BILL ANALYSIS 1 1 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 4 2 5 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