 2001,
First Extraordinary Session, authorizes the State
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 PUC-approved procurement plan.
Specifically, this bill:
1.Requires the PUC to allocate electricity provided by DWR
among the IOUs.
2.Requires each IOU to file, and the PUC 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
AB 57
Page
3
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 PUC to establish balancing accounts for
each IOU to track the differences between 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 PUC to provide for periodic review and
modifications of procurement plans.
6.Authorizes the PUC to contract out for risk management
and strategy advisors.
7.Requires the PUC, 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 PUC
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.
AB 57
Page
4
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 PUC from the Utility
Reimbursement Account.
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 PUC. This authority is a foundation of utility
regulation, dating back to the establishment of the PUC'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 PUC 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 form
the PX were deemed "per se reasonable" by the PUC.
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 PUC
has been viewed by IOUs as a deterrent to entering such
contracts.
In 2000, the PUC began to authorize IOUs to purchase power
through privately-negotiated bilateral contracts. By
August 2000, the PUC 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 PUC then indicated that
contracts for a price more than five percent above the
average of comparable transactions would be subject to
reasonableness review.
AB 57
Page
5
After the adoption of this standard, the PUC twice proposed
price benchmarks for forward contract 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 PUC never
adopted a specific price benchmark.
PUC review of contracts presents the possibility that
recovery for 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 PUC. 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.
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 part of its obligation
AB 57
Page
6
to serve, to obtain adequate supplies of electricity to
meet the needs of its customers. The 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 in the Assembly Utilities and
Commerce Committee.
Procurement for IOU customers will also be affected by the
pending sunset of DWR's power purchasing authority. While
this bill 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.
FISCAL EFFECT : Appropriation: Yes Fiscal Com.: Yes
Local: Yes
SUPPORT : (Verified 6/18/02)
Association of California Water Agencies
California Manufacturers and Technology Association
State Public Utilities Commission
Coalition of California Utility Employees
Independent Energy Producers Association
Natural Resources Defense Council
Office of Ratepayer Advocates
Pacific Gas and Electric Company
Sempra Energy
Southern California Edison
The Utility Reform Network
OPPOSITION : (Verified 6/18/02) (Reflects previous
amended version)
California Energy Commission
Foundation for Taxpayer and Consumer Rights
NC:cm 6/25/02 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
AB 57
Page
7
**** END ****