BILL ANALYSIS 1 1 SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE DEBRA BOWEN, CHAIRWOMAN AB 1284 - Leslie Hearing Date: July 8, 2003 A As Amended: June 17, 2003 FISCAL/URGENCY B 1 2 8 4 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.Exempts a customer that meets specified conditions from at least 1.7 cents of the 2.7 cent cost responsibility surcharge (CRS) adopted by the CPUC pursuant to AB 1X and AB 117. The bill is intended to apply only to its sponsor, Sierra Pine. 2.Declares the intent of the Legislature that bundled customer indifference be achieved and that no costs be shifted as a result of the bill. 3.Sunsets January 1, 2009. 4.Is an urgency measure. BACKGROUND As part of the restructuring of the electric industry, AB 1890 authorized direct access. 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. Many of these customers were returned without their knowledge or consent by their providers as the direct access market collapsed. 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. In a decision issued in November 2002 (D.02-11-022), the CPUC determined direct access customers' obligation for payment of DWR and IOU procurement costs, but capped the payment for these costs 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. Because it was returned to PG&E bundled service by its then-provider, Enron, and later returned to a different direct access provider, Sierra Pine has been subject to the 2.7 cent CRS under the CPUC decision. PG&E has collected over $1 million in CRS charges from Sierra Pine since January 2001. Although most of the CRS is intended to cover DWR's costs, PG&E has not yet remitted any of its CRS revenues to DWR. This bill would relieve Sierra Pine of an estimated $2 million annually in electricity costs. COMMENTS 1.Is a CRS waiver necessary? The effect of this bill is to provide a 1.7 cent rate discount as a business retention tool. The author and sponsor intend it to be financed by fellow direct access customers, rather than bundled customers, who are already financing overall direct access customer obligations due to the 2.7 cent CRS cap. The author and the committee may wish to consider whether the 1.7 cents must be waived, or if payment can deferred instead, and whether the CPUC should be authorized to determine the amount of discount necessary to retain Sierra Pine and then authorize deferral of a portion of CRS collection. The author and the committee may also wish to consider other alternatives to retain Sierra Pine besides a rate discount financed entirely by other customers, which sets a questionable precedent and invites other customers suffering from high electricity rates to seek similar treatment. One alternative would be a low-interest loan to cover CRS payments, subject to a matching requirement by Sierra Pine's direct access provider. 2.Another casualty of Enron. Sierra Pine's liability for CRS was created by its unauthorized return to bundled service by Enron during the energy crisis. Like many other direct access customers in California, Sierra Pine has cause for legal action to recover damages from Enron for breech of contract. This bill illustrates an inherent problem with direct access. Direct access providers have no enforceable obligation to serve their customers beyond whatever contract terms are negotiated, which provided little protection to the direct access customers dumped in 2001. As the default provider to dumped customers, it's the IOU and its bundled customers that take the risk for non-performance by the direct access provider. As the Sierra Pine situation shows, recovering the cost of providing default service may be difficult. The author and the committee may wish to consider including provisions in this bill to discourage direct access providers from dumping their customers, such as requiring providers to pay any resulting default service costs, and requiring providers to post collateral as a condition of CPUC registration to cover any such costs. ASSEMBLY VOTES Assembly Floor (74-0) Assembly Appropriations Committee (24-0) Assembly Utilities and Commerce Committee (12-0) POSITIONS Sponsor: SierraPine Composite Solutions Support: Acoustic Authority Agra Trading American Laminates Auburn Hardwoods Capitol Plywood, Inc. Support (continued): Coastal Wood Products Crystal Art Gallery Do+Able Products, Inc. Frost Hardwood Lumber Company Ganahl Lumber G.L. Veneer Co., Inc. Haley Bros., Inc. Joe Kunz Company Kelleher Corporation Lifetime Doors, Inc. Masonite International Corporation Pacific MDF Products Inc. Patrick Industries, Inc. Saint Gobain Abrasives/Norton Company Somerville Plywood Corp. SUBA MFG., Inc. Weyerhaeuser Company 2 individuals Oppose: Department of Finance Southern California Edison Lawrence Lingbloom AB 1284 Analysis Hearing Date: July 8, 2003