BILL ANALYSIS                                                                                                                                                                                                                   1
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             SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
                            DEBRA BOWEN, CHAIRWOMAN
          

          SB 1126 -  Alarcon                                Hearing  
          Date:  April 24, 2001                S
          As Proposed to be Amended                    Non-FISCAL      
            B

                                                                       
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                                   DESCRIPTION
           
           This bill  finds that public power is one way for customers  
          to increase their control over energy pricing and supply.

           Current law  permits individual customers to aggregate their  
          electric loads on a voluntary basis, provided that each  
          customer does so by a positive written declaration  
          (opt-in).

           This bill  permits public agencies to serve as aggregators  
          for the businesses and residential customers within the  
          territory of that agency after a majority vote of  its  
          elected governing body.  If a customer wishes to be served  
          by someone other than the entity selected by the public  
          agency, he or she may do so upon written notice (opt-out)  
          to the public agency pursuant to the rules established by  
          that agency.

           Current law  bars a municipal utility from selling electric  
          power to the customers of an investor-owned utility (IOU),  
          and vice-versa, unless each utility consents.

           This bill  allows a municipal utility to sell to customers  
          of an IOU if the customers of the IOU agree, the municipal  
          utility provides low-income public benefit programs at  











               least as beneficial as the IOU, and the municipal utility  
               gives priority to IOU customers in areas which have a  
               higher percentage of low-income residential and small  
               business customers.  This provision sunsets in 18 months  
               and is replaced with a provision that permits a municipal  
               utility to sell electric power to the customers of an IOU,  
               and vice versa, only if the regulatory body of the utility  
               selling electricity first finds that such sales won't harm  
               its own customers.

                                         BACKGROUND
                
               In comparison to IOUs (e.g. Pacific Gas & Electric,  
               Southern California Edison, and San Diego Gas & Electric),  
               municipal utilities appear to many to be islands of  
               stability, supply adequacy, and rational prices.  This has  
               led to efforts to encourage municipalization, including SB  
               23X (Soto), which was heard by this committee recently, and  
               to permit municipal utilities to serve customers outside of  
               their traditional service areas.


































          Municipalization arguably increases local control and may  
          ultimately help insulate customers from the dysfunctional  
          wholesale electric market.  However, in and of itself,  
          municipalization shouldn't be considered a short-term  
          panacea for today's electric problems.

          The concept of community aggregation, wherein the governing  
          body of the community, such as the city council, could  
          choose an electric supplier for the entire community, was  
          discussed but ultimately tabled during the 1996 electric  
          restructuring debates.  This bill resurrects that concept  
          by permitting the governing body to select a provider of  
          electric service which then becomes the default provider  
          for everyone in the community. 

          During those 1996 discussions, the issue of competition  
          between municipal utilities and IOUs was also discussed.   
          At that time, the concern was that the IOU's would have  
          lower costs, which would make it very tough for the  
          municipal utilities to compete.  The shoe now appears to  
          have wound up on the other foot, at least for the time  
          being.

          The author intends that the two parts of this bill work  
          together.  Community aggregation allows customers to band  
          together and shop around, while allowing the municipal  
          utilities to compete in IOU service territories gives those  
          community aggregators another place to shop.  Nothing in  
          this bill deals with competition in the distribution of  
          electricity.  Rather, the bill deals with competition in  
          the sense of a direct access relationship between a  
          municipal utility and customers of an IOU.

                                     COMMENTS
           
           1)Community Aggregation  .  The concept of community  
            aggregation is an attempt to create buying power within a  
            community.  By aggregating a community's buying power,  
            the community will theoretically benefit by obtaining  
            lower prices and better service than if individual  
            community members made their own deals.  For example, a  
            city will choose a single garbage collection company for  
            all its citizens and businesses instead of allowing every  
            homeowner to go out and contract for garbage service on  










                 their own.
                
                 The electricity world today is a seller's market, not a  
                 buyer's market.  As such, any benefits of community  
                 aggregation may be hard to realize, at least over the  
                 next few years.  As the Department of Water Resources  
                 (DWR) continues to buy power for IOU customers, community  
                 aggregators will likely be subject to the same exit fees  
                 as any other direct access customers, further diminishing  
                 any benefits of community aggregation.

                 Given that reality and the prospect for a continuing  
                 imbalance in the next several years,  the author and  
                 committee may wish to consider  whether creating more  
                 competing buyers in a stagnant world of sellers will only  
                 serve to bid  up  the price people will pay for  
                 electricity.  





































            Some people have proposed the idea of a "buyer's cartel"  
            as a means of offsetting the power of a "seller's  
            cartel," which is how some view the status of current  
            energy market in California.  The notion of a buyer's  
            cartel is that all buyers would act as one.  This bill is  
            somewhat the antithesis of a buyer's cartel in that while  
            it allows individuals to join together and form blocks,  
            those blocks will still be competing against one another  
            to buy power - a competition that may only serve to drive  
             up  the price for electricity. 

           2)Opt-In vs. Opt-Out  .  Under current law, people can  
            aggregate their electric loads on a voluntary basis,  
            provided that each customer "opts in" to the system.   
            This bill changes the burden on the individual consumer  
            because it permits, for example, a city council to decide  
            to aggregate the load for everyone within the boundaries  
            of the city and requires the individual consumer to  
            "opt-out" if he or she wants to continue buying power  
            from their existing - or another - provider.  

           3)Municipal Utility Sales To IOU Customers  .  The second  
            part of the bill allows municipal utilities to offer  
            service to IOU customers without letting IOUs provide  
            similar service to municipal utility customers.

            DWR continues to search, on a daily basis, for affordable  
            electricity to meet the needs of IOU customers.  This  
            bill, by allowing a municipal utility with surplus power  
            to sell to a community that aggregates its customers,  
            gives the municipal utility the ability to play DWR and  
            the city off one another to drive up the price for that  
            power. 

            No matter which entity winds up buying that power, it  
            appears that DWR - and its customers - will wind up  
            paying more.  Under one scenario, the municipal utility  
            would stop selling its supposedly cheaper power to DWR  
            and instead would sell it to a specific city.  In this  
            case, DWR's costs and the costs for all of its ratepayers  
            would go up because DWR wouldn't have access to that  
            cheaper power.  Under the second scenario, DWR and the  
            aggregating city would bid up the price of that municipal  
            power, but because the prices paid for power by IOU  










                 customers are currently frozen, the aggregating city  
                 would logically stop bidding for the power once it hits  
                 the frozen rate.  In this case, DWR would wind up with  
                 the power, but it'll be paying more for it than it  
                 otherwise would have had the city not been able to bid up  
                 the cost of the electricity.

                 There is also a question as to whether this provision  
                 advances the author's desire to encourage local control,  
                 because this provision simply allows a group of customers  
                 to aggregate to buy the surplus power of the municipal  
                 utility.  This falls far short of municipalization, which  
                 also gives customers a voice in the policies and  
                 operation of the utility.

                4)Focus On Low-Income Areas  .  The bill also requires  
                 municipal utilities that want to serve IOU customers via  
                 direct access to focus on low-income areas.  This may  
                 well discourage some municipal utilities from  
                 participating and raises the question of how many of the  
                 31 municipal utilities in California have surplus power  
                 to sell and are willing to participate in this program.
































           5)Whose Customers Are Harmed & Who Decides?   Under current  
            law, an IOU has to agree to allow a municipal utility to  
            come into its territory to compete and vice-versa.  Under  
            this bill, for 18 months, a municipal utility has the  
            ability to unilaterally decide to offer service to  
            customers in an IOU territory.  The IOU can't stop the  
            municipal utility from coming in, nor does the municipal  
            utility have to open its territory to the IOU.

            After 18 months, this bill levels the playing field by  
            allowing IOUs and municipal utilities to sell to one  
            another's customers without requiring the consent of the  
            other utility if the regulatory body of the utility  
            selling electricity first finds that such sales won't  
            harm its customers. 

            This provision runs counter to the author's goals in that  
            - after 18 months - it permits an IOU to sell electricity  
            to a municipal utility's customers without the consent of  
            the municipal utility.  While a municipal utility may  
            appear to hold the upper hand today when it comes to  
            electricity pricing, that hasn't always been the case and  
            may not be the case at some point in the future. 

           6)Related Legislation  .  SB 23X (Soto), which is pending in  
            this committee, makes it easier for cities and counties  
            to form municipal utility districts.

            AB 48X (Migden), which is pending in the Assembly  
            Appropriations Committee, is similar to this bill.

            AB 54X (Wright), which is pending in this committee,  
            permits the Los Angeles Department of Water & Power to  
            sell power to five specific governmental entities in the  
            Southern California Edison service territory.

                                    POSITIONS
           
           Sponsor:
           
          Author

           Support:
           










               None on file

                Oppose:
                
               None on file

               
               Randy Chinn 
               SB 1126 Analysis
               Hearing Date:  April 24, 2001