BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 428 - Richman/Canciamilla Hearing Date:
June 22, 2004 A
As Amended: June 2, 2004 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:
1.Terminates the suspension of direct access on January 1, 2006.
2.Requires the CPUC, by April 1, 2005, to establish rules for
phased implementation of direct access.
3.Authorizes the CPUC to establish requirements it determines
necessary to ensure bundled customer indifference to direct
access.
4.Requires the CPUC to permit direct access equivalent to load
growth and reduction in DWR contract obligations from
2006-2009.
5.Requires the CPUC, by April 1, 2005, to establish a
core/non-core direct access model, to commence January 1,
2009, consistent with specified principles.
6.Requires the Independent System Operator to enforce resource
adequacy requirements.
7.Requires the CPUC, by April 1, 2005, to report on its direct
access rules.
8.Prohibits the CPUC from adopting an IOU procurement plan
unless it complies with the CPUC's schedule for phased
implementation of direct access.
9.Requires the CPUC to establish transition rules that allow an
IOU to avoid stranding capacity through its procurement plan.
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 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 has grown since that time
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 dedicated 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 (Decision 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 doesn't cover 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.
According to DWR, the current direct access under-collection is
about $750 million. The shortfall is expected to continue to
grow in 2004. Over time, as DWR costs decline, direct access
customers' payments are projected to catch up and pay off this
under-collection. DWR estimates the under-collection will be
paid off in 2011 in PG&E territory, 2014 in SCE territory, and
2005 in SDG&E territory. 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.Multiple choice. This bill establishes new direct access
statutes without reconciling them with the existing direct
access statutes enacted by AB 1890, which require the CPUC to
authorize and facilitate direct access. For new customers,
these statutes are inoperative due to the suspension of direct
access. Under this bill, they will become operative again on
January 1, 2006.
This bill directs the CPUC to permit direct access equivalent
to load growth and reduction in DWR contract obligations from
2006-2009. This bill further directs the CPUC to establish
core/non-core direct access, beginning in 2009. It's not
clear how each of these provisions of law would relate to the
others and how they would be applied to existing and future
direct access customers. To create a more consistent,
deliberate direct access policy, the author and the committee
may wish to consider reconciling existing law requiring the
CPUC to facilitate direct access with the provisions of this
bill requiring the CPUC to limit, or impose new conditions on,
direct access.
2.Direct access starts in 2006, but core/non-core principles
don't apply until 2009. This bill restores direct access in
2006 and permits, but doesn't require, the CPUC to impose
certain conditions. The core/non-core program begins in 2009,
three years after the direct access suspension is lifted.
Prospective direct access customers will have an incentive to
leave before 2009 to avoid the limitations associated with
core/non-core. The author and the committee may wish to
consider whether the core/non-core rules should be implemented
before customers are permitted to depart.
3.Fewer customers to carry forced loan. This bill doesn't
address the burden on bundled customers resulting from the
CPUC's current direct access program. While the bill
authorizes the CPUC to ensure "bundled customer indifference,"
the CPUC claims its existing forced loan is consistent with
this term. The bundled business customer paying to subsidize
its direct access competitor would probably beg to differ.
If the forced loan is left in place, and additional customers
are allowed to move from bundled service to direct access, the
per customer share of the forced loan will increase. To avoid
increasing the burden of direct access customer costs on
bundled customers, the author and the committee may wish to
consider postponing additional direct access until the forced
loan is repaid.
4.Mixed signals to IOUs regarding investments. AB 57 (Wright),
Chapter 835, Statutes of 2002, requires IOU procurement plans
to "enable the (IOU) to fulfill its obligation to serve at
just and reasonable rates." The IOUs are currently expected
to meet load growth and replace the DWR contracts over the
next several years via the procurement process initiated by
the CPUC pursuant to AB 57. The CPUC has recently approved
contracts for new power plants to serve IOU customers which
will be completed in the 2006-2009 timeframe. The IOUs are
required to buy additional renewable power under long-term
contracts pursuant to SB 1078 (Sher), Chapter 516, Statutes of
2002, the Renewable Portfolio Standard (RPS). The Governor,
the energy agencies and pending legislation (SB 1478 (Sher))
have endorsed accelerating the RPS schedule. Under the recent
CPUC long-term procurement decision (Decision 04-01-050), IOUs
will be obligated to build or buy resources to meet a 15-17
percent reserve margin by 2008. The Governor has asked the
CPUC to accelerate achievement of the reserve margin to 2006.
The energy agencies have adopted a goal of decreasing per
capita energy consumption.
The IOUs, and their customers, are the primary vehicle to
deliver all of the above. These initiatives, on top of
existing obligations for utility generation, qualifying
facilities, and DWR contracts, will make the IOUs' portfolios
stable, but also fairly inflexible.
Against this backdrop, this bill permits the IOU customers who
would support all these initiatives to leave for direct access
during the same time period the intitiatives are to be
implemented. The bill further requires the CPUC to ensure the
IOUs don't procure to meet the needs of customers who might
leave, without knowing whether they will leave, or if they
leave, whether they will return. The author and the committee
may wish to consider how an expansion of direct access can be
reconciled with other policy goals embodied in AB 57, SB 1078
and the Energy Action Plan.
5.Related legislation. AB 2006 (Nunez), pending in this
committee, requires the CPUC to implement a core/non-core
model, subject to conditions which are more specific and
restrictive than this bill.
PRIOR VOTES
Senate Energy, Utilities and Communications Committee
(2-3) (failed passage)
Assembly Floor (67-0)
Assembly Appropriations Committee (24-0)
Assembly Utilities and Commerce Committee
(11-0)
POSITIONS
Sponsor:
Author
Support:
Sempra Energy (if amended)
Independent Energy Producers (if amended)
Oppose:
California Coalition of Utility Employees
Clean Power Campaign (unless amended)
Foundation for Taxpayer and Consumer Rights
Natural Resources Defense Council (unless amended)
Pacific Gas and Electric Company (unless amended)
The Utility Reform Network (TURN)
Lawrence Lingbloom
AB 428 Analysis
Hearing Date: June 22, 2004