BILL ANALYSIS AB 1284 Page A Date of Hearing: April 28, 2003 ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE Sarah Reyes, Chair AB 1284 (Leslie) - As Amended: April 24, 2003 SUBJECT : Direct transactions: cost responsibility surcharges. SUMMARY : Exempts specified business entities from some of the exit fees that have been imposed by the California Public Utilities Commission (PUC) on direct access customers. Specifically, this bill : 1)Exempts a business entity from liability for the full cost responsibility surcharge or exit fee recently imposed by PUC on direct access customers if the business facility or plant: a) Signed a direct access contract with an electrical service provider (ESP) that was effective prior to February 1, 2001; b) Had its direct access contract involuntarily terminated by the ESP after February 1, 2001, but returned to direct access within 90 days thereafter; c) Had an average net margin as a percent of sales for the five years beginning January 1, 1996 through December 31, 2000 was greater than 2 percent; d) Had average electrical energy costs that exceeded 8 percent as a percentage of sales for that same 5-year period; e) Participated continuously in an interruptible or curtailable service program; f) Had average electrical costs as a percentage of sales that exceeded the average net margin as a percentage of sales for that 5-year period; and g) Submits a signed declaration from an officer, director or company owner stating that, without the specified relief from cost recovery surcharges, the applicable plant will face certain and imminent closure. AB 1284 Page B 2)Provides that, in lieu of paying the full cost recovery surcharge as specified in PUC decisions, the business entity shall instead pay charges imposed to enable Department of Water Resources (DWR) to recover electricity bond costs fees, in an amount not to exceed one (1) cent per kilowatt-hour (kWh) on the actual electricity consumed. 3)Sunsets the provisions of this bill on January 1, 2009 4)Declares the intent of the Legislature that no costs be shifted between customer classes as a result of the provisions of this bill. EXISTING LAW : 1)Suspends the right of retail end use customers to acquire electricity from providers other than the investor-owned electric utilities (IOUs) until DWR no longer supplies power that it purchased on behalf of IOUs during the energy crisis of 2000-2001. 2)Provides that various classes of customers who have purchased electricity from a supplier other than an IOU are responsible for a fair share of both the electricity purchase costs incurred by DWR, and the purchase contract costs of the IOUs from which they are departing. FISCAL EFFECT : Unknown. COMMENTS : In early 2001, the Legislature passed AB X1 1 (Keeley), Chapter 4, Statutes of 2001. Among other things, AB X1 1 specified that, after the passage of a period of time as determined by PUC, the right of retail end use customers to acquire electric service from providers other than the IOUs shall be suspended until DWR no longer supplies power under the authority granted in AB X1 1 for DWR to buy power on behalf of IOUs. Subsequently, PUC permitted direct access customer contracts entered into on or before September 20, 2001, to remain in AB 1284 Page C effect, but specified that bundled customers<1> shall not be adversely impacted by shifting of costs caused by customers migrating from bundled to direct access load. Last year, AB 117 (Migden), Chapter 838, Statutes of 2002, clarified the Legislature's intent concerning recovery of DWR-related costs from retail end-use customers, stating that those who have "[p]urchased 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 ... 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."<2> Thus, AB 117 (Migden) directs PUC to impose a "fair share" of cost responsibility on all customers who took utility service on or after February 1, 2001. The amount of the fair share is left to PUC to determine. In November 2002, a PUC decision<3> addressed direct access cost responsibility surcharges or exit fees and related issues. These costs are costs incurred by DWR on behalf of customers in the service territories of the three major utilities, and costs incurred by each of the utilities through their own resources and contracts. The charges are applicable to all direct access load that took bundled service on or after February 1, 2001. The payment of charges by direct access customers is currently subject to an overall cap of 2.7 cents/kWh. Continuous direct access customers that remained on direct --------------------------- <1> Direct access customers purchase electricity from an independent electric service provider (ESP), and receive only distribution and transmission service from the IOU utility. "Bundled" customers, however, rely on IOU for all these services. Distribution and transmission charges are "bundled" with a charge for the procurement of energy supplies. <2> Public Utilities Code 366.2 (d)(1). <3> D. 02-11-022. AB 1284 Page D access both before and after February 1, 2001 are excluded from the charges. Involuntary shift from direct access electric service to bundled service. Enron, Inc. was a major ESP provider for California entities. In 2001, it subjected its direct access customers to unauthorized and involuntary switching to bundled service without advance notice. Many remained on utility bundled service only briefly. In recent PUC proceedings to determine the amount of exit fee responsibility, these entities unsuccessfully argued that they should be treated as if they were continuously on direct access service, which would thereby exempt them from any exit fee responsibility. To the extent that the ESP initiated involuntary switching, these parties argued that charging a direct access exit fee unfairly penalized them because they entered into contracts with ESPs as early as 1998, fully performed pursuant to the terms of their direct access contracts, including payment of their bills rendered by the ESPs pursuant to consolidated billing; and relied on their ESPs and not the utilities to meet their full power requirements. In refusing to adopt this proposal, PUC noted that a direct access customer have cause for legal action against the ESP and could seek a judgment for damages in the appropriate court jurisdiction. In the case of Enron, however, the likelihood of recovery against the bankrupt entity is small. Nevertheless, PUC took the position that bundled utility customers should not be required to bear the burden of wrongful actions of ESPs, and PUC imposed responsibility for the payment of exit fees without any exemptions based upon whether or not the direct access customer had granted advance permission to the ESP to execute the switch. In enacting AB 117 (Migden), the Legislature clearly stated its preference that all parties pay a fair share of DWR's electricity purchase costs, and that there be no cost shifting between customers. The policy question presented to the Committee by this bill is whether and under what circumstances should the Legislature depart from these uniform cost-shifting principles. AB 1284 Page E In this bill, businesses that were viable concerns for the five (5) years leading up to the energy crisis, but which nonetheless had high energy costs, are eligible for a reduction in exit fee responsibility if they were involuntarily returned to bundled service for a short time and will essentially go out of business without the relief set forth in this bill. REGISTERED SUPPORT / OPPOSITION : Support Sierra Pine Ltd. (sponsor) Lumber and Sawmill Workers Union Local 2927 Source International Moulding Division Crystal Art Gallery G.L. Veneer Co., Inc. Somerville Plywood Corp. Yuba River Moulding & Millwork, Inc. Opposition Southern California Edison Analysis Prepared by : Paul Donahue / U. & C. / (916) 319-2083