BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 428 - Richman Hearing Date:
July 8, 2003 A
As Amended: June 16, 2003 FISCAL B
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DESCRIPTION
Existing law:
1.Authorizes retail competition (direct access) within the
service areas of the investor-owned utilities (IOUs) (AB 1890
(Brulte), Chapter 856, Statutes of 1996).
2.Requires the California Public Utilities Commission (CPUC) to
suspend the right of IOU customers to acquire direct access
service until the Department of Water Resources (DWR) no
longer supplies power to IOU customers (AB 1X (Keeley),
Chapter 4, Statutes of 2001). Pursuant to AB 1X, the CPUC has
suspended direct access as of September 20, 2001.
3.Declares the intent of the Legislature that all customers
taking service from an IOU after the enactment of AB 1X bear a
fair share of specified DWR costs and that any cost shifting
between customers be prevented (AB 117 (Migden), Chapter 838,
Statutes of 2002).
This bill establishes four new classes of IOU customers who may
opt for direct access under different conditions - "core,"
"non-core," "core-elect," and customers taking retail service
from affiliated generators.
Specifically, this bill :
Defines "core" customers to include customers with demand under
500 kilowatts (kW), "non-core" customers to include customers
with demand of 500 kW, subject to the CPUC lowering the
threshold to 200 kW and permitting multiple customers to
aggregate, and "core-elect" customers as non-core customers that
choose to be served by an IOU's procurement plan.
Beginning January 1, 2006, obligates IOUs to provide:
1.Commodity service from the "procurement plan portfolio" to
core customers, as well as core-elect customers that elect to
receive service for a minimum term of three years.
2.Default commodity service to returning non-core customers,
with no obligation to procure electricity pursuant to a
procurement plan. Default commodity service is priced at the
higher of spot electricity purchases or the tariff rate for
core-elect customers. The CPUC is required to establish rules
to ensure that default service costs are paid only by non-core
customers.
3.Transmission, distribution, and "resource adequacy" services
to all customers.
On or before January 1, 2005, requires the CPUC to adopt rules
to implement this bill, including:
1.A deadline, on or before June 30, 2005, for non-core customers
to elect core-elect service for at least three years or to
elect direct access. Non-core customers who fail to make an
election are switched to default service.
2.Terms and condition under which non-core customers may take
default service, including the time period after which a
customer must select core-elect service or return to direct
access.
3.Provisions to ensure prompt recovery of reasonable costs an
IOU incurs to serve customers and provisions to ensure there
is no cost shifting between customer classes.
4.A method for determining the rates and charges for core and
core-elect customers, and the default commodity service price,
including estimated prices to be in effect as of January 1,
2006.
5.Rules for the aggregation of customer load at multiple meters
for purposes of determining the core or non-core status of a
customer, including the use of appropriate meters.
6.Provisions to ensure that no cost-shifting occurs between core
and core-elect customers.
7.A six-month notice requirement to begin receiving or to cancel
core-elect service upon completion of the three-year
commitment.
On or before July 1, 2004, requires the CPUC to establish
tariffs for a non-core customer that include all applicable
transmission, distribution, public goods, and cost recovery
surcharge costs otherwise paid by non-core customers for the
following purposes:
1.To transmit over non-dedicated electrical corporation
facilities, electricity generated by a corporation or person
at one location for consumption by the same corporation or
person, or an affiliated corporation, or person at a separate
location.
2.To procure electricity from new or expanded generation
facilities.
3.To procure electricity from a co-generation facility that sold
power to the electrical corporation on or after June 1, 2003.
Requires the CPUC to establish annually the appropriate mix and
level of long-, medium- and short-term IOU commitments and to
ensure the flexibility needed to minimize stranded procurement
costs.
Requires non-core customers opting for direct access to pay
specified IOU and DWR procurement costs, subject to CPUC
determination.
Requires the CPUC, in consultation with the Energy Commission
and the Independent System Operator, to establish resource
adequacy requirements for all IOU customers, including non-core
and community choice aggregation customers, subject to a
nonbypassable charge.
Requires the CPUC to ensure that customers moving from
core-elect to non-core service at the end of a three-year term
don't have to pay for IOU or DWR procurement costs.
Requires the CPUC to ensure that all electric service providers
(ESPs) and community choice aggregators (CCAs) meet the
renewable portfolio standard (RPS) and support demand side
management programs, either directly or through "in-lieu
arrangements" approved by the CPUC.
Requires the CPUC to establish rules or tariffs that provide an
option for residential customers to receive direct access from
renewable resources beginning January 1, 2006.
BACKGROUND
The "core/non-core" approach to utility service is derived from
natural gas service, where customers are divided into core and
non-core classes according to consumption. Gas utilities are
required to procure and deliver a portfolio of gas supplies
sufficient to serve their core (residential and small
commercial) customers. Non-core customers must arrange for
procurement and transportation of their own gas supplies. As an
alternative to self-procurement, Southern California Gas permits
non-core customers to opt in to the core and Pacific Gas and
Electric offers supply and transportation to non-core customers
at its incremental cost.
As part of the restructuring of the electric industry, AB 1890
authorized direct access. While customers were allowed to
choose alternate providers of energy, the IOUs' obligation to
serve all customers remained and customers large and small were
entitled to remain with, or return to, bundled IOU service.
Historically, IOU electric customers have been entitled to the
portfolio of supplies procured to serve them without regard to
their size.
To avoid the dysfunctional spot market that financially
decimated the IOUs and threatened catastrophic rate increases,
AB 1X established a structure to permit DWR to buy needed
electricity for IOU customers under long-term contracts. To
ensure the predictable revenue stream necessary for long-term
contracts, the issuance of ratepayer-backed revenue bonds, and
prevent cost-shifting from direct access to bundled service
customers, the CPUC was directed to suspend direct access to
prevent additional migration of IOU customers. After a
seven-month delay, the CPUC suspended direct access on September
20, 2001.
Between January and June 2001, the vast majority of customers
previously served by direct access providers returned to IOU
service, benefiting from retail rates which were lower and more
stable than market prices. However, between July 1, 2001 and
September 20, 2001, thousands of predominantly large industrial
customers, who had taken service from the state at below-market
rates, departed for direct access as market conditions improved.
During the July 1 to September 20 period, direct access
increased from approximately 2% to approximately 13% of the
total IOU load. Direct access load continues to grow due to the
CPUC's liberal interpretation of the Legislature's direction to
suspend direct access, including allowing customers to begin
direct access service after the suspension date and switch
between bundled service and direct access service.
Meanwhile, the CPUC has proposed to dedicate a share of bundled
customer rates to a loan program to defer direct access
customers' payment of DWR and IOU procurement costs. In a
decision issued in November 2002 (D.02-11-022), the CPUC capped
the payment for these costs applicable to direct access
customers at 2.7 cents per kilowatt hour. The CPUC majority
reasoned such a cap was necessary to maintain the viability of
existing direct access contracts.
The 2.7 cent charge won't pay back what direct access customers
owe for DWR power already delivered, or for DWR operating costs
in the next few years, so a revenue shortfall or
"under-collection" results. Since payment of DWR's costs (bond
payment and ongoing revenue requirement) can't be postponed, the
CPUC decision shifts the obligation to pay any shortfall from
direct access customers to each IOU's bundled customers, be they
residential, agricultural, commercial or industrial.
According to the CPUC, the direct access shortfall as of January
1, 2003 was $609 million. The shortfall is expected to continue
to grow for several years. Over time, as DWR costs decline,
direct access customers' payments are projected to catch up and
pay off this under-collection. In the meantime, IOU customer
rates will have to maintained at a level high enough to support
this "forced loan" to direct access customers.
COMMENTS
1.Who will finance long-term infrastructure investment? This
bill states that it's intended to "provide for and expedite
the construction of electric generation capacity?by phasing in
a retail market for the most efficient and financially stable
customers." The implication of this statement is that direct
access suppliers and customers will support investments in new
power plants. However, the history of direct access and the
conditions needed to finance new power plants don't support
this proposition.
According to direct access trade association Alliance for
Retail Energy Markets:
Unlike the IOUs, ESPs and potential CCAs face great
uncertainty concerning their long-term loads. Thus,
mandatory long-term contracting would entail significant
and potentially untenable risks for such retailers.
Moreover, direct access contracts do not extend for
long-term periods. A typical direct access contract may
be for as short as six months or perhaps as long as two
years.
(Comments of the Alliance for Retail Energy Markets on
the Proposed Decision of ALJ Allen, June 9, 2003, page
4.)
The inherently short term nature of direct access supply
contracts does not mesh well with the current state of power
plant project finance. Given the recent experience in
California and the condition of financial markets in general,
lenders are extremely risk averse. To secure financing, power
plant developers have been required to secure recovery of at
least 125% of their capital costs in long-term contracts with
assured cost recovery. Even then, permitted power plants with
long-term contracts have been struggling to get financing.
2.Uncertainty over who's serving whom may stunt planning and
investment in coming years. This bill attempts to draw a line
between core and non-core customers according to size.
However, because of the vague customer definitions, the
discretion given to the CPUC to move the line at any time
between 2004 and 2009, and the ability of smaller customers to
band together to qualify as non-core, the division between
core and non-core is really only advisory. In addition, the
division between core customers (less than 500 kW) and
non-core customers (500 kW initially, but subject to reduction
to 200 kW and aggregation) overlaps, causing multiple
conflicts in the conditions the bill attaches to each class.
An initial cut will be made in 2005, when non-core customers
would be required to choose direct access or a minimum
three-year term of IOU service as a core-elect customer. In
the meantime, IOUs and other retail suppliers will have no
idea what their future loads will be. Unfortunately, this
coincides with a critical time to make investments to meet
future electricity needs.
After the election, IOUs will be subject to a decrease in load
in three-year intervals, as core-elect customers are permitted
to leave, and an increase in load at any time a direct access
customer returns to IOU service. Within the direct access
market, ESPs competing with one another will be subject to
ever fluctuating customer bases. The bill doesn't require
direct access customers to sign, or ESPs to offer, contracts
for any fixed terms, or otherwise address the migration of
customers within the direct access market.
3.Long-term planning and investment for bundled customers may be
sacrificed to provide flexibility to accommodate switchers.
Because this bill provides that customers switching from
core-elect to non-core service at the end of a three-year term
won't have any continuing obligation for IOU or DWR
procurement costs, the IOUs may be reluctant to commit to
procurement investments that can't be recovered within three
years. This three-year cycle isn't likely to support
investment in new renewable resources, conventional power
plants or other capital intensive projects needed to provide
adequate service to bundled customers.
4.Should core resources be limited to generation, and subject to
cost-of-service? In the intent section, this bill states IOUs
will have an obligation to provide electric commodity service
to core customers, and core-elect customers, from a combined
portfolio of generation resources allocated on
non-discriminatory, cost-of-service basis.
IOU portfolios currently contain a mix of generation and
demand reduction (e.g. energy efficiency) resources. Limiting
core resources to generation could make the core portfolio
more volatile and less cost-effective. In addition, while
IOU-owned generation is currently regulated on a
cost-of-service basis, IOU wholesale procurement is not
cost-of-service, but is based on federal market-based rates.
5.Large bundled customers failing to make an election are
slammed to default service. The majority of IOU customers
that would be considered non-core under this bill are
currently receiving bundled service, and have never opted for
direct access. Under this bill, non-core customers would be
permitted to receive service from the undefined "procurement
plan portfolio" as core-elect customers, provided they make an
election to do so and commit to at least three years of
service. Non-core customers may also elect direct access.
However, the default for a bundled customer who does nothing
and fails to make an election is to get switched to something
called "default commodity service," which is based on the
higher of spot prices or the tariff rate for core-elect
customers. These provisions appear to restrict rights that
bundled customers currently enjoy, such as installing
customer-owned generation or continuing to receive bundled
service. It's unclear why the default shouldn't be what it is
today - bundled service.
6.Renewable and demand-side requirements duplicate, and
potentially conflict with, existing law. This bill requires
the CPUC to ensure that ESPs and CCAs meet the RPS and support
demand side management programs, either directly or through
"in-lieu arrangements" approved by the CPUC. Existing law
already directly requires ESPs and CCAs, or their customers,
to meet the RPS, and to support demand side management
programs through the public goods charge. However, existing
law doesn't specifically provide for in-lieu arrangements,
which could diminish the effectiveness of the current
requirements.
7.Self wheeling for generators. In addition to authorizing
retail direct access transactions between customers and ESPs,
this bill includes a provision intended to permit operations,
such as oil refineries, with excess on-site generation to use
IOU transmission and distribution facilities to deliver
electricity to affiliates at another site, without being
considered a utility or an ESP. Previously, self-wheeling
transactions have not been permitted, except for a limited
exemption for adjacent sites, known as "over the fence"
transactions. These sales may not be subject to the RPS.
8.Related legislation . SB 888 (Dunn, Bowen and Burton) directs
the CPUC to develop, and submit to the Legislature for
enactment as a statute, a detailed proposal for implementation
of a "core/non-core" model for retail electric service that
achieves specified objectives. SB 888 is pending in the
Assembly.
AB 816 (Reyes) requires the CPUC to reinstate direct access
for customers over 500kW, pursuant to specified conditions.
AB 816 is pending in this committee.
ASSEMBLY VOTES (prior version)
Assembly Floor (67-0)
Assembly Appropriations Committee (24-0)
Assembly Utilities and Commerce Committee
(11-0)
POSITIONS
Sponsor:
Author
Support:
Bay Area Economic Forum
California Business Properties Association
California Maufacturers & Technology Association (if amended)
California State University
Calpine Corporation
Pacific Gas and Electric Company (if amended)
Sempra Energy (if amended)
Silicon Valley Manufacturing Group
University of California
Oppose:
California Coalition of Utility Employees
California Farm Bureau Federation
Clean Power Campaign (unless amended)
Environment California (unless amended)
Foundation for Taxpayer and Consumer Rights
Natural Resources Defense Council (unless amended)
Southern California Edison
Lawrence Lingbloom
AB 428 Analysis
Hearing Date: July 8, 2003