BILL ANALYSIS 1 1 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 1 1 2 6 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