BILL ANALYSIS
SB 1876
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Date of Hearing: June 24, 2002
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Roderick D. Wright, Chair
SB 1876 (Bowen) - As Amended: June 19, 2002
SENATE VOTE : 26-7
SUBJECT : Electrical restructuring.
SUMMARY : Modifies the electric restructuring law pertaining to
public utility holding companies, and retention and sale of
public utility electricity generation assets. Specifically,
this bill :
1)Requires the California Public Utilities Commission (PUC) to
ensure that utility retained generation be dedicated to serve
the utility's bundled service customers.
2)Defines "utility retained generation" as utility owned
electricity generation, qualifying facility contracts, and
other bilateral electricity contracts entered into by an
investor-owned utility (IOU).<1>
3)Provides that the cost of major capital additions and
improvements to an IOU's retained generation assets shall be
reviewed and approved by PUC in advance of IOU being allowed
to invest in major capital additions or improvements.
4)Subjects public utility holding companies to PUC jurisdiction
for purposes of enforcing various PUC decisions.
5)Specifies that any gain or loss on sale associated with the
sale, transfer, or disposition of assets that have been
included in the rate base of an IOU shall be allocated
exclusively to the ratepayers served by IOU.
6)Calculates gain or loss on sale as the difference between the
transfer or sale price and the net depreciated book value of
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<1> This bill specifies that defining utility-retained
generation is not intended to predetermine the outcome of
pending civil or regulatory proceeding involving bilateral
electricity contracts entered into by the San Diego Gas and
Electric Company.
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the assets at the time of the transfer.
7)Repeals laws requiring PUC to establish a mechanism that
ensures recovery by IOUs of transition costs from their
customers, including costs for generation related assets and
obligations, that were being collected in PUC-approved rates
on December 20, 1995, that may become uneconomic as a result
of a competitive generation market.<2>
8)Repeals laws authorizing IOUs to recover utility generation
related plant and regulatory assets to the extent that they
remain un-recovered after December 31, 2001, due to IOUs'
ability to recover costs related to the implementation of
direct access, the Power Exchange (PX), and the Independent
System Operator (ISO).
9)Directs PUC to allocate uneconomic costs<3> of among various
classes of customers and rate schedules to ensure that costs
are recovered in substantially the same proportion as similar
costs are recovered as of June 1996 through the retail rates
of the relevant electric utility.
10)Requires rates for IOU retained generation provide a
reasonable opportunity for both cost recovery and return based
on those assets' depreciated book value.
11)Requires PUC to establish a "firewall" segregating the
recovery of costs of competition transition charge exemptions
so that the costs of the exemptions granted to residential
customers shall be recovered from them, and costs of
exemptions granted to other customer classes shall be
recovered from the members of that class.
12)Directs PUC to establish a Ratepayer Refund Account for each
IOU. If any refunds are recovered by an IOU in connection
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<2> The author plans to offer an amendment in committee intended
to clarify that the transition costs described in Section 367(a)
of this bill, which are recoverable only until 12/31/01, are
costs of pre-12/20/95 investments, as in current law.
<3> These "stranded costs" are frequently defined as the capital
costs (depreciation and return on investment) for a generating
plant that cannot be fully recovered in a competitive market,
because the revenue at the market price is less than total
operating cost, including the cost of capital.
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with the charging of excessive costs for wholesale power by
electric power generators, the refunds would be credited to
the account and held in trust for the benefit of ratepayers.
13)Repeals laws authorizing an IOU that is also a gas
corporation, and served fewer than four million customers as
of December 20, 1995, to implement a rate cap mechanism that
reflects price changes in the fuel market.
14)Repeals laws listing qualifications for PX governing board
members, and granting the Electricity Oversight Board (EOB)
power to oversee PX procedures and qualifications of PX board
members.
15)Repeals laws requiring EOB to ensure incorporation of ISO and
PX as public benefit nonprofit corporations.
16)States the intent of the Legislature to provide for
development of regional electricity transmission markets in
the western states, through adoption of a regional compact
among cooperating party states, to be approved by EOB.
EXISTING LAW:
1)Requires public utility generation assets to remain dedicated
to service for the benefit of California ratepayers.
2)Establishes a ISO and a PX as separately incorporated public
benefit nonprofit corporations.
3)Establishes EOB to oversee ISO and PX in order to ensure the
success of the electrical industry restructuring and to ensure
a reliable supply of electricity in the transition to a new
market structure.
4)Grants PUC power to supervise and regulate every public
utility in the state and to take all actions that are
necessary and convenient in the exercise of that power.
5)Requires PUC to establish an effective mechanism that ensures
recovery by IOUs of transition costs from their customers,
including costs for generation related assets and obligations,
that were being collected in PUC-approved rates on December
20, 1995, that may become uneconomic as a result of a
competitive generation market.
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6)Requires each IOU to propose a cost recovery plan for the
recovery of the uneconomic costs.
FISCAL EFFECT : Unknown
COMMENTS :
Gain on Sale
Over several years, PUC has issued a number of decisions
assigning or allocating the gain on the sale of public utility
property to or between shareholders and ratepayers. In general,
PUC has applied a risk analysis to allocation of gain on sale --
evaluating the relative risk to shareholders or ratepayers with
respect to a particular asset (or liability). PUC rules and
precedent allocates gain on sale on a category by category
basis.
On sales of nondepreciable property, such as land, PUC allocates
gain on sale, or at least a higher percentage of gain on sale,
to shareholders. In the case of depreciable property, which is
more likely to be used for provision of services to ratepayers,
the gain on the sale is normally appropriately allocated to
ratepayers.
PUC typically allocates any gain to shareholders or ratepayers
according to the amount of time the asset was held in rate base
versus the amount of time it was held outside the rate base.
That can sometimes result in a 50/50 split of gain to be shared
between shareholder and ratepayer.
This bill allocates any gain or loss on the sale of assets
exclusively to ratepayers if the asset has been included in the
rate base of IOU. Which goes against the rule widely followed
in the U.S. that those who shouldered the risk of loss are
entitled to the benefit from the gain.<4>
Holding companies
In a series of decisions in recent years, PUC has authorized
formation of holding companies. In each decision authorizing
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<4> Democratic Central Committee of the Dist. of Columbia v.
Washington Metropolitan Area Transit Comm'n (1973) 485 F. 2d 786
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the holding company systems, PUC incorporated a provision
requiring that the utilities be given "first priority" within
those systems.<5>
The "first priority" condition has generally been interpreted to
require a holding company to give preference to the utility when
investing capital whenever the parent determines that the
investment requirements of the utility are necessary to meet the
utility's obligation to serve.
PUC recently issued a series of decisions<6> on the subject of
the first priority condition, stating that when a utility's
access to or possession of capital of any type is impaired, and
its ability to discharge its obligation to serve is consequently
threatened, the first priority condition requires its holding
company to give the utility preference over all competing
potential recipients of capital resources.
Thus, at least under certain circumstances, PUC has decided that
the first priority condition includes a requirement that a
holding company infuse all types of capital into its respective
utility subsidiaries when necessary to fulfill the utility's
obligation to serve.
But none of PUC decisions broadly interpreting the first
priority condition has brought a holding company within PUC
jurisdiction, as is done in this bill. This is a significant
change, despite the fact that the jurisdiction here is for the
limited purpose of monitoring and enforcing PUC holding company
decisions.
Cost recovery
AB 1890 (Brulte), Chapter 854, Statutes of 1996, restructured
California's electric industry in order to establish a
competitive generation market. Under that law, IOU generation
assets are subject to rate regulation by PUC, and were to
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<5> For example, PUC decision in PG&E's case stated: "The
capital requirements of PG&E, as determined to be necessary and
prudent to meet the obligation to serve or to operate the
utility in a prudent and efficient manner, shall be given first
priority by PG&E Corporation's Board of Directors."
(D.96-11-017).
<6> See, e.g., D. 02-02-039, issued January 11, 2002.
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continue to be subject to PUC regulation until those assets have
undergone market valuation.
AB X1 6 (Dutra), Chapter 2, Statutes of 2001, First
Extraordinary Session, repealed the reference to market
valuation, and provided that the remaining generation facilities
will continue to be regulated by PUC until the owner of those
facilities has applied to PUC to dispose of those facilities,
and has been authorized to sell the assets by PUC. This bill
further prohibits the sale of any public utility-owned power
plant until January 1, 2006, and requires PUC to ensure that
generation assets remain dedicated to service for the benefit of
California ratepayers.
In light of the "re-regulation" of utility generation assets,
PUC began to apply cost-based ratemaking to IOU retained
generation assets. Thus, the costs of those utility generation
assets that would have been recovered (or not) in the market
were to be recovered in cost of service rates.
The author of this bill states, however, that given that rates
were increased twice last year, and that IOUs have recovered
billions of dollars of stranded costs, repealing the cost
recovery sections of AB 1890 are necessary and simply recognize
the reality that existing AB 1890 stranded cost recovery
provisions are no longer necessary or functional.
Pending litigation
Repealing the cost recovery provisions of AB 1890 could have an
effect on Southern California Edison v. Lynch, et al. In that
action, on which a decision by the Ninth U.S. Circuit Court of
Appeals is imminent, TURN alleges as an Intervenor that Edison -
PUC settlement agreement entered into last October violates the
relevant restructuring laws in two respects. First, TURN argues
that the settlement expressly maintains the rate-freeze beyond
March 31, 2002, and does so for the purpose of allowing Edison
to recover its past procurement costs - the costs the statute
says and PUC has, until this agreement, insisted could trigger
the risk of less-than-full recovery of uneconomic costs. And
second, TURN alleges the settlement the rate-freeze guarantee
that protects consumers from price increases during the
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transition to a competitive market.<7>
REGISTERED SUPPORT / OPPOSITION :
Support
Coalition of California Utility Employees
TURN
Public Utilities Commission
Opposition
Berkeley Chamber of Commerce
Kearny & Associates
Labor Management Services
Oakland Metropolitan Chamber of Commerce
Pacific Gas & Electric Company
Sempra Energy
Analysis Prepared by : Paul Donahue / U. & C. / (916) 319-2083
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<7> A similar set of allegations was recently made in a petition
for a Writ of Mandamus now before the California Supreme Court
in Foundation For Taxpayer and Consumer Rights v. CPUC.