BILL ANALYSIS
AB 2006
Page 1
GOVERNOR'S VETO
AB 2006 (Nunez)
As Amended August 25, 2004
2/3 vote
-----------------------------------------------------------------
|ASSEMBLY: |50-28|(May 27, 2004) |SENATE: |22-14|(August 26, |
| | | | | |2004) |
-----------------------------------------------------------------
-----------------------------------------------------------------
|ASSEMBLY: |45-30|(August 27, | | | |
| | |2004) | | | |
-----------------------------------------------------------------
Original Committee Reference: U. & C.
SUMMARY : Enacts the Reliable Electric Service Act of 2004
(RESA) and specifies cost recovery and obligation to serve
provisions for investor owned utilities (IOUs), long term
procurement planning requirements, resource adequacy
requirements, and the California Public Utilities Commission
(PUC) process reform requirements.
The Senate amendments enact RESA and set forth findings and
declarations related to each of the provisions below:
1)Obligation to serve: Restates and further specifies 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.
2)Cost recovery: Requires PUC to approve and maintain rates
sufficient to ensure an IOU fully recovers:
a) IOU's initial capital investment in resources approved
and found reasonable by PUC in the certificate of Public
Convenience and Necessity (CPCN) process; and,
b) IOU's full costs of contracting for generation resources
AB 2006
Page 2
with another entity, taking collateral requirements and
debt equivalence associated with the contract into account.
Provide this bill doesn't alter the requirements of existing
law regarding cost recovery described above.
Declare the Legislature's intent to reaffirm California's
traditional regulatory compact, as described.
3)Long-term planning: 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.
IRP must include five- and 10-year forecasts and identify
needed resources. PUC must review and approve IRP, and may
make revisions it determines necessary.
Requires 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.
Requires IRP to provide for investments in necessary generation
resources, including contracts for existing, new, re-powered
or co-generation projects.
Authorizes IRP to provide for investments in distributed
generation resources under specified conditions related to
improving reliability and deferring traditional distribution
investments.
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.
4)Transmission: Requires PUC to prepare a plan to streamline
the siting process for transmission projects, and a report on
the status of transmission projects pending in CPCN process,
AB 2006
Page 3
and submit them to the Governor and Legislature in 2005.
5)Resource adequacy: Requires all load-serving entities (e.g.,
IOUs, energy service providers (ESPs) and community choice
aggregators), except municipal utilities and customer
generation, to meet the same requirements for resource
adequacy, resource diversity and the Renewable Portfolio
Standard (RPS) applicable to IOUs.
Requires 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.
6)PUC process reform: Requires 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.
Establishes the same detailed conflict-of-interest standards to
PUC Commissioners that currently apply to the California
Energy Commission; PUC 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.
Requires 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, PUC
must then deny the utility's proposal.
AS PASSED BY THE ASSEMBLY , this bill:
1)Required PUC to approve and maintain just and reasonable rates
sufficient to ensure that IOUs fully recover the cost of
investments found reasonable by PUC. This cost recovery
assurance applies to direct investment made by IOUs and IOUs'
reasonable opportunity to fully recover reasonable costs of
contracting for generation resources as determined by PUC.
AB 2006
Page 4
2)Required IOUs to file, and PUC to review and approve, long
term resource plans, consistent with existing law
requirements, to include demand and supply forecasts for 5,
10, and 15 years and to ensure adequate resources to serve IOU
customers.
3)Required IOUs to recommend to PUC approval of generation
resources necessary to meet diversified resource adequacy
requirements consistent with the following: a non-utility
generation selected through a competitive solicitation; b)
bilateral contracts, determined to be reasonably priced
relative to a PUC-developed market based benchmark; and, c)
utility owned generation as filed by an IOU consistent with
its approved procurement plan and determined by PUC to be
reasonably priced relative to PUC benchmark.
4)Required IOUs to invest in transmission infrastructure based
on need determined by the Independent System Operator (ISO).
5)Required PUC, by December 31, 2005, to adopt rules and
establish a core/non core service model for electrical
service, with non-core customers defined as those with maximum
peak demand exceeding 500 kilowatt.
6)Allowed non-core customers to enter into direct transactions
with for non-IOU ESPs, and requires PUC to prevent any cost
shifting to IOU customers as a result of direct access (DA)
electrical purchases.
7)Required ESPs with DA contracts to meet PUC-approved resource
adequacy requirements.
8)Allowed non-core customer utilizing DA to receive default
electric service from an IOU by paying the higher of the
short-term spot market rate or the otherwise applicable tariff
rate.
9)Required non-core customers electing to remain with IOU to
make five-year rolling commitments for IOU service.
10)Subjected all non-IOU electric service providers, including
AB 2006
Page 5
community choice aggregators, excluding local publicly owned
utilities, customer generation serving specific customer load,
and over the fence transactions to the same requirements for
resource adequacy and diversity as apply to IOUs.
11)Required PUC, in consultation with ISO, to establish
requirements to ensure adequate generation capacity to
reliably serve all electrical customers per #10), above, and
required ISO to enforce these requirements in a
non-discriminatory manner.
FISCAL EFFECT : Unknown
COMMENTS :
1)Background and purpose of this bill: Existing law requires
rates charged by public utilities to be just and reasonable
and assigns responsibility for ensuring the reasonableness of
rates to PUC. This authority is a foundation of utility
regulation, dating back to the establishment of 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. The purpose of 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).
In an effort to facilitate both wholesale and retail
competition, PUC decisions implementing electric industry
restructuring compelled IOUs to sell off power plants needed
to serve their own customers, then required 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 PUC was viewed by
IOUs as a deterrent to entering such contracts, when spot
AB 2006
Page 6
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, IOU got no reward beyond the
ability to recover its costs. 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
after the energy crisis, AB 57 (Wright), Chapter 835, Statutes
of 2002, addresses 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 PUC. Thus, whether power plants are
developed by regulated utilities or non-utility generators,
PUC must provide for rate recovery to assure they get built,
with ratepayers providing the ultimate credit support.
2)Opposition: As amended in the Senate the opponents argue that
this bill would establish an approach to resource adequacy,
which is fundamentally flawed and will not ensure that
electricity resources are available when needed. This bill
would also limit consideration of competitive alternatives to
investment in generation; add a new and confusing requirement
that appears to limit an electrical corporation's ability to
recover costs incurred to serve some future customers; and
would require additional unnecessary proceedings at PUC that
AB 2006
Page 7
would delay resolution of important regulatory matters.
3)Opposition to resource adequacy language: As amended in the
Senate, this bill relies on each load serving entity (LSE) to
meet resource adequacy requirements but exempts local publicly
owned utilities (munis), the State Water Project, and customer
generation from these requirements. Opponents argue that to
carry out such a program effectively, California needs to have
comprehensive resource adequacy rules applied consistently
across all LSEs by an administrator with the authority to
obtain compliance information, the capability to review that
information, and to ensure compliance.
4)Opposition to language on public process: As amended in the
Senate, this bill requires that any PUC decision that directly
or indirectly impacts rates or the settlement of any judicial
or administrative proceeding in which PUC is a party, be
approved by a majority vote of commissioners in a public
hearing. Opponents argue that the language is excessive in
application and may have extensive ramifications upon PUC.
The language is not clear as to what is considered a decision
and what is not. Potentially, this language could require
disclosure of attorney-client communications between the
commissioners and their legal staff.
5)Opposition to settlement language: As amended in the Senate,
this bill would also require PUC, prior to adopting any
settlement agreement that is contested by any party and that
involves a ratepayer obligation of greater than $10 million,
to hold a hearing to review the settlement and any alternative
proposed by any party. Opponents argue that this requirement
fails to recognize the value that settlements bring in PUC
process and is duplicative of existing rules adopted by PUC
which allow for hearings to be granted on contested
settlements. Mandating public hearings of contested
settlements will likely discourage parties from entering into
regulatory settlements that may later be challenged and impede
resolution of issues without going through a full PUC hearing.
GOVERNOR'S VETO MESSAGE :
Developing a reliable cost effective energy supply
AB 2006
Page 8
for California is a top priority of my
administration. To ensure investment and to develop
electricity generation, California must provide for
long-term resource adequacy, consistent with the
State Energy Action Plan, in a manner that creates
stability and predictability in wholesale markets.
A transparent, competitive procurement process is
essential to obtain the best possible deal for
California ratepayers.
The California Public Utilities Commission (PUC) has
acted on my request to accelerate resource adequacy
requirements. I remain committed to meeting our
future energy needs through a combination of energy
efficiency, demand response, renewable energy and
traditional generating resources.
This bill creates a redundant and burdensome energy
procurement process that would steer the state back
towards monopoly utilities without some of the
consumer protections necessary to protect
ratepayers. These provisions direct ratepayers to
assume all the risk associated with electricity
generation including cost overruns while ensuring
utility profits.
Many of the provisions in this bill are unnecessary
and duplicate existing statute or policy decisions
that can be found in AB 57, PUC decisions, and
Energy Commission proceedings. However, AB 2006
adds layers of mandates and process that favor
monopoly utilities and will significantly delay
ongoing proceedings at the commission, resulting in
considerable delay in power plant construction.
I commend the author for including sections that
address transmission siting and permit streamlining,
along with an attempt to direct the PUC to report
back on their progress to improve rate design.
Ensuring sufficient supplies of reliable,
competitively priced electricity remains the
AB 2006
Page 9
cornerstone of my energy policy. I look forward to
working with the [L]egislature to continue to bring
clarity and consistency to California's energy
policy in the coming months
Analysis Prepared by: Daniel Kim / U. & C. / (916) 319-2083
FN: 0009354