BILL ANALYSIS 1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 2006 - Nunez
Hearing Date: August 10, 2004 A
As Amended: August 9, 2004 FISCAL B
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DESCRIPTION
Existing law:
1.Requires all charges demanded or received by any public
utility, including investor-owned electric utilities
(IOUs), to be just and reasonable and assigns
responsibility for ensuring the reasonableness of such
charges to the California Public Utilities Commission
(CPUC).
2.Requires every public utility, including IOUs, to furnish
and maintain such adequate, efficient, just, and
reasonable service, instrumentalities, equipment, and
facilities necessary to promote the safety, health,
comfort, and convenience of its patrons, employees, and
the public.
3.For IOU-owned electricity generation plants:
a. Requires the CPUC to certify the public convenience
and necessity require a plant before an IOU may begin
construction (Certificate of Public Convenience and
Necessity, or CPCN). For a plant subject to licensing
by the California Energy Commission (CEC) pursuant to
the Warren-Alquist Act, the CEC license is required
prior to a CPCN. The CPUC is required, under certain
circumstances, to appoint a construction project board
of consultants to evaluate the design, construction,
project management, and economic soundness of a
proposed plant.
b. Requires the CPUC, in the case of an IOU's plant
estimated to cost more than $50 million, to specify in
the CPCN the maximum cost determined to be reasonable
and prudent. The CPUC is required to deny recovery of
additional costs unless it determines the cost has in
fact increased and the public convenience and
necessity require construction of the plant at the
increased cost.
(AB 179 (Sher), Chapter 926, Statutes of 1985)
c. Requires the CPUC to disallow expenses related to
the planning, construction, or operation of a plant if
the expenses result from any unreasonable error or
omission regarding any portion of the plant which
costs, or is estimated to cost, more than $50 million
or if the expenses are not supported by records
sufficient to enable the CPUC to completely evaluate
any relevant or potentially relevant issue related to
their reasonableness and prudence.
(AB 1776 (Sher), Chapter 1212, Statutes of 1985)
d. Authorizes the CPUC to remove from an IOU's rate
base a plant which has been out of service for nine or
more consecutive months, and disallow expenses related
to that plant.
(AB 2378 (Hauser), Chapter 139, Statutes of 1986)
1.For IOU electricity procurement via wholesale purchases:
a. Requires each IOU to file - and the CPUC to review
and accept, modify, or reject - a procurement plan
enabling the IOU to fulfill its obligation to serve
its customers at just and reasonable rates,
eliminating the need for "after-the-fact"
reasonableness reviews (with specified exceptions),
and ensuring timely recovery of prospective
procurement costs.
b. Requires the procurement plan to be based on one or
more of the following reasonableness standards:
i. An approved competitive bid-based procurement
process.
ii. A performance-based incentive mechanism that
shares procurement risks and rewards between an IOU
and its customers.
iii. Objective standards and review to determine the
recoverability of procurement transactions prior to
their execution.
(AB 57 (Wright), Chapter 835, Statutes of
2002)
1.Requires IOUs and certain other retail sellers to
increase their existing level of renewable resources by
one percent of sales per year, establishes a deadline of
2017 to achieve a 20 percent renewable portfolio, and
establishes a detailed process and standards for
renewable procurement (the Renewable Portfolio Standard
(RPS)).
(SB 1078 (Sher), Chapter 516, Statutes of 2002)
2.Requires IOUs to offer optional "interruptible or
curtailable" electric service to heavy industrial
customers at rates which are discounted to reflect the
risk of being subject to interruptions.
3.Requires the CPUC to direct the IOUs to continue efforts
to reduce industrial rates to a level competitive with
other states, without shifting costs to other classes.
This bill enacts the "Reliable Electric Service Act of
2004." Specifically, this bill :
1.Findings and Declarations:
Sets forth findings and declarations related to each of
the provisions below.
2.Obligation to Serve:
Restates and further specifies the IOUs' obligation to
plan for and provide to its customers reliable electric
service, as defined. Provides IOUs have no obligation to
buy electricity or meet resource adequacy requirements
for a direct access customer. Requires costs incurred to
implement direct access to be recovered from direct
access customers.
3.Cost Recovery:
a. Requires the CPUC to approve and maintain rates
sufficient to ensure an IOU fully recovers:
i. The IOU's initial capital investment in resources
approved and found reasonable by the CPUC in the
CPCN process.
ii. The IOU's full costs of contracting for generation
resources with another entity, to include collateral
requirements and debt equivalence associated with
the contract.
a. Provides this bill doesn't alter the requirements
of existing law regarding cost recovery described
above.
b. Declares the Legislature's intent to reaffirm
California's traditional regulatory compact, as
described.
1.Long-Term Planning:
a. Requires each IOU to prepare a long-term integrated
resource plan (IRP) every three years to achieve a
diversified portfolio of resources to serve its
customers. The IRP must include 5 and 10-year
forecasts and identify needed resources. The CPUC
must review and approve the IRP, and may make
revisions it determines necessary.
b. Requires the IRP to provide for investments in
energy efficiency and load management resources that
compare favorably to supply alternatives in terms of
costs, environmental improvements and reliability.
c. Requires the IRP to provide for investments in
necessary generation resources, including contracts
for existing, new, re-powered or co-generation
projects.
d. Authorizes the IRP to provide for investments in
distributed generation resources under specified
conditions related to improving reliability and
deferring traditional distribution investments.
e. Requires an IOU, through its IRP, to meet resource
adequacy requirements for the electric load of its
customers through a portfolio of contracted-for
generation and IOU-owned generation, combining the
potential benefits of a competitive wholesale market,
including operating efficiencies and lower prices,
with the stability of cost-of-service generation
resources, to achieve the "best value" for ratepayers
at just and reasonable rates.
1.Transmission:
Requires the CPUC to prepare a plan to streamline the
siting process for transmission projects, and a report on
the status of transmission projects pending in the CPCN
process, and submit them to the Governor and Legislature
in 2005.
2.Resource Adequacy:
a. Requires all load-serving entities (e.g., IOUs,
ESPs and community choice aggregators), except
municipal utilities and customer generation, to meet
the same requirements for resource adequacy, resource
diversity and the RPS applicable to IOUs.
b. Requires the CPUC to establish, implement and
enforce resource adequacy requirements as specified.
Requires the cost of meeting resource adequacy
requirements to be equitably recovered from all
customers through CPUC-approved rates.
1.Rates:
a. Requires the CPUC to prepare a report describing
the extent to which existing rate allocations for each
customer class reflect "cost of service."
b. Authorizes the CPUC to order an IOU to offer
discounted rates to large manufacturing customers if
the CPUC determines those customers face a competitive
disadvantage compared to others states' electricity
rates.
BACKGROUND
Existing law requires rates charged by public utilities to
be just and reasonable and assigns responsibility for
ensuring the reasonableness of rates to the CPUC. This
authority is a foundation of utility regulation, dating
back to the establishment of the CPUC's predecessor, the
Railroad Commission, in 1909. The power to review expenses
that are recoverable from utility ratepayers was judged
necessary to protect the public from the exercise of public
utilities' monopoly powers. Indeed, the purpose of the
CPUC is to determine the reasonable expenses of utility
service (cost of service) and provide for equitable
recovery of these costs from customers (rate-making).
In an effort to facilitate both wholesale and retail
competition, CPUC decisions implementing electric industry
restructuring compelled the IOUs to sell off power plants
needed to serve their own customers, then required the IOUs
to buy and sell all their power through spot markets. At
the same time, long-term resource planning and investment
was abandoned in favor of a laissez faire, "reliability
through markets" approach.
As a result of market conditions during the energy crisis,
long-term, bilateral contracts were viewed as an attractive
way to stabilize volatile and high prices. However, review
of the reasonableness of these contracts by the CPUC was
viewed by IOUs as a deterrent to entering such contracts,
when spot market purchases were not subject to review.
CPUC review of contracts presented the possibility that
recovery of certain contract expenses would be disallowed
if the contract was judged to be an unreasonable deal (e.g.
unjust price or inappropriate conduct). On the other hand,
if the contract was a great deal, the IOU got no reward
beyond the ability to recover its costs. The IOUs
complained these circumstances placed all the downside risk
on them and created a disincentive to enter into long-term
contracts. The competing argument was if IOUs were
permitted to pass their power purchase costs on to their
customers unconditionally, they had little incentive to
negotiate the best deal.
To pave the way for IOUs to resume their procurement duties
in 2003, AB 57 addressed the procurement review issue by
establishing a process under which an IOU can be assured
its electricity procurement expenses will be recoverable in
rates, if that procurement is conducted consistent with a
CPUC-approved procurement plan. AB 57 relates only to
wholesale procurement from third parties. It does not
address cost recovery for other IOU expenses, such as
investments in IOU-owned generation.
Since the electricity crisis, major new power plants, or
re-powering of existing plants, are financed only to the
extent the recovery of their capital costs can be assured
via contracts approved by the CPUC. Thus, whether power
plants are developed by regulated utilities or non-utility
generators, the CPUC must provide for rate recovery to
assure they get built - with ratepayers providing the
ultimate credit support.
COMMENTS
1.Committee amendments (July 6 version).
This bill was heard in this committee and approved, as
amended, on June 29. A series of amendments were adopted
formally. In addition, a number of other issues were
raised by committee members and witnesses and, although
no specific amendments were adopted, the author agreed to
work on them.
The amendments adopted:
a. New cost recovery assurance was limited to the
initial capital costs specified at the time of CPCN
application (Section 400.5 (b)).
b. The relationship between the new Integrated
Resource Plan (IRP) and the AB 57 procurement plan and
other elements of the IRP was clarified (Section
400.10).
c. Non-core energy efficiency acquisitions were
required to be independently measured and verified
according to CPUC protocols (Section 400.21(a)(10)).
d. A disclaimer was added indicating the provisions of
this bill would have no effect on implementation of
the RPS (New Section 400.50).
e. Technical amendments were adopted per suggestions
in the committee analysis.
Issues identified for further work:
a. CPUC process reform.
b. Consideration of alternatives, exceptions to
competitive bid, in the CPCN process.
c. Consideration of natural gas plant efficiency and
carbon risk in IOU resource planning and procurement.
d. Structure of "provider of last resort" service for
non-core customers.
e. How to deal with the "forced loan" problem
associated with the existing direct access program.
f. Requiring customers to declare intent early in the
core/non-core transition in order to figure out who's
serving whom as soon as possible.
Of these issues, a, b, and c are not yet addressed in the
bill , and d, e, and f are irrelevant with the removal of
all core/non-core provisions by the most recent
amendments.
1.Subsequent amendments (July 29 and August 9 versions).
Since the committee amendments, the bill has been amended
twice by the author. The July 29 amendment established
an alternative resource adequacy structure where the CPUC
can require the IOU to be responsible for resource
adequacy for all load-serving entities (i.e. ESPs) in its
territory, and recover its costs from all customers as a
nonbypassable wires charge. These amendments also
addressed a variety of technical issues with the prior
versions.
The August 9 amendments remove all of the direct access
and core/non-core provisions, as well as the alternative
resource adequacy provisions added on July 29. The
amendments also add a new provision authorizing the CPUC
to order an IOU to offer discounted rates to large
manufacturing customers (see Comment 4 below for analysis
of this provision).
2.Current CPUC resource planning and selection process
seems arbitrary.
Many recent CPUC actions are notable for their detachment
from statutory foundation and public scrutiny. The
CPUC's procurement proceeding has drifted beyond the
purpose of AB 57 into areas where there's little
statutory guidance. For example, the CPUC has approved a
number of contracts in the past two years through an ad
hoc process lacking clear rules or consistency with the
statutory scheme of the RPS or AB 57.
In large part, the CPUC has relied on "procurement review
groups" - non-market participant parties who agree to
sign strict confidentiality agreements - as a substitute
for public review of proposed resource investments.
Public access to the nuts and bolts of IOU resource
proposals has been curtailed severely.
The level of confidentiality afforded to IOUs'
procurement-related filings is unprecedented and, in some
cases, clearly unwarranted. The current process
frustrates meaningful public review and participation,
making it difficult to judge the performance of the IOUs,
or even understand the policy objectives pursued by the
CPUC.
In uncodified findings, this bill calls for "an open
regulatory forum where all persons affected by public
utility service and rates can observe and participate in
the decisionmaking process," but there are no operative
provisions to activate that statement. The author and
the committee may wish to consider whether this bill
adequately addresses the process shortcomings of the
CPUC, or exacerbates those shortcomings by giving the
CPUC significant additional responsibilities without
addressing its ability to carry them out in a way that
provides fair, open, record-based decisions.
3.New rate discount provisions are unclear in effect,
open-ended, and need to be better defined.
In lieu of the "core/non-core" provisions in prior
versions, this bill now authorizes the CPUC to order an
IOU to offer discounted rates to large manufacturing
customers if the CPUC determines those customers face a
competitive disadvantage compared to others states'
electricity rates.
As part of its general rate-making authority, the CPUC
already has authority to approve rate discounts proposed
by IOUs. In fact, similar special rates for eligible
manufacturers have existed in the past and have recently
been proposed and approved by the CPUC.
Existing law also requires IOUs to offer optional
interruptible electric service to heavy industrial
customers at rates which are discounted to reflect the
risk of being subject to interruptions and directs the
IOUs to continue efforts to reduce industrial rates to a
level competitive with other states, without shifting
costs to other classes.
By authorizing the CPUC to do something it can do, and
has done, under existing law, it's not clear what these
provisions are adding, beyond a salutary nod to
manufacturing customers faced with high rates in the wake
of the electricity crisis and an implicit endorsement of
shifting IOU costs from manufacturing customers to other
customers.
The current eligibility standard in the bill, that the
customer faces a rate disadvantage relative to other
states, is no standard at all. It's well known that
California IOU electric rates are higher than almost any
other state, and are significantly higher than many
neighboring states. However, electricity rates should
not be the sole factor in determining competitive
advantage or disadvantage relative to other states.
Focusing on electricity rates ignores many competitive
advantages for manufacturers located in California, such
as access to ports, transportation, and markets, as well
as the availability of a skilled labor pool and
relatively low property tax rates.
In addition, for itinerant manufacturers, electricity
costs may not be a material factor in deciding where to
locate. Cheap electricity isn't going to keep a company
in California if it's intent on locating in a state or
foreign country because it has cheaper labor, lower
taxes, or weaker environmental standards.
If this bill includes provisions permitting or
encouraging a rate discount for needy manufacturers, the
standards by which customers would be eligible or not
eligible need to be better defined. If retaining
manufacturers is the goal, the author and the committee
may wish to consider limiting eligibility to customers
who actually would relocate for economic reasons, where
electricity cost is a material factor in the decision,
and requiring benefiting customers to do their part by
maintaining trade and jobs in California. The author and
the committee may also wish to consider specifying the
size or range of the discount.
PRIOR VOTES
Senate Energy, Utilities and Communications Committee(5-2)
Assembly Floor (50-28)
Assembly Appropriations Committee (16-4)
Assembly Utilities and Commerce Committee (9-3)
POSITIONS
Sponsor:
Southern California Edison
Support:
African Village Weekend Cultural and Performing Arts
Allergan
Altadena Town Council
AltaMed
Antelope Valley Board of Trade
Antelope Valley Chamber of Commerce
Applied Business Computer Services
Arcadia Chamber of Commerce
Armijo Newspapers and Public Relations
Artesia Chamber of Commerce
Baldwin Park Chamber of Commerce
Bell Chamber of Commerce
Bell Gardens Association of Merchants and Commerce
Building Industry Association of Tulare/Kings Counties
Californians for Reliable Electric Service
California State Conference of the NAACP
Casa Youth Shelter
Central City Company
Cerritos Chamber of Commerce
CHARO Community Development Corporation
City of Chino
City of Costa Mesa
City of Delano
City of Fillmore
City of Lancaster
City of Newport Beach
City of Thousand Oaks
City of Tulare
Claremont Chamber of Commerce
Coalition of California Utility Employees
College Bound
Consumers Coalition of California
Dickerson Employee Benefits
Duarte Chamber of Commerce
East Bay Municipal Utility District (if amended)
El Monte/South El Monte Chamber of Commerce
Environmental Health and Safety Resources
Filipino-American Service Group
Forensic Analytical Consultants
Four Points Sheraton
Future America
Gateway Chamber Alliance
GREKA Energy Corporation
Greater Antelope Valley Economic Alliance
Griffin Industries
Harvey Mudd College
Highland Area Chamber of Commerce
Hispanic Market Link
Human Services Association
Inland Action
Inland Valley News
Irwindale Chamber of Commerce
La Casa de San Gabriel Community Center
La Casa Lopez Restaurant
La Puente Valley Regional Occupational Program
Lakewood Chamber of Commerce
Latin Business Association
League of California Cities
Lockheed Martin Aeronautics Company
Long Beach Museum of Art
Los Angeles Urban League
Los Cerritos YMCA
Maywood Chamber of Commerce
McIntosh Real-estate Construction
Metal Center
MELA Counseling Services Center
Mexican American Opportunity Foundation
North San Diego County NAACP
Orange County Community Housing Corporation
Palm Desert Chamber of Commerce
People for People
Project Amiga
Quality Upholstering
Rosemead Chamber of Commerce
San Bernardino Area Chamber of Commerce
San Bernardino Downtown Business Association
San Gabriel Mountains Regional Conservancy
San Gabriel Valley Economic Partnership
Sempra Energy (if amended)
Temple City Chamber of Commerce
Three Valleys Municipal Water District
Tulare Joint Union High School District
Tulare Kings Hispanic Chamber of Commerce
Turning Point
Ty's Diesel Air and Electric
Ventura County Economic Development Association
West San Gabriel Valley Boys and Girls Club
Westlake Village Homeowners Association
7 individuals
Oppose:
AES Corporation
Agricultural Energy Consumers Association (unless amended)
Associated Builders and Contractors of California
Burney Forest Power
California Biomass Energy Alliance (unless amended)
California Cogeneration Council
California Manufacturers and Technology Association (unless
amended)
California Wind Energy Association (unless amended)
Calpine
City of Temecula
Clean Power Campaign (unless amended)
Colmac Energy
Covanta Energy (unless amended)
Community Renewable Energy Services
Enpower Corporation
Foundation for Taxpayer and Consumer Rights
Global Power Company
GWF Power Systems
Independent Energy Producers
Minnesota Methane
Mt. Poso Congeration Company
Natural Resources Defense Council (unless amended)
Santa Ana Watershed Project Authority
The Utility Reform Network (TURN) (unless amended)
Wheelabrator Environmental Systems
2 individuals
Lawrence Lingbloom
AB 2006 Analysis
Hearing Date: August 10, 2004