BILL ANALYSIS
AB 57
Page A
CONCURRENCE IN SENATE AMENDMENTS
AB 57 (Wright)
As Amended June 24, 2002
2/3 vote. Urgency
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|ASSEMBLY: |65-0 |(May 24, 2001) |SENATE: |30-0 |(June 28, 2002) |
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|COMMITTEE VOTE: |14-0 |(April 23, 2001) |RECOMMENDATION: |concur |
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Original Committee Reference: U. & C.
SUMMARY : Inaugurates a process at the California Public Utilities
Commission (PUC) by which an investor-owned utility (IOU) may
obtain a determination that its proposed electricity procurement
expenses will be deemed reasonable, and therefore recoverable from
ratepayers, before the procurement expenses are incurred, rather
than after, as is current practice.
The Senate amendments substantially amend the Assembly version of
this bill, to:
1)Require PUC to allocate electricity provided by the Department of
Water Resources (DWR) among IOUs.
2)Require each IOU to file, and PUC to review and accept, modify or
reject, a procurement plan specifying the date IOU intends to
resume procurement, and enabling IOU to fulfill its obligation to
serve its customers at just and reasonable rates, eliminating the
need for after-the-fact reasonableness reviews, and ensuring
timely recovery in rates of prospective procurement costs.
3)Require the procurement plan to be based on one or more of the
following standards of reasonableness:
a) An approved competitive bid-based procurement process;
b) A performance-based incentive mechanism that shares
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procurement risks and rewards between an IOU and its
customers; and,
c) Objective standards and review to determine the
recoverability of procurement transactions prior to their
execution.
4)Require PUC to establish balancing accounts for each IOU to track
the differences between revenues and procurement costs incurred,
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 5% of the IOU's actual recorded
generation revenues for the prior calendar year.
5)Require PUC to provide for periodic review and modifications of
procurement plans.
6)Authorize PUC to contract out for risk management and strategy
advisors.
7)Require 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 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.
8)Allow an IOU with less than 500,000 retail customers to apply for
an exemption from these provisions.
9)Appropriate $600,000 to PUC from the Utility Reimbursement
Account to carry out the procurement program.
EXISTING LAW :
1)Requires the rates of IOUs to be just and reasonable, and directs
PUC to make that determination.
2)Authorizes DWR to procure the net short electricity requirements
of electric utilities.
3)Prohibits DWR from contracting for electricity after December 31,
2002, but allows DWR to continue to administer existing
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electricity purchase contracts after that date.
4)Provides that, to the extent practicable, power sold by DWR to
retail end use customers shall be allocated pro rata among all
classes of customers.
AS PASSED BY THE ASSEMBLY , this bill:
1)Declared that IOU customers will benefit by increased reliance on
long-term contracts, and less reliance on the spot markets, and
that increased reliance on long-term purchases will bring price
stability at reasonable prices to all consumers.
2)Required PUC to reflect in bundled service rates, and to deem
reasonable without engaging in a reasonableness review, a
contract entered into by an IOU in accordance with general
guidelines outlined in this bill.
FISCAL EFFECT : The Assembly Appropriations Committee noted cost
savings to PUC from avoided reasonableness reviews of electricity
purchases by IOUs.
COMMENTS :
1)Just and reasonable rates: Existing statutory and case law
requires that rates received by public utilities be just and
reasonable. The goal is to obtain for ratepayers the most
efficient service, and protect them from unreasonable costs.<1>
PUC and other regulators throughout the nation apply a general
negligence standard for determining whether utility management
acted with due care, and assigns responsibility for ensuring the
reasonableness of rates to PUC.
The negligence or reasonableness standard does take into account
special circumstances. The regulator must determine whether
actions taken by the utility were prudent at the time, under the
circumstances, considering that the company had to operate at
each step of the way prospectively rather than in reliance on
hindsight, and in light of all conditions and circumstances which
were known or which reasonably should have been known at the time
the decisions were made.<2>
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<1> See El Paso Natural Gas Co. v. FPC (5th Cir. 1960) 281 F.2d 567
<2> See, e.g., Boston Edison Company (1982) 46 P.U.R.4th 431; Acker
v. United States (1936) 298 U.S. 426
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This bill sets up a process whereby that review of the
reasonableness of an IOUs electricity procurement plan will occur
in advance, rather than in hindsight, and procurement made
according to the PUC-approved procurement plan will later be
regarded as having been reasonable per se because of the prior
approval.
2)Long term contracts and credit ratings: When the electric market
was restructured, PUC required IOUs to buy and sell from the
Power Exchange (PX), which initially offered only day-ahead and
hour-ahead markets. In 1999, PX began facilitating forward
contract transactions in its block forward market. Purchases
from PX were deemed reasonable per se by 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. IOUs regard after-the-fact reviews of the
reasonableness of these contracts by PUC a deterrent to entering
contracts.
All three IOUs are preparing to resume their role in procurement of
electricity. The credit rating agencies have indicated in
analyses of IOUs that an investment grade rating, which is, for
the most part, essential for an IOU in order to make large
electricity purchases without significant up-front collateral, is
not likely to be achieved by IOUs unless cost recovery of
procurement expenses will be assured into the future.
In a February 2002 publication, for example, Standard and Poor's
stated among other things that investment grade ratings for IOUs
will not be readily forthcoming if utility procurement practices
continue to be subject to after-the-fact reasonableness reviews.
The credit rating agencies have further noted that a statutory
scheme allowing for advance approval of procurement expenses is
preferable to a regulatory structure, the fear being that the
regulatory climate is too volatile and subject to frequent
change.
3)PUC actions re: IOU electricity purchase resumption: In October
2001, PUC issued an Order Instituting Rulemaking (R. 01-10-024)
to establish ratemaking mechanisms to enable the three IOUs to
resume purchasing electric energy, capacity, ancillary services
and related hedging instruments to fulfill their obligation to
serve and meet the needs of their customers.
Among other things, PUC's articulated objectives in developing a
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cost recovery procurement mechanism are to improve the ability of
the utilities to meet their obligation to serve their customers'
electric loads, enhance the financial stability and
creditworthiness of IOUs, and diminish the need for
after-the-fact reasonableness reviews of procurement purchases.
4)Renewable energy purchases: This bill was amended in the Senate
Energy Committee to require IOUs to procure renewable energy
resources when covering unmet resource needs in procurement
plans. This bill now requires each IOU to demonstrate that it
will increase its renewable electricity purchases by 1% per year
until a 20% portfolio goal is achieved.
5)Assembly Rule 77.2: Because this bill was substantially amended
in the Senate, it was referred to the Committee on Utilities &
Commerce for further action upon its return to the Assembly. The
Committee heard the bill on July 1, 2002, and has reported it
back to the Floor for final vote on concurrence in Senate
Amendments.
Analysis Prepared by : Paul Donahue / U. & C. / (916) 319-2083
FN: 0005831