BILL ANALYSIS 1 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE DEBRA BOWEN, CHAIRWOMAN SB 85XX - Burton Hearing Date: July 10, 2001 S As Introduced: June 11, 2001 FISCAL B X 2 8 5 DESCRIPTION Current law freezes electrical rates for investor-owned utility (IOU) customers at June 10, 1996 levels through March 31, 2002 or the date at which the utility's stranded costs have been recovered, whichever comes first. Residential and small commercial customers are required to receive rate reductions of 10% for that same period which are financed through rate reduction bonds. Current law states legislative intent that not later than April 1, 2002, residential and small commercial customers receive a total rate reduction of at least 20% (10% on top of the above-noted 10% reduction) from June 10, 1996 rate levels. Once the 10% rate reduction expires, this bill bars the California Public Utilities Commission (CPUC) from raising rates back to the pre-10% rate reduction levels solely because the mandatory rate reduction period has expired. This bill does not otherwise effect the authority of the CPUC to set rates. BACKGROUND A fundamental feature of the 1996 electric restructuring effort was a 10% rate reduction for residential and small commercial customers, accompanied by an overall rate freeze for all customers through March 2002 or whenever the utility's stranded costs were recovered. Those rate reductions were financed through rate reduction bonds, which are being repaid by the beneficiaries of the rate reductions through a charge on the utility bills. The Legislature and Governor restructured electric markets in 1996 with the notion that electric rates would be reduced. The 10% statutorily required rate reduction was simply the down payment, the first of what were hoped to be many subsequent rate reductions. The Legislature's electric restructuring conference committee was confident enough that electric rates would continue to drop that it discussed a statutory mandate of lower rates subsequent to the end of the rate freeze, though that effort was ultimately abandoned in favor of the statement of legislative intent. COMMENTS 1)What Will Happen To Customer Rates? While Californians can still hope for lower electric rates, the reality is likely to be much different than what everyone had hoped it would be. Still left open is the question of what happens when the statutory 10% rate reduction ends at the end of March 2002 (or whenever the CPUC finds that the IOUs have paid off their stranded costs). If nothing is done, then residential and small commercial customers will likely see an increase in their bills. That increase will be somewhat less than 10%, because the 10% rate reduction applies to rates in effect before the 1 cent per kilowatt hour increase that took effect on January 4, 2001 and before the average 3 cents per kilowatt hour increase authorized on March 28, 2001 that took effect last month. 2)Thawing Of Rate Freeze Alone Can't Trigger Rate Hikes . This bill bars the CPUC from raising rates on residential and small commercial customers after the end of the statutory 10% rate reduction simply because the mandate for a 10% reduction lapses. This will have one of four consequences: Rates for non-residential and small commercial customers must rise to make up for the lost revenue. Another revenue source will have to be found to make up for the lost revenue. The CPUC will need to find another rationale for raising residential and small commercial customer rates. The utilities will have to make due with less revenue. The author notes residential and small commercial customers never advocated for restructuring electric markets, yet they've been hit with historic rate increases as a consequence of that restructuring. The Legislature made clear its 20% rate reduction expectations for residential and small commercial customers in the intent language of the restructuring statutes. That expectation, the only explicit finding on lower rates for any customer class, won't be met. Given that change in circumstance, the author believes it's only fair that residential and small commercial rates not be increased again. 3)How Will Rate-Setting Work In A Post-Freeze World? This bill raises the larger issue of how rates will be set once the rate freeze is formally ended. At the time the deregulation statute was enacted, the thought was utility distribution and transmission rates would continue to be regulated on a cost-of-service basis, while generation costs would be passed through at market prices. At this point, the events that have unfolded over the past year seem to have resulted in electric rates that are set by the CPUC subject to the requirement that the CPUC provide the Department of Water Resources (DWR) with sufficient revenue to cover its power procurement costs, which will be revised at least annually. 4)Effect On San Diego Gas & Electric Customers . SDG&E customers saw their rate freeze end two years ago. While it isn't completely clear, this bill would seem to have no effect on SDG&E customers. POSITIONS Sponsor: Author Support: The Utility Reform Network Oppose: California Manufacturers and Technology Association Randy Chinn SB 85XX Analysis Hearing Date: July 10, 2001