BILL ANALYSIS                                                                                                                                                                                                              1
          1





                SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
                               DEBRA BOWEN, CHAIRWOMAN
          

          AB 426 - Cox/Richman                              Hearing Date:   
          June 22, 2004              A
          As Amended: June 14, 2004                    Non-FISCAL       B
                                                                        
                                                                        4
                                                                        2
                                                                        6

                                      DESCRIPTION
          
           This bill  prohibits the California Public Utilities Commission  
          (CPUC) from imposing any "cost responsibility surcharge" on a  
          customer of a local publicly owned electric utility (muni) if  
          the customer's service location has not previously received  
          service from an investor owned utility (IOU).

                                      BACKGROUND
           
          "Municipalization" of electric service is not a new phenomenon.   
          IOUs have been subject to losing customers and service territory  
          to munis for as long as private and public utilities have  
          co-existed, which is almost as long as electric service has  
          existed.  Munis may form or expand in areas where IOUs have  
          customers and infrastructure or in areas of new development  
          without IOU customers or infrastructure ("greenfields").  If  
          existing IOU assets are taken by the muni's formation or  
          expansion, the value is resolved through the condemnation  
          process.

          Concerns about the need to make individual customers responsible  
          for utility charges on a "nonbypassable" basis erupted about 10  
          years ago, as the state was considering restructuring the  
          electric industry to allow open competition for IOUs' retail  
          customers.  Although the concern was primarily related to the  
          potential for large losses of customers to direct access, which  
          was the new threat presented by electric restructuring,  
          preexisting alternatives to IOU service, such as self-generation  
          and municipalization, were also implicated in the debate.

          The issue addressed by this bill represents the progression of  











          the nonbypassable charge debate to its most abstract, into areas  
          where customers and service do not now exist.  The question  
          posed by the bill is whether a new customer at a location which  
          never took service from an IOU nevertheless should compensate  
          the IOU for costs incurred by the IOU to serve its customers  
          generally.

          The first time a nonbypassable charge policy made its way into  
          state law was in AB 1890 (Brulte), Chapter 854, Statutes of  
          1996.  AB 1890 said the competition transition charge (CTC),  
          intended to ensure equitable recovery of IOUs'  
          generation-related obligations, was nonbypassable.  As for  
          munis, AB 1890 said an IOU customer's obligation to pay the CTC  
          could not be avoided by muni formation or annexation.  However,  
          the CPUC never adopted, and the IOUs never applied, a mechanism  
          to collect CTC from customers lost to munis.

          The next round of cost recovery concerns came with the  
          Department of Water Resources (DWR) long-term electricity  
          contracts.  AB 1X (Keeley), Chapter 4, Statutes of 2001,  
          authorized DWR to enter into power contracts.  Rather than  
          establish a nonbypassable charge, AB 1X addressed the concern  
          about subsequent loss of customers to direct access by directing  
          the CPUC to suspend direct access.  AB 1X did not address loss  
          of load to municipalization or self-generation.  AB 117  
          (Migden), Chapter 838, Statutes of 2002, subsequently clarified  
          AB 1X to say that every customer  served by DWR  should bear a  
          "fair share" of DWR's costs.

          Since the passage of AB 1X and AB 117, the CPUC has issued  
          several orders establishing responsibility for DWR and IOU  
          procurement costs for customers departing IOU service for direct  
          access, self-generation and muni service.  Collectively, the  
          charges to recover these costs are known as the cost  
          responsibility surcharge (CRS).

          In July 2003, the CPUC issued a decision establishing a CRS  
          applicable to customers departing IOU service for muni service  
          (Decision 03-07-028).  The policy basis for the CPUC's  
          application of the CRS to muni customers is the following  
          provision of AB 117:

               It is the intent of the Legislature that each retail  
               end-use customer that has purchased power from an  










               electrical corporation on or after February 1, 2001,  
               should bear a fair share of (DWR's) electricity  
               purchase costs, as well as electricity purchase  
               contract obligations incurred as of (January 1, 2003),  
               that are recoverable from electrical corporation  
               customers in commission-approved rates.  It is further  
               the intent of the Legislature to prevent any shifting  
               of recoverable costs between customers.

          Under AB 117, to the extent a greenfield customer has not  
          "purchased power from an electrical corporation on or after  
          February 1, 2001," the CRS, at least as it relates to DWR costs,  
          should not apply.  However, the CPUC decision only partially  
          excluded greenfield customers from the CRS.  The decision  
          excluded new load served by a muni providing service as of  
          February 1, 2001 from the CRS, but not new load served by munis  
          formed after that date.  In August, the CPUC granted several  
          munis' request for rehearing of Decision 03-07-028, but limited  
          review to the issue of where to draw the line on new load  
          (Decision 03-08-076).  The decision granting rehearing asked for  
          more evidence on how to allocate the exemption for new load.   
          The rehearing is pending.

          Most recently, SB 772 (Bowen), Chapter 46, Statutes of 2004,  
          addressed recovery of a bond charge to finance a portion of  
          PG&E's bankruptcy recovery costs.  SB 772 requires the CPUC to  
          ensure collection of PG&E's recovery costs from all electric  
          consumers in PG&E's current service territory, with specified  
          exceptions.  As for munis, SB 772 generally provides that  
          recovery costs are unavoidable by customers taking service from  
          a muni that forms in, or expands into, PG&E's current service  
          territory.  However, SB 772 requires the CPUC to determine the  
          extent to which recovery costs are recoverable in greenfield  
          areas served by a muni.




















          Munis objected to SB 772 on the basis it could lead to PG&E  
          billing customers served by a muni that annexes or overlaps a  
          portion of PG&E's current service territory.  In the Assembly,  
          SB 772 alternately included, then excluded, greenfields from the  
          obligation to pay recovery costs.  In a compromise, the bill  
          ultimately was amended to  not  decide the issue.  Instead, except  
          for a limited exemption for greenfield load served by city-owned  
          utilities, the bill deliberately requires the CPUC to decide the  
          greenfield issue by applying its pending decision on  
          responsibility for DWR costs.

                                       COMMENTS
           
           1.What is a cost responsibility surcharge?   CRS is a term of art  
            coined by the CPUC with no statutory definition.  Whether this  
            bill succeeds in its intent to prevent the application of the  
            CTC, DWR charges, the PG&E recovery bond charge, or any other  
            charge depends entirely on the CPUC's definition of the CRS.   
            Since this meaning of this bill hinges on the meaning of that  
            term,  the author and the committee may wish to consider   
            defining CRS, or specifically referencing the charges that may  
            not be imposed.   The author and the committee may also wish to  
            consider  whether a muni customer never served by an IOU should  
            be responsible for any IOU charge.  If not, the bill could  
            simply prohibit the CPUC from imposing any charge.

           2.Specific sections should be cited.   Rather than say  
            "Notwithstanding any other law,"  the author and the committee  
            may wish to consider  whether this bill should reference  
            specific statutes authorizing the charges greenfield muni  
            customers would avoid - i.e., "Notwithstanding Sections 366.2,  
            369 and 848.1."

           3.Did DWR buy power for IOUs to serve greenfields?   IOUs contend  
            DWR bought power on behalf of would-be greenfield customers,  
            so when greenfields are developed and customers materialize,  
            those customers should pay for the DWR power whether they are  
            IOU customers, in which case they would consume a share of the  
            DWR power, or muni customers, in which case they would not  
            consume DWR power.  In fact, DWR (and IOUs) forecasted load  
            growth, but they also forecasted loss of load to due to a  
            variety of factors, including municipalization.  

           4.Same issue under consideration at CPUC.   IOUs argue this bill  










            interferes with an existing CPUC proceeding.  The flip side of  
            that argument is this bill is necessary to correct the CPUC's  
            misapplication of AB 117.

                                      PRIOR VOTES
           
          Senate Agriculture and Water Resources Committee                
          (10-2)*
          Senate Energy, Utilities and Communications Committee           
          (5-2)*
          Assembly Floor                          (71-4)*
          Assembly Appropriations Committee       (23-1)*
          Assembly Utilities and Commerce Committee                       
          (9-2)*
          Assembly Water, Parks and Wildlife Committee                    
          (12-5)*

          *Votes reflect a previous, unrelated version of the bill.

                                       POSITIONS
           
           Sponsors:
           
          California Municipal Utilities Association
          Northern California Power Agency
          Southern California Public Power Authority

           Support:
           
          City of Roseville
          Sacramento Municipal Utility District

           Oppose:
           
          Pacific Gas and Electric Company
          Sempra Energy
          Southern California Edison

          

































          Lawrence Lingbloom 
          AB 426 Analysis
          Hearing Date:  June 22, 2004