BILL ANALYSIS
SB 1976
Page 1
SENATE THIRD READING
SB 1976 (Torlakson)
As Amended August 15, 2002
2/3 vote. Urgency
SENATE VOTE : 38-0
UTILITIES AND COMMERCE 15-0 APPROPRIATIONS 23-0
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|Ayes:|Wright, Pescetti, |Ayes:|Steinberg, Bates, |
| |Calderon, Bill Campbell, | |Alquist, Aroner, Ashburn, |
| |John Campbell, | |Cohn, Corbett, Correa, |
| |Canciamilla, Cardenas, | |Daucher, Diaz, Firebaugh, |
| |Horton, Kelley, La Suer, | |Goldberg, Maldonado, |
| |Maddox, Nation, Papan, | |Negrete NcLeod, Robert |
| |Reyes, Simitian | |Pacheco, Papan, Pavley, |
| | | |Dickerson, Simitian, |
| | | |Washington, Wiggins, |
| | | |Wright, Zettel |
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SUMMARY : Requires the California Energy Commission (CEC) to
report on real-time electricity pricing tariffs, and sets up a
process at the Public Utilities Commission (PUC) by which an
investor-owned utility (IOU) may obtain a determination that its
proposed electricity procurement expenses will be deemed
reasonable, and therefore recoverable from ratepayers, before
the procurement expenses are incurred. Specifically, this bill :
1)Requires CEC to consult with the California Public Utilities
Commission (PUC) and report, by March 2003, to the Legislature
and the Governor regarding the feasibility of implementing
critical peak pricing, and other dynamic pricing tariffs for
electricity for electricity in California.
2)Specifies that the report shall consider:
a) How wholesale real-time prices would be calculated and
made available to customers;
b) Options for day-ahead and hour-ahead retail prices;
c) Options for facilitating customer response to real-time
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prices and managing total customer costs;
d) Estimates of potential peak load reductions, including
shifting of peak load demand to off-peak periods;
e) Options for incorporating demand responsiveness into the
wholesale competitive market and operations of the
California Independent System Operator; and,
f) Options for ensuring customer protection under a
real-time pricing scenario, including identifying how to
safeguard groups who may be disproportionately vulnerable
to the impact of volatile prices.
g) Options for a variety of customer classes, including,
industrial and commercial properties that receive
electricity from a master-meter through a submetered system
3)Require the Public Utilities Commission (PUC) to allocate
electricity provided by the Department of Water Resources
(DWR) among the investor-owned utilities (IOUs).
4)Require each IOU to file, and PUC to review and accept, modify
or reject, a procurement plan specifying the date the IOU
intends to resume procurement, and enabling IOU to fulfill its
obligation to serve its customers at just and reasonable
rates, eliminating the need for after-the-fact reasonableness
reviews, and ensuring timely recovery in rates of prospective
procurement costs.
5)Require the procurement plan to be based on one or more of the
following standards of reasonableness:
a) An approved competitive bid-based procurement process;
b) A performance-based incentive mechanism that shares
procurement risks and rewards between an IOU and its
customers; and,
c) Objective standards and review to determine the
recoverability of procurement transactions prior to their
execution
6)Require IOUs, in their procurement plans, in order to fulfill
unmet resource needs, procure renewable energy resources with
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the goal of ensuring that at least additional 1% per year of
the electricity sold by IOU is renewable energy until a 20%
renewable resources portfolio is achieved, provided sufficient
public goods charge funds are available to cover the
above-market costs of new renewable energy.
7)Require PUC to establish balancing accounts for each IOU to
track the differences between revenues and procurement costs
incurred, to review the account semiannually, and adjust rates
or issue refunds to promptly amortize the accounts. Until
January 1, 2006, adjustment is required whenever an account is
under- or over-collected by more than 5% of IOU's actual
recorded generation revenues for the prior calendar year.
Require PUC to provide for periodic review and modifications
of procurement plans
8)Require PUC to establish balancing accounts for each IOU to
track the differences between revenues and procurement costs
incurred, to review the account semiannually, and adjust rates
or issue refunds to promptly amortize the accounts. Until
January 1, 2006, adjustment is required whenever an account is
under- or over-collected by more than 5% of the IOU's actual
recorded generation revenues for the prior calendar year.
Require PUC to provide for periodic review and modifications
of procurement plans.
9)Authorize PUC to contract out for risk management and strategy
advisors. Require PUC, prior to its approval of any
divestiture of generation assets owned by an IOU, to determine
the impact of the divestiture on the IOU's procurement rates,
and allows approval only if the PUC determines the divestiture
will result in net ratepayer benefits.
10)Allow an IOU with less than 500,000 retail customers to apply
for an exemption from these provisions.
EXISTING LAW :
1)Requires the rates of IOUs to be just and reasonable.
2)Authorizes DWR to procure the net short electricity
requirements of electric utilities.
3)Prohibits DWR from contracting for electricity after December
31, 2002, but allows DWR to continue to administer existing
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electricity purchase contracts after that date.
4)Provides that, to the extent practicable, power sold by the
DWR to retail end use customers shall be allocated pro rata
among all classes of customers.
5)Requires CEC to conduct an ongoing assessment of the
opportunities and constraints presented by all forms of
energy.
FISCAL EFFECT : Minor absorbable General Fund costs for CEC to
complete the report.
COMMENTS : This bill sets up a process whereby that review of
the reasonableness of an IOUs electricity procurement plan will
occur in advance, rather than in hindsight, and procurement made
according to the PUC-approved procurement plan will later be
regarded as having been reasonable per se because of the prior
approval.
Long term contracts and credit ratings: When the electric
market was restructured, PUC required IOUs to buy and sell from
the Power Exchange (PX), which initially offered only day-ahead
and hour-ahead markets. In 1999, PX began facilitating forward
contract transactions in its block forward market. Purchases
from PX were deemed reasonable per se by PUC. As a result of
market conditions during the energy crisis, long-term, bilateral
contracts were viewed as an attractive way to stabilize volatile
and high prices. IOUs regard after-the-fact reviews of the
reasonableness of these contracts by PUC a deterrent to entering
contracts.
All three IOUs are preparing to resume their role in procurement
of electricity, but the credit rating agencies have indicated in
their analyses of IOUs that an investment grade rating, which is
for the most part essential for an IOU in order to make large
electricity purchases without significant collateral, cannot be
achieved without an assurance that cost recovery mechanism will
be honored into the future. In a February 2002 publication,
Standard and Poor's stated among other things that investment
grade ratings for the IOUs will not be readily forthcoming if
utility procurement practices are to be subject to after the
fact reasonableness reviews.
Restructuring of the electricity markets over the last years
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throughout the nation has brought about new challenges to
electric utilities. In the past in a regulated environment,
electric utilities usually had guaranteed profit on every
kilowatt-hour of electricity sold. A market-based electricity
market no longer guaranties profit.
Real time pricing: Real-time pricing (RTP) is aimed at
businesses using more than 200 kilowatt-hours. Facilities
affected would range from smaller factories to expansive office
complexes. To put RTP in motion, CEC has awarded $35 million to
the state's three major investor-owned utilities (IOUs) to buy
20,000 sophisticated meters that track price in 15-minute
intervals. The meters would be distributed free.
Under RTP, the electricity price is no longer constant over the
day but it changes every hour. The customer usually receives
the next day's hourly prices one day in advance. The utility
bases the next day's hourly prices on the expected hourly
electricity production cost for the next day. Real-time prices
vary greatly because the production costs of a utility vary
greatly from hour to hour depending on the utility's load and
the different types of power plants that have to be operated to
satisfy the demand.
Commercial, industrial and agricultural customers, as well as a
small number of residential customers currently have time of use
tariffs in place. Time of use rates set two or three different
prices for different times of the day, with differing rates
depending on the season. The time of use tariff does not
reflect actual day-to-day variations in demand and price.
Puget Sound Energy in Bellevue, Washington, was the first
electricity distribution utility in the nation to provide a
time-of-use price and comparative time-of-day consumption
information to all customers. This program exposes customers to
the cost savings and efficiency benefits of shifting electricity
demand to off-peak periods. In a review of Puget's program, the
United State Department of Energy reports that 89% of Puget's
customers using real-time metering and the time of use tariff
shifted at least some of their energy use from peak hours to
off-peak hours. On average, customers shifted five percent of
their peak period load to off-peak hours.
This bill requires CEC to determine exactly how prices would be
calculated, the options for managing a RTP program, estimates of
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potential peak load reductions, and how that will all work in
harmony with the grid operation.
RTP for customers of IOUs requires PUC to adopt an RTP tariff.
Last May, CEC petitioned PUC to implement an RTP tariff as an
alternative to PUC-administered interruptible program for
customers with loads greater than 200 kilowatts. Many of these
customers have received real-time meters pursuant to a program
established by AB X1 29 (Kehoe), Chapter 8, Statutes of 2001,
which appropriated $35 million to CEC for installation of
real-time meters. According to CEC, this program will result in
the installation of 22,000 meters statewide, but without a RTP
tariff, little else can happen in the program.
Analysis Prepared by : Paul Donahue / U. & C. / (916) 319-2083
FN: 0006396