BILL ANALYSIS
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THIRD READING
Bill No: AB 2006
Author: Nunez (D)
Amended: 8/25/04 in Senate
Vote: 21
SENATE ENERGY, UTIL. & COMM. COMMITTEE : 5-2, 6/29/04
AYES: Bowen, Alarcon, Murray, Sher, Vasconcellos
NOES: Battin, McClintock
NO VOTE RECORDED: Morrow, Dunn
ASSEMBLY FLOOR : 50-28, 5/27/04 - See last page for vote
SUBJECT : Electrical restructuring: Reliable Electric
Service Act of
2004
SOURCE : Southern California Edison
DIGEST : This bill enacts the Reliable Electric Service
Act of 2004.
ANALYSIS :
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 State Public Utilities Commission (PUC).
CONTINUED
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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 PUC to certify the public convenience
and necessity require a plant before an IOU may begin
construction [Certificate of Public Convenience and
Necessity (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 PUC 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 PUC, in the case of an IOUs plant
estimated to cost more than $50 million, to specify
in the CPCN the maximum cost determined to be
reasonable and prudent. The PUC 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 PUC 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 PUC 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 PUC to remove from an IOUs rate
base a plant which has been out of service for nine
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or more consecutive months, and disallow expenses
related to that plant.
[AB 2378 (Hauser), Chapter 139, Statutes of 1986]
4. For IOU electricity procurement via wholesale purchases:
A. Requires each IOU to file, and the PUC 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:
(1) An approved competitive bid-based
procurement process.
(2) A performance-based incentive mechanism that
shares procurement risks and rewards between an
IOU and its customers.
(3) Objective standards and review to determine
the recoverability of procurement transactions
prior to their execution.
[AB 57 (Wright), Chapter 835, Statutes of 2002]
5. 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]
6. 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.
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7. Requires the PUC 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. AB 2006 restates and further
specifies the IOUs' obligation to plan for and provide
to its customers reliable electric service, as defined.
IOUs have no obligation to buy electricity or meet
resource adequacy requirements for customers taking
unregulated "direct access" service.
3. Cost Recovery:
A. Requires the PUC to approve and maintain rates
sufficient to ensure an IOU fully recovers:
(1) The IOU's initial capital investment in
resources approved and found reasonable by the PUC
in the CPCN process.
(2) The IOU's full costs of contracting for
generation resources with another entity, taking
collateral requirements and debt equivalence
associated with the contract into account.
B. Provides this bill does not alter the requirements
of existing law regarding cost recovery described
above.
C. Declares the Legislature's intent to reaffirm
California's traditional regulatory compact, as
described.
4. 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
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its customers. The IRP must include 5 and 10-year
forecasts and identify needed resources. The PUC
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.
5. Transmission. Requires the PUC 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.
6. 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.
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B. Requires the PUC 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 PUC-approved rates.
7. PUC Process Reform:
A. Requires the PUC, prior to adopting any settlement
that affects customer rates, to hold hearings and
review alternatives to the settlement, to ensure the
settlement resolves the issue at the lowest
reasonable cost to ratepayers. All rate-changing
decisions must be made in public.
B. Establishes the same detailed conflict of interest
standards to PUC Commissioners that currently apply
to the Energy Commission - Commissioners may not have
income from the companies they are to regulate, and
they may not participate in any decision in which
they, or specified relatives or associates, have a
financial interest.
C. Requires the PUC, prior to approving a utility
power plant, to review similar proposals from
non-utility generators. If an alternative is put
forward which achieves the same or better reliability
and environmental performance at a lower cost, the
PUC must then deny the utility's proposal.
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 PUC. This
authority is a foundation of utility regulation, dating
back to the establishment of the PUC'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 PUC
is to determine the reasonable expenses of utility service
(cost of service) and provide for equitable recovery of
these costs from customers (rate-making).
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In an effort to facilitate both wholesale and retail
competition, PUC 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 PUC was
viewed by IOUs as a deterrent to entering such contracts,
when spot market purchases were not subject to review.
PUC 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 (Wright) 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 PUC-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 PUC. Thus, whether power
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plants are developed by regulated utilities or non-utility
generators, the PUC must provide for rate recovery to
assure they get built, with ratepayers providing the
ultimate credit support.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
SUPPORT : (Unable to verify)
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OPPOSITION : (Unable to verify)
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ASSEMBLY FLOOR :
AYES: Berg, Bermudez, Calderon, Canciamilla, Chan, Chavez,
Chu, Cohn, Corbett, Correa, Diaz, Dutra, Dymally,
Firebaugh, Frommer, Goldberg, Hancock, Jerome Horton,
Jackson, Kehoe, Koretz, Laird, Leno, Levine, Lieber, Liu,
Longville, Lowenthal, Matthews, Montanez, Mullin, Nakano,
Nation, Negrete McLeod, Oropeza, Parra, Pavley, Reyes,
Ridley-Thomas, Salinas, Samuelian, Simitian, Steinberg,
Strickland, Vargas, Wesson, Wiggins, Wolk, Yee, Nunez
NOES: Aghazarian, Bates, Benoit, Bogh, Campbell, Cogdill,
Cox, Daucher, Dutton, Garcia, Harman, Shirley Horton,
Houston, Keene, La Malfa, La Suer, Leslie, Maddox,
Maldonado, Maze, McCarthy, Nakanishi, Pacheco, Plescia,
Richman, Runner, Spitzer, Wyland
NO VOTE RECORDED: Haynes, Mountjoy
NC:mel 8/26/04 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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