BILL ANALYSIS 1 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE DEBRA BOWEN, CHAIRWOMAN SB 654 - Haynes Hearing Date: April 24, 2001 S As Amended: April 16, 2001 FISCAL B 6 5 4 DESCRIPTION This bill creates a refundable tax credit for individuals and corporations equal to the product of the percentage of the reduction in electricity consumption (not to exceed 25%) on a year versus year basis and the person's (or company's) electricity bill for that year. This bill requires every investor-owned utility (IOU) to provide on customer bills the amount by which the customer has reduced his or her consumption compared to the prior year. BACKGROUND Increasing energy efficiency and conservation efforts may well be the only way to avoid blackouts and skyrocketing prices this summer. SB 5X (Sher), Chapter 7, Statutes of 2001, and AB 29X (Kehoe), Chapter 8, Statutes of 2001, collectively provide over $500 million for energy efficiency programs. The Governor has also created a program to pay consumers who cut their electricity use by more than 20% through the summer months. Using less energy has a number of benefits. First, lower usage reduces the customer's bill directly. Second, lower overall consumption reduces the price of electricity for everyone, even those who don't cut their consumption. Third, lower usage lowers the likelihood of blackouts. Paying customers to conserve, as is the approach in this bill, is an appealing and direct way to encourage conservation. It's simple, universally applicable, theoretically easy to administer, and the savings begin with the first kilowatthour (kwh) saved. Rather than pay exorbitant prices to out of state generators and marketers, paying customers to conserve returns money to customers. There are indications the Department of Water Resources (DWR) will be forced to buy a significant amount of electricity on the spot market this summer. Spot market prices have been incredibly high and, absent some action by the Federal Energy Regulatory Commission, there's no reason to believe prices this summer will moderate back to anywhere near historically average levels. With spot market prices anywhere from $0.25/kilowatt-hour (kwh) to $0.75/kwh, or 5 to 15 times their historic levels, many energy efficiency programs will be comparatively cost-effective. COMMENTS 1)Logical, Yes, But Is It Workable? Like the Governor's 20/20 Conservation Program, the appealing concept in this bill must be considered in light of a number of practical implementation and fairness issues. 2)Changes In Weather, Not Behavior, Can Earn Cash . Rewarding a customer for electricity reductions on a year vs. year basis may inadvertently provide a customer with unearned benefits because changes in electricity usage are driven by many factors, including the weather. For example, if Year 1 has a relatively warm summer compared to Year 2, then customers will receive the tax credit created by this bill for no reason other than the fact that the temperature dropped. 3)Change In Family, Not Behavior, Can Earn Cash . A customer might have teenagers in the house in Year 1, but in Year 2 those teenagers may have left for college or moved out on their own. In this case, a customer would receive a tax benefit - financed by every other taxpayer in the state - solely because the size of their family was reduced. An analysis by Pacific Gas & Electric (PG&E) comparing customer usage from the summer of 1999 versus the summer of 2000 found that 12.6% of customers reduced their usage by more than 20% and an additional 12.6% reduced their usage between 7% and 20%. Without controlling for major changes in customer circumstance, the refundable tax credit program created by this bill will unfairly reward some customers. This may be even more true with business and industrial customers, who may have reduced usage because they are doing less well or are suffering from a contraction in their business. 4)How Are New Customers Treated? A second complication with a year vs. year comparison is that many customers don't have a history. In PG&E's service territory, one-third of residential customers change location every year, making it difficult to make a comparison. While statistics aren't available for business customers, it's reasonable to believe that there is substantial turnover, particularly with small businesses. 5)Is Reduction Based On The Home Or On The Individual? One of the features in the Governor's 20/20 Reduction Program that many view as unfair is that a person's savings are based on the amount of energy used in the home the prior year. So, a single person moving into a home that was occupied by a family of four the prior year is likely to easily be able to reach the 20% savings level mandated by the program, but a family of four moving into a house that was occupied by a single person the year before is likely to have a difficult time meeting the 20% savings level. This bill, on Page 2, Lines 19-24, appears to take an arguably fairer approach by basing the person's tax credit on the amount of energy they save from year to year, not on the amount of energy used in the physical structure. However, this approach isn't without inequities either. For example, a person moving from a house to an apartment is likely to get a conservation tax credit solely based on their decision to move to a smaller living space, while a person going from an apartment to a house likely won't see any benefit. 6)A Compounding Benefit . Programs that pay people to conserve electricity, by their very nature, tend to most directly reward those who haven't conserved in the past, and consequently have the most ability to cut usage, while those who have a history of conservation won't see much, if any, benefit. This bill, like the Governor's 20/20 Conservation Program, adds a financial benefit on top of the "natural" financial benefit that comes with conserving electricity (the less you use, the less you pay). Furthermore, those who have the financial ability to buy new energy efficient appliances that cut their electricity usage without any other change in behavior will receive the tax credit provided by this bill. 7)Municipal Utility Customers Pay For Program But Can't Benefit . The bill has a further inequity in that it excludes customers of municipal utilities despite the fact that those customers pay state income taxes that will be used to finance the tax credits created by this program. The author and committee may wish to consider whether this program should be extended to customers of all utilities. 8)Comparing Usage On Monthly Bills - How Exactly Is It Done? The program envisioned in this bill provides the customer with the benefit of his conservation efforts only once a year when the taxes are paid. By deferring the reward, the impact of the program may be diminished. A more potent system would be to reward the customer immediately by reducing their bill for savings achieved in the prior month. Page 2, Lines 4-10 of the bill attempts to provide customers with some feedback by requiring the IOU to show, on each monthly bill, how much each customer has reduced his or her usage in the current year when compared to the prior year. The author and committee may wish to consider how the logistics of this comparison should work when a customer moves between utilities. If a customer moves from PG&E's service territory to Southern California Edison's (SCE) service territory, will SCE be able to access the customer's PG&E files in order to provide the comparison to last year's usage? There is an additional implementation issue with regard to the customer's usage date and how it's displayed on the bill. According to PG&E, its accessible billing data is limited to the current month plus the previous 12 months. The year vs. year comparison required by this bill will require changes to the billing system which may be complex and costly, particularly in light of additional billing changes contemplated by the CPUC in its rate design and in various other bills currently being considered. 9)How Are The Energy Savings & Tax Credit Amount Calculated? Page 2, Lines 19-24 of the bill defines "energy conservation percentage" as the amount of electricity a person has saved from one year to the next. Page 2, Lines 13-18 then requires that figure to be multiplied by the cost of electricity paid by the taxpayer in the taxable year in question to create the amount of the tax credit. Many larger customers are billed different rates for electricity depending on when it's consumed. Electricity at peak times costs much more than electricity at non-peak times. This bill doesn't differentiate between the two and weigh energy savings occurring during peak times more heavily than energy savings occurring during non-peak times. 10) Potential Cost . How much this bill could cost the state treasury depends on how much energy people conserve, what the price of power is, and how many people apply for the refundable tax credit. If you assume that everyone conserves the maximum amount and is eligible for the 25% credit cap in the bill and multiple it by the $25 billion in total utility revenues assumed in the CPUC's recently proposed rate increase, the cost of the program is about $6.25 billion per year. 11) Related Legislation . SB 63X (Perata), which is pending in this committee, approaches energy efficiency in a fashion similar to this bill by paying customers up to $0.10/kwh for every kwh reduction in usage this summer compared to the prior summer. POSITIONS Sponsor: Author Support: California Apartment Association California Manufacturers & Technology Association Howard Jarvis Taxpayers Association Oppose: None on file Randy Chinn SB 654 Analysis Hearing Date: April 24, 2001