BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
SB 997 - Morrow Hearing
Date: April 24, 2001 S
As Introduced: February 23, 2001 FISCAL B
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DESCRIPTION
Existing law requires that charges demanded or received by
public utilities be just and reasonable and assigns
responsibility for ensuring the reasonableness of such
charges to the California Public Utilities Commission
(CPUC).
This bill requires the CPUC to "deem reasonable," and
prohibit reasonableness review, of an investor-owned
utility's (IOU) power purchase and related contracts if
certain guidelines are met. Specifically, this bill:
? Declares certain benefits of long-term contracts and the
intent of the Legislature to provide guidance for power
procurement by IOUs.
? Provides that if an IOU maintains a portfolio of
contracts that meets between 50 and 95 percent of its
peak net short load, the portfolio is not subject to CPUC
reasonableness review.
? Further requires the CPUC to deem reasonable any forward
contract:
1. Approved by the CPUC.
2. Resulting from an open, competitive bidding process
(soliciting at least 15 suppliers) and within the
lowest 25 percent of bids received.
3. Priced below the average of other contracts entered
into after the effective date of this bill.
4. Entered into through a power exchange, the ISO or
any other market recognized by the CPUC.
5. Executed prior to December 31, 2000.
6. Intended to hedge price risk.
? Prohibits the CPUC from limiting the number or length of
any forward contract.
? Allows a 15 percent price premium for contracts for
renewable energy.
BACKGROUND
Existing law requires that charges demanded or received by
public utilities be just and reasonable and assigns
responsibility for ensuring the reasonableness of such
charges 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.
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 indicated that
contracts for a price more than five percent above the
average of comparable transactions would be subject to
reasonableness review.
Since the adoption of this standard, the CPUC has 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 has been 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 has not adopted a specific price
benchmark yet.
As a result of current market conditions, long-term power
purchase contracts have been 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.
CPUC review of contracts presents the possibility that
recovery of certain contract expenses will be disallowed if
the contract is judged to be a bad deal. 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. 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.
Use of forward contracts by IOUs has been very limited.
None of the IOUs have forward contracted to the level
authorized by the CPUC. Since the passage of AB 1X
(Keeley), Chapter 4, Statutes of 2001, most of the net
short requirements of IOUs have been procured by the
Department of Water Resources.
COMMENTS
1)Will this bill promote forward contracting? As noted
above, DWR is currently buying power to meet the IOUs'
net short requirements. As long as this continues, the
IOUs bear none of the risk associated with these
purchases and would be unlikely enter new contracts to
purchase power. As a result, the primary near-term
effect of this bill will be to prevent CPUC review of
existing contracts.
2)Are we conceding the question of reasonableness? By
deeming contracts reasonable regardless of price, this
bill accepts the proposition that whatever price the
market yields is reasonable . In other venues, the state
has argued that the market participants are unlawfully
charging unreasonable prices. The author and committee
may wish to consider what effect, if any, a legislative
determination of reasonableness will have on the state's
pursuit of remedies for prices it has otherwise argued
are unreasonable.
3)Should all existing contracts be deemed reasonable? This
bill establishes certain conditions whereby future
contracts would be shielded from CPUC review, but it also
shields any contract executed prior to December 31, 2000
from CPUC review. These existing contracts were entered
under authorities granted by the CPUC with an
understanding of the rules in effect at the time. This
bill retroactively changes those rules to favor the IOUs'
interests.
To the extent that this bill is intended to remove
barriers to forward contracting, the author and committee
may wish to consider whether the bill should limit the
CPUC authority with respect to contracts already signed.
For example, the Office of Ratepayer Advocates (ORA) is
currently challenging the use of contracts entered into
by SDG&E in 1996 and 1997. ORA contends that SDG&E sold
the contract energy to the PX at a profit, resold energy
from the PX to its customers at the PX price, and kept
the profit for its shareholders rather than passing the
full value of the contract on to its customers. This
bill would deem these contracts reasonable, which may
prevent ORA from challenging the use to which they were
put.
4)Related legislation. This bill is essentially identical
to AB 57 (Wright), which is currently pending in the
Assembly Utilities and Commerce Committee.
POSITIONS
Sponsor:
Author
Support:
Sempra Energy
Oppose:
None on file
Lawrence Lingbloom
SB 997 Analysis
Hearing Date: April 24, 2001