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

          AB 425 -  Richman                                 Hearing Date:   
          July 8, 2003               A
          As Amended:         July 7, 2003             FISCAL       B
                                                                        
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                                      DESCRIPTION
           
           Existing law  requires: 

          1.Investor-owned utilities (IOUs) to offer optional  
            "interruptible or curtailable" electric service to heavy  
            industrial customers at rates which are discounted to reflect  
            the risk of being subject to interruptions.

          2.The California Public Utilities Commission (CPUC) to direct  
            the IOUs to continue efforts to reduce industrial rates to a  
            level competitive with other states, without shifting costs to  
            other classes.

          3.The CPUC to continue the availability of interruptible  
            service, at the same rates in effect on June 10, 1996, at  
            least until March 31, 2002.

           This bill  extends and revises the interruptible service program.  
           Specifically, this bill:

          1.Requires the CPUC to continue the availability of  
            interruptible service indefinitely at a rate which reflects a  
            "cost-based pricing incentive."

          2.Changes the statutory eligibility for interruptible programs  
            from "qualified heavy industrial customers" to "all customers  
            with demand at, or in excess of, 500 kilowatts" and authorizes  
            the CPUC to exclude any category of customers for which firm  
            service is essential for public health and safety.

          3.Requires customers who fail to interrupt when called to pay a  











            penalty of $9.30 per kilowatt-hour of excess power taken, but  
            authorizes the CPUC to adopt a different penalty if it  
            determines the penalty is insufficient to ensure compliance.

          4.Requires IOUs to remove from interruptible service a customer  
            who chooses not to comply substantially with two consecutive  
            interruption requests.

          5.Requires IOUs to eliminate any unauthorized (i.e. not  
            cost-based) incentives in existing interruptible rates before  
            January 1, 2005 or until the conclusion of the rate design  
            phase of its next general rate case (GRC).

                                      BACKGROUND
           
          Since the mid-1980s, large IOU customers have been offered rate  
          discounts for agreeing to interrupt their electricity service to  
          prevent broader service interruptions when demand threatens to  
          exceed supply.  If demand exceeds supply after these voluntary  
          interruptions, IOUs implement rotating outages based on  
          CPUC-authorized curtailment priorities.

          Interruptible programs serve as blackout insurance, providing  
          statewide grid reliability, and reducing the potential for  
          rotating outages or a catastrophic system collapse.  Ratepayers  
          pay the premium by funding rate discounts to attract large  
          customers who are willing to interrupt when called.   
          Interruptible customers are subject to six-hour interruptions at  
          a time, not to exceed a total of 100 or 150 hours per year.  In  
          return, they are assured a fixed discount of about one cent per  
          kilowatt-hour.

          IOUs have used interruptible rates as a tool to attract and  
          retain large customers.  Prior to 2001, interruptions were very  
          infrequent, so customers were able to accrue substantial rate  
          benefits at fairly low risk.  

          In late 2000 and early 2001, the equation flipped and many  
          customers who were attracted to the program by the rate discount  
          weren't prepared to meet the extensive and unprecedented  
          interruption obligations.  Some customers reported they didn't  
          realize they were subject to interruptions and there were some  
          customers on the program for which firm service is critical,  
          such as hospitals.











          Many customers failed to interrupt and incurred large penalties.  
           Although the penalty amounts were large, they were far exceeded  
          by the premium paid by ratepayers to fund the discount over the  
          years.  However, the CPUC waived the penalties for many  
          customers and barred those customers from participating in the  
          program.

          Although the statute only requires the program to extend through  
          March 2002, in April 2001, the CPUC extended it through December  
          2002, to cover the 2001 and 2002 summer peak demand.  In April  
          2002, the CPUC again extended the program for each IOU until the  
          conclusion of the rate design phase of its next GRC.  This  
          effectively extended the program through early 2004.  The CPUC's  
          intent is to consider continuation of the program in the context  
          of the IOUs' GRCs.

          The current program permits 2,500 megawatts of load to be  
          enrolled between the three IOUs, at a total maximum cost of $250  
          million/year.  Current enrollment is about 1,400 megawatts.  The  
          last annual cost figure was $163 million.  According to the  
          CPUC, interruptible programs cost ratepayers about $2 billion  
          between 1990 and 2001.

                                       COMMENTS

          1.How are the rates and penalties determined?   This bill  
            requires interruptible rates to "reflect a cost-based pricing  
            incentive."  The standard this would set for the CPUC is  
            unclear.  For example, what cost would the pricing incentive  
            be based on?   The author and the committee may wish to  
            consider  instead requiring that interruptible rates are "cost  
            effective compared to other available resource options."





















            This bill sets a specific non-compliance penalty ($9.30 per  
            kilowatt-hour), which is equivalent to the highest existing  
            penalty among the three IOUs.  While the penalty level is set  
            in the bill, the CPUC is authorized to change it.  Rather than  
            specifying a penalty which is immediately subject to change,  
             the author and the committee may wish to consider  instead  
            directing the CPUC to establish and enforce penalties  
            sufficient to ensure compliance.

           2.Are customers who failed to interrupt in 2001 eligible for the  
            program?    The author and the committee may wish to consider   
            whether customers who have previously been subject to  
            penalties for non-compliance with interruptible programs  
            should be eligible for the program.

           3.Will the customer be there when needed?   This bill provides  
            that a customer who chooses not to comply substantially with  
            two consecutive interruption requests will be removed from the  
            program.  That doesn't do much good to the other IOU customers  
            who are then subject to interruption themselves.  The  
            interruptible program will not be very good insurance unless  
            it's clear that compliance is mandatory, and the consequences  
            of non-compliance are severe.   The author and the committee  
            may wish to consider  whether customers who fail to comply with  
            interruption requests should be required to refund to  
            ratepayers their accrued discounts.
                                           
                                   ASSEMBLY VOTES
           
          Assembly Floor                     (67-4)
          Assembly Appropriations Committee  (20-0)
          Assembly Utilities and Commerce Committee                       
          (13-0)

                                       POSITIONS
           
           Sponsor:
           
          California Large Energy Consumers Association

           Support:
           
          BOC Gases
          California Business Properties Association










          California Chamber of Commerce
          California Manufacturers & Technology Association
          Praxair, Inc.
          Redondo Beach Chamber of Commerce
          Southern California Edison

           Oppose:
           
          Coalition of California Utility Employees

          Lawrence Lingbloom 
          AB 425 Analysis
          Hearing Date:  July 8, 2003