BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
SB 888 - Dunn, Bowen, and Burton
Hearing Date: May 6, 2003 S
As Amended: April 28, 2003 FISCAL
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DESCRIPTION
This bill enacts the "Repeal of Electricity Deregulation Act of
2003," which repeals or modifies specified "deregulation"
policies established by AB 1890 (Brulte), Chapter 856, Statutes
of 1996, confirms and expands upon certain recently-enacted
"regulation" policies, and spells out the rights and obligations
of utilities, ratepayers and the California Public Utilities
Commission (CPUC) in the state-regulated aspects of electricity
service.
This bill's key objective is to avoid a recurrence of the
instability and high cost of the past few years by:
1.Confirming a regulatory compact.
2.Restoring long-term resource planning.
3.Phasing out retail competition.
Specifically, this bill :
1.Repeals AB 1890's extensive legislative findings supporting
electricity deregulation and instead establishes extensive new
findings citing the failures of deregulation and supporting
state regulation of electricity service. Requires CPUC
actions to be consistent with the bill's findings. (Sections
1, 3 & 5).
2.States legislative intent to achieve effective regulation of
public utilities and achieve the following policy goals
(Section 4):
a. Restore and affirm the utilities' obligation to serve.
b. Eliminate opportunities for market manipulation
associated with power plant divestiture.
c. Ensure reliability and deter market manipulation through
effective power plant maintenance and operation standards.
d. Provide for cost-effective investments in transmission
and distribution, with reasonable rates of return.
e. Require metering, billing, collection and customer
service to be provided by CPUC-regulated utilities.
f. End utility employee layoffs and provide reasonable
wages and working conditions.
g. Establish an integrated resource planning process that
results in a balanced, reliable, environmentally
responsible portfolio of supply and demand reduction
resources.
h. Prioritize cost-effective energy efficiency and
renewable resources in resource planning.
i. Require transparent corporate ownership of utilities,
improve accountability for holding company requirements,
and seek enforcement of the federal Public Utility Holding
Company Act (PUHCA).
j. Provide for fair allocation of electricity costs through
CPUC-set rates, rather than direct access.
aa. Restore consumer and
investor confidence by making utility costs transparent and
establishing and enforcing accounting standards.
bb. Assure universal service
with affordable rates and discounts for low-income
customers.
cc. Provide an open regulatory
forum where affected parties can observe and participate.
1.Codifies an explicit "regulatory compact" governing the rights
and obligations of investor-owned utilities (IOUs) and the
CPUC. Under the regulatory compact, IOUs have an obligation
to serve all customers in their service area, including
specified duties, and the CPUC has an obligation to provide
IOUs a reasonable opportunity to recover their investments,
including a reasonable rate of return (Section 6).
2.Transfers responsibility for inspection, maintenance, repair
and replacement standards for IOU transmission facilities from
the Independent System Operator (ISO) to the CPUC (Sections 13
& 21).
3.Prohibits the ISO from entering a multi-state regional
transmission organization unless approved by the Legislature
by concurrent resolution (Section 15).
4.Repeals AB 1890's provisions authorizing, and requiring the
CPUC to facilitate, direct access electricity service. Phases
out existing direct access by requiring existing direct access
customers to receive retail service from their IOU once their
current direct access contracts expire. Expressly permits
community aggregation and self-generation service options
(Sections 22-26, 30, 37, 38).
5.Requires IOUs to hold in trust, for the benefit of ratepayers,
any refunds for excessive electricity costs that the IOU has
recovered or will recover from ratepayers (Section 28).
6.Requires the CPUC to regulate IOU power plants on a
cost-of-service basis (confirming the existing practice) and
extends the current prohibition on power plant divestiture
from 2006 to 2010 (Section 33).
7.Requires IOU customers' electricity metering and billing to be
performed by IOUs. Prohibits charging time-of-use or
real-time rates to residential or small commercial customers
without customer consent (Sections 39 & 40).
8.Requires the CPUC to establish and oversee a "long-term,
comprehensive integrated resource planning process" that
results in a balanced, reliable, environmentally responsible
portfolio of supply and demand reduction resources and is
consistent with existing laws related to procurement of
renewable resources and energy planning and forecasting.
Requires IOUs to implement their procurement plans consistent
with the long-term plan and in a manner that gives priority to
acquiring cost-effective energy efficiency resources (Section
42).
9.Changes a standard governing recovery of IOU transmission
investments from "facilitating competition" to "providing
lower cost delivery of electricity" (Section 43).
10. Authorizes the CPUC to
require an IOU to invest directly in, or contract for, power
plants as a non-exclusive means of fulfilling its obligation
to serve. Requires such investments to be consistent with the
IOU's approved procurement plan and existing laws related to
procurement of electricity, and renewable resources in
particular (Section 44).
11. Authorizes the CPUC to
monitor and enforce IOU holding companies' compliance with the
conditions of the CPUC's approval of the formation of the
holding companies (Section 45).
12. Repeals various obsolete
provisions of AB 1890, including provisions related to the
recovery of uneconomic costs by IOUs during the 1998-2002
transition period, provisions related to the now-defunct Power
Exchange (PX), and provisions related to publicly-owned
utilities' participation in direct access, and makes
conforming amendments to other sections (Sections 7-12, 14,
16-20, 27, 29, 31, 32, 34-36, 41 & 46-51).
KEY POLICY QUESTIONS
1.Should electric utility planning, investment and rate-setting
be conducted in public processes and subject to regulatory
oversight, or should these decisions be led by the private
sector?
2.How can the state best assure investment in the electricity
infrastructure necessary to meet the needs of IOU customers
and consistent with California's policy priorities (i.e.,
reliable, affordable, efficient and diverse electricity
service)?
BACKGROUND
Historical Context - 1900-1996
The early electric power industry was developed using direct
current transmission, a system in which a relatively low voltage
of electricity could travel only over short distances.
Typically, numerous power plants were built within a small
densely populated area, usually a city, and consumers were able
to choose their service provider. This structure created much
competition within a local marketplace.
This paradigm began to change as technology rapidly transformed
the industry. Newer machines, such as steam turbines, were
smaller and less complex, and could create a greater amount of
power with a much smaller capital investment. The discovery of
alternating current transformers allowed companies to transport
power over longer distances at a higher voltage. Savvy
entrepreneurs, such as Samuel Insull of Chicago Edison, realized
they could exploit the greater economies of scale afforded by
these new technologies, and maximize profits by consolidating
the smaller utility companies. Fueled by the rapid growth of
electricity consumption, the utilities boomed during the early
20th century.
By 1907, Insull had acquired 20 other utility companies and
renamed his firm Commonwealth Edison. He and others argued that
electric utilities were a "natural monopoly" because it would be
inefficient to build multiple transmission and distribution
systems due to the great expense of capital investment.
Therefore, it was inherent that only one company would dominate
the market. The emerging utility monopolies were vertically
integrated, meaning they controlled the generation of electric
power, its transmission in real time across high-voltage wires,
and its low-voltage distribution to homes and businesses.
Reformers of the Progressive Era tried to govern these emerging
utility monopolies through state regulation. By 1914, 43 states
(including California) had established regulatory polices
governing electric utilities.
As their businesses grew, the new electric power barons such as
Insull began to restructure their companies, largely through the
use of holding companies. A holding company is a company that
controls a partial or complete interest in another company, and
it can be a useful tool in consolidating the operations of
several smaller companies. However, the electric utilities of
the 1920s began to exploit the use of holding companies to buy
up smaller utilities in an effort designed not to improve the
company's operating efficiency, but as a speculative attempt to
maximize profits. The growing utility monopolies then exploited
this structure, pyramiding holding company on top of holding
company, sometimes such that a holding company was as many as
ten times removed from the operating company. Each new holding
company would buy a controlling interest in the holding company
below it and the additional costs and fees for the operating
companies were passed along in a higher rate base for the
consumer. While the operating companies were subject to state
regulation, the holding companies were not; therefore each
holding company could issue fresh stocks and bonds without state
oversight. The abuse of holding companies allowed for the
consolidation of utilities such that by the end of the 1920s,
ten utility systems controlled three-fourths of the United
States' electric power business.
The size and complexities of the holding companies were proving
state regulation of utilities ineffective and soon caught the
attention of the federal government. In 1928, the Federal Trade
Commission began a six-year investigation into the market
manipulations of the holding companies. The booming utilities
of the 1920s traditionally had been seen as relatively secure
investments, and utility stocks were held by millions of
investors. The pyramidal holding company structure allowed the
holding companies to inflate the value of utility securities,
which eventually were decimated by the 1929 stock market crash.
Elected to the presidency in 1932, Franklin Delano Roosevelt
fought vehemently against the holding companies, calling them
"evil" in his 1935 State-of-the-Union address. After a
hard-fought campaign by the president and his allies, and in the
face of bitter opposition from the utilities, Congress passed
the Public Utility Holding Company Act in 1935. PUHCA outlawed
the pyramidal structure of interstate utility holding companies,
determining that they could be no more than twice removed from
their operating subsidiaries. It required holding companies
that owned 10% or more of a public utility to register with the
Securities and Exchange Commission and provide detailed accounts
of their financial transactions and holdings. Holding companies
that operated within a single state were exempt from PUHCA. The
legislation had a dramatic effect on the operations of holding
companies: Between 1938 and 1958 the number of holding
companies declined from 216 to 18. This forced divestiture led
to a new paradigm for the electricity marketplace which lasted
until the deregulation of the 1980s and 1990s: a single
vertically-integrated system which served a circumscribed
geographic area regulated by either the state or federal
government.
Roosevelt made the fight for public power an integral part of
his New Deal campaign and pushed for other important legislation
to that end. In the same year as PUHCA, Congress passed the
Federal Power Act of 1935, which gave the Federal Power
Commission (FPC) regulatory power over interstate and wholesale
transactions and transmission of electric power. The FPC had
been established under the Federal Water Power Act of 1920 to
encourage the development of hydroelectric power plants. The
Commission originally consisted of the secretaries of war,
interior and agriculture. The Federal Power Act changed the
structure of the FPC so it consisted of five commissioners
nominated by the president, with the stipulation that no more
than three commissioners could come from the same political
party. The Federal Power Act gave the FPC a mandate to ensure
electricity rates that are "reasonable, nondiscriminatory and
just to the consumer."
Another component of FDR's fight for public power was the
creation of federal agencies to distribute power to those who
were neglected by the traditional utilities, particularly
farmers and other customers in rural areas. His administration
created the Tennessee Valley Authority (TVA) in 1933 and the
Rural Electrification Association (REA) in 1935 to create and
finance rural utility companies. The end result of the New Deal
era regulatory intervention into the electric industry led to
four primary types of service providers: private investor-owned
utilities with stock freely traded in the marketplace by
shareholders; publicly-owned utilities, such as those owned by
municipalities; cooperative utilities which were usually found
in rural communities; and federal electric utilities, such as
the TVA and REA.
After the tumult of the Roosevelt years and the end of World War
II, the electric power industry enjoyed a period of steady
growth, driven by both technological and efficiency advances
that were reflected in lower prices. Between 1947 to 1973, the
growth rate for the industry held steady at about 8% per year
and there was little change in the industry structure. The
industry began to promote increased electricity usage through
advertising campaigns with slogans such as GE's "Live Better
Electrically" campaign begun in 1956. As the industry grew and
prices continued to decline, there was little need for state and
federal regulatory intervention. IOUs were the primary service
providers for most Americans and their continued growth and low
rates satisfied both consumers and investors.
The energy crisis of the 1970s is often symbolized by images of
long lines at gas pumps all over the United States resulting
from the 1973 OPEC oil embargo. Oil, coal and natural gas
shortages, as well as declining public confidence in the nuclear
power industry, contributed to rate increases for consumers
throughout all the energy industries, including electricity.
Elected in 1976, President Jimmy Carter made energy concerns one
of his top priorities. In attacking the demand side of the
problem, he waged a public campaign focused on conservation to
reduce the American public's high rates of energy consumption.
To combat the supply side, he sought to cultivate the growth of
new sources of energy, including nuclear power and renewable
resources such as solar and wind power. These two approaches
were crystallized in the five-part National Energy Act, which
Carter signed into law in 1978.
The Public Utility Regulatory Policies Act (PURPA) was the piece
of Carter's National Energy Act that affected the electric power
industry. It was designed to encourage efficient use of fossil
fuels by allowing non-utility generators (known as Qualifying
Facilities or QFs) to enter the wholesale power market. PURPA
designated two main categories of QFs: co-generators, which use
a single fuel source to either sequentially or simultaneously
produce electric energy as well as another form of energy, such
as heat or steam; and independent power producers, which use
renewable resources including solar, wind, biomass, geothermal
and hydroelectric power as their primary energy source.
Although intended to be an environmental statute, a primary
effect of PURPA was to introduce competition into the generation
sector of the electricity marketplace, thus challenging the
utilities' claim that the electricity market encouraged a
"natural monopoly."
One year prior to the National Energy Act, President Carter
signed the Department of Energy Organization Act. The act
created the Department of Energy by consolidating organizational
entities from a dozen department and agencies. Under this
legislation, the FPC was replaced by the Federal Energy
Regulatory Commission (FERC) as the federal agency that
establishes and enforces wholesale electricity rates.
The free-market mania of the 1980s and 1990s further challenged
the notion of the electric power industry as a "natural
monopoly." Many politicians and economists argued regulation
had outlived its value, and the market should determine prices.
The telecommunications and transportation industries were
deregulated, and the natural gas industry followed suit.
Advocates for deregulating the electricity industry argued the
implementation of PURPA had proved non-utility generators could
produce power as inexpensively and effectively as the regulated
utilities. Large industrial consumers searching for lower
prices also chimed in and urged federal regulators to pursue
deregulation.
In 1992, Congress passed President Bush's Energy Policy Act
(EPACT), which opened access to transmission networks to
non-utility generators. EPACT further facilitated the
development of a competitive market by creating another category
of generators known as exempt wholesale generators (EWGs), which
were exempted from regulations faced by the traditional
utilities. To assist in the implementation of PURPA and EPACT,
FERC issued Orders 888 and 889 in April 1996. The two orders
provided guidelines on how to open electricity transmission
networks on a nondiscriminatory basis in interstate commerce.
Source: PBS Frontline -
http://www.pbs.org/wgbh/pages/frontline/shows/blackout
AB 1890 and the Retail Side of Electricity Deregulation
The push toward electricity deregulation at the federal level
led states with relatively high electricity rates, including
California, to investigate and pursue deregulation of the
state-regulated aspects of electricity service, and retail
service in particular. In California, the push was led by large
industrial customers facing high electricity costs and an ailing
economy. These customers saw advantage in bypassing the IOUs
"bundled service" and buying electricity directly from
suppliers.
The industrial customers were joined in the push for
deregulation by merchant generators and marketers, who wanted to
compete on equal footing with the IOUs and sell electricity and
related services to selected profitable customers. The IOUs,
who saw promising ventures in deregulated electricity markets
for themselves, favored deregulation once their primary concern
about recovery of investments stranded by the departure of their
customers to competitors was satisfied.
In 1996, electricity deregulation, or "restructuring,"
legislation was passed by the Legislature. AB 1890 codified a
series of deregulation proposals either undertaken or
recommended by the CPUC, whose work on deregulation had been
inspired by the EPACT and subsequent FERC policies. Chief among
the CPUC proposals was "direct access" - the authorization of
retail competition within IOU service areas. AB 1890 ended the
retail service monopoly of utilities and authorized retail
customers to buy power directly from alternative providers,
beginning in 1998.
The essential bargain of AB 1890 was to authorize direct access
and assure the IOU's could recover stranded investments, but the
CPUC's implementing decisions took a series of further steps,
intended to facilitate competition, and direct access in
particular, which would prove disastrous. These included
compelling the IOUs to sell off the power plants that generated
the electricity needed to serve their own customers, requiring
the IOUs to buy and sell all their power through the PX and ISO
spot markets, and retreating from long-term planning and
investment.
Other elements of deregulation, such as the IOUs' transfer of
control of their transmission systems to the ISO to facilitate
non-discriminatory access to competing suppliers, were addressed
in AB 1890, but likely would have happened anyway pursuant to
federal policies, such as FERC's Order 888. The main
contribution of AB 1890 in this area, which was to attempt to
ensure accountability of the ISO to the state, met with limited
success.
AB 1890 also contained a number of side deals. These included a
guaranteed 10% reduction in retail rates for small customers, a
guaranteed level of funding for low-income and environmental
public purpose programs, and assistance for IOU employees whose
jobs would be at risk. The final product was widely supported.
At the time, deregulation champions heralded the bill as paving
the way for more competitive, efficient, reliable, and
affordable electricity service. Many would-be critics saw
deregulation in California as inevitable and AB 1890 as the best
possible bargain. Few questions were asked. AB 1890 passed
without a single "NO" vote.
The Collapse of the AB 1890 Edifice
In the first two years after its implementation, the
deregulation experiment appeared to be paying off well for IOUs
and customers alike in California. Service remained reliable,
wholesale prices remained below the frozen retail rates, and the
IOUs' stranded cost recovery surged, due in large part to the
unexpectedly high prices fetched for the sale of their power
plants. Large rate reductions were anticipated once the
transition period was over.
Evidence of market power began to surface in 1999. Irregular
but enormous price spikes in spot energy and ancillary services
markets raised concerns among observers. The potential for
market power abuse and increased prices was at the forefront of
skepticism over Pacific Gas & Electric (PG&E) Company's failed
attempt divest its entire hydroelectric system to an unregulated
affiliate. The Legislature's refusal to permit the PG&E
divestiture was the first major hiccup in the march toward
deregulation.
Then, in mid-2000, unprecedented price spikes began to occur
with growing regularity. In San Diego, where the rate freeze
had ended, San Diego Gas & Electric (SDG&E) customers were
directly exposed to the high prices. Within six months, the
market was in disarray, rolling blackouts occurred during
periods of relatively low electricity demand, suppliers' demands
for extraordinary prices were unchecked, high wholesale prices
caused nearly all customers of the collapsing direct access
market to return to the IOUs' frozen rates, the IOUs became
financially unable to pay for electricity, and the state had to
assume the IOUs' power buying duties to "keep the lights on."
To avoid the dysfunctional spot market that financially
decimated the IOUs and threatened catastrophic rate increases,
AB 1X (Keeley), Chapter 4, Statutes of 2001, established a
structure to permit the Department of Water Resources (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, benefiting from retail rates which were lower and more
stable than market prices. 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. Direct access load continues to grow due to the
CPUC's liberal interpretation of the Legislature's direction to
suspend direct access, including allowing customers to begin
direct access service after the suspension date and switch
between bundled service and direct access service.
The Consequences for IOU Customers
Since early 2001, the electricity rates set by the CPUC for the
customers of the state's major IOUs have exceeded the IOUs'
ongoing cost of service, far exceeding the rates of in-state
municipal utilities or any neighboring state, and ranking among
the highest in the nation.
In January, and again in March, 2001, the CPUC increased rates
for the customers of Southern California Edison (SCE) and PG&E a
combined average of 4 cents per kilowatt hour. High-usage
residential customers and the vast majority of business
customers who take bundled service were hit especially hard.
The rate increases marked the practical collapse of the rate
freeze and transition cost recovery scheme created by AB 1890.
While DWR has claimed a share of electricity rates for its
ongoing operating costs and payments on bonds it issued to
finance its high-cost power purchases in 2001, the IOUs have
also been collecting an extra measure of rates that would
otherwise be dedicated to buying electricity. Under the CPUC
rate increase decisions, these extra rates were subject to
refund to utility customers.
However, the CPUC has maintained these higher rates, instead of
refunding the excess funds to customers or using them for
ongoing procurement, and expanded their purposes to include
restoring the financial health of SCE and PG&E. For example, in
October 2001, the CPUC entered a settlement of federal
litigation with SCE permitting SCE to use excess rates to pay
off about $3.6 billion of procurement debts incurred in 2000.
Since then, SCE has been applying an average of about $200
million per month in rates to pay these debts. A challenge to
the settlement by The Utility Reform Network (TURN) is now
pending in the California Supreme Court.
In November 2002, the CPUC issued a unanimous decision
(D.02-11-026), applicable to both SCE and PG&E, lifting its
prior restriction on the use of the 2001 rate increases and
allowing the money to be used for "returning each utility to
financial health."
Sometime in 2003, SCE's and PG&E's accumulation of excess rates
should match their historic procurement debts, leaving little
excuse for continuing today's high rates. Once the debts are
paid, rates can be reduced, or dedicated to some purpose other
than payment of past IOU debts. SCE has filed a petition to
reduce its rates which, if approved by the CPUC, would take
effect later this year.
Meanwhile, the CPUC has proposed to dedicate a share of the
excess rates to a loan program to defer direct access customers'
payment of DWR and IOU procurement costs. In a decision issued
in November 2002 (D.02-11-022), the CPUC capped the payment for
these costs applicable to direct access customers at 2.7 cents
per kilowatt hour. The CPUC majority (Commissioners Peevey,
Brown and Duque) reasoned such a cap was necessary to maintain
the viability of existing direct access contracts.
2.7 cents 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. Although collection of the surcharge
from direct access customers began on January 1, the
under-collection of DWR's share has been exacerbated by IOUs'
failure to remit a share of the charges to DWR. The CPUC
estimates the shortfall will grow for several years and peak at
nearly $2 billion. Over time (perhaps 10-15 years), 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.
Post-AB 1890 Retreat from Deregulation
In addition to the emergency enactment of AB 1X, other state
laws enacted during and since the energy crisis have emphasized
maintaining and enhancing publicly-accountable, state and/or
local control over electricity planning, investment and
rate-setting. Examples include:
AB 5X (Keeley), Chapter 1, Statutes of 2001-2002, and SB 47
(Bowen), Chapter 766, Statutes of 2001, provided for
gubernatorial appointment and Senate confirmation of the ISO
board.
AB 6X (Dutra), Chapter 2, Statutes of 2001-2002, put an end to
market valuation and divestiture of IOU power plants.
AB 57 (Wright), Chapter 835, Statutes of 2002, established a
CPUC-regulated procurement planning and cost recovery process
for IOUs.
SB 6X (Burton), Chapter 10, Statutes of 2001-2002, established
the Power Authority to facilitate public investment in
cost-based electricity resources.
SB 39XX (Burton), Chapter 19, Statutes of 2001-2002,
authorized the CPUC and ISO to establish inspection and
maintenance standards for merchant power plants to ensure
their availability.
SB 1078 (Sher), Chapter 516, Statutes of 2002, required IOUs
to increase procurement of renewable resources subject to a
process overseen by the CPUC.
SB 1389 (Bowen), Chapter 568, Statutes of 2002, required the
Energy Commission to prepare an Integrated Energy Policy
Report every two years based on its assessment of trends in
energy markets, including electricity.
During and since the energy crisis, the state has also actively
challenged FERC policies and enforcement practices at FERC and
in the courts.
COMMENTS
1.Comparison of major features (pre-AB 1890, AB 1890 and SB
888). Electricity deregulation is typified by
dis-integration, or "unbundling," of the three major elements
of vertically-integrated utility service - generation,
transmission, and retail service. The following is a
comparison of the operation of these elements prior to AB
1890, under AB 1890/subsequent legislation and under SB 888:
Generation
Pre-AB 1890 - IOUs owned or controlled generation needed to
meet demand. Power plants owned by IOUs were regulated by the
CPUC on a cost-of-service basis. PURPA introduced competition
in the form of QFs, which replaced IOU development of power
plants. IOUs bought power from QFs under long-term contracts
at the IOUs' avoided cost. Approximately 25% of the
electricity demand of IOU customers is now met by QFs.
AB 1890/subsequent legislation - The CPUC compelled IOUs to
sell fossil power plants to EWGs to facilitate competition and
required IOUs to buy and sell all power through the PX at
prices set at auction. EWG plants aren't dedicated to serve
any particular customers, although EWGs may choose to contract
with IOUs (or DWR). Since the enactment of AB 6X in 2001,
prices for IOU generation have been set on a cost-of-service
basis. For the next few years, the bulk of additional
generation needed to meet demand (net short) will be supplied
via DWR contracts with EWGs.
SB 888 - No fundamental change to regulated/private investment
balance, except that CPUC authority to require IOUs to invest
in generation is confirmed and cost recovery of reasonable,
approved investments is assured. IOU investments must be
consistent with an integrated resource plan, which also
considers procurement and demand-side alternatives.
Transmission
Pre-AB 1890 - IOUs owned and operated their transmission.
IOUs gave priority access for delivery of power to their
customers. Excess capacity was available for wholesale
wheeling.
AB 1890/subsequent legislation - IOUs still own transmission
lines, but operational control is transferred to the ISO. ISO
manages the three IOUs' transmission grids as a single, open
access system. IOU generation has no more access to the
system than competing generators and marketers.
SB 888 - No fundamental change, except responsibility for
inspection, maintenance, repair and replacement standards for
IOU transmission facilities is returned to the CPUC from the
ISO. Federal open access mandate remains.
Retail Service
Pre-AB 1890 - IOUs have an obligation to provide universal
service and customers must take bundled service from the IOU
at rates set by the CPUC. Self-generation and
municipalization are long-term service alternatives.
AB 1890/subsequent legislation - IOUs retain the obligation to
provide universal service, but IOU customers may buy
electricity from retail competitors at unregulated prices, to
be delivered by the IOU, and may freely depart and return to
bundled IOU service. IOU customers attempt to recover IOU
investments made on behalf of direct access customers through
a non-bypassable "competition transition charge." In 2001,
direct access was suspended to support AB 1X's long-term
contracting effort, but not before the direct access load
returned to its historic levels and created new stranded
costs. IOU customers attempt to recover DWR investments made
on behalf of direct access customers through "cost recovery
surcharge."
SB 888 - Retail service returns to pre-AB 1890 model, where
IOUs have an obligation to provide universal service and
customers must take bundled service from the IOU at rates set
by the CPUC. Existing direct access customers remain on
direct access for the duration of their existing contracts.
Self-generation and municipalization remain as long-term
service alternatives. Community aggregation, where a city or
county provides universal direct access service to willing
residents, is retained as a service alternative as well.
2.Does this bill repeal deregulation? The Legislature itself
did not enact deregulation, and it cannot itself repeal it.
Deregulation has been effected by a complex array of mostly
federal and some state statutes, regulatory orders and court
decisions dating back at least to 1978. PURPA and EPACT
deregulated wholesale generation. EPACT and FERC actions such
as Orders 888, 889 and 2000 deregulated IOU-owned transmission
to accommodate the delivery of non-utility generation. These
federal policies are not reversible, although states can
choose the extent to which they wish to participate in their
implementation.
Some states have resisted these federal policies by
maintaining vertically integrated utilities. California did
not resist, and in AB 1890 consented to and furthered the
dis-integration of California's major IOUs, leaving
distribution utilities without the means under their control
to meet their obligation to serve. Municipal utilities have
resisted and remained vertically integrated. The results, in
terms of retail rates, speak for themselves.
AB 1890 contained a mix of provisions, some furthered
deregulation policies and some weren't policies at all, but
essentially commercial bargains between interested groups.
The Legislature has already taken several individual steps to
reverse deregulation. This bill take the further step of
repealing the policy of direct access, and attempting to phase
out its existing practice. As noted above, direct access is
the central deregulation policy initiated by AB 1890 and
subject to exclusive state jurisdiction. This bill also
affirmatively reverses the retreat from long-term planning,
which is another characteristic of electricity deregulation.
3.Who pays for the investments (and the mistakes)? The lesson
of deregulation and the energy crisis is that the buck stops
with ordinary IOU customers, who are the ultimate source of
investment in electricity infrastructure. As such, providers
of electricity service should be accountable to them. IOU
cost overruns, unjust "market-based" wholesale prices, and the
costs of providing back-up service to customer-speculators
have not been borne equitably by IOUs, their holding
companies, merchant generators or marketers. These costs have
been borne by electricity consumers, in particular the 98% of
IOU customers who take bundled service and rely on the CPUC
and FERC to ensure their rates are reasonable.
4.Are ending power plant divestitures and employee layoffs
realistic policy goals? This bill includes as policy goals
"stopping electric plant divestiture" and "ending employee
layoffs" (Section 4). These are stated as policy goals
intended to be pursued by the Legislature. The bill also
includes an operative provision extending the current
prohibition on power plant divestiture from 2006 to 2010
(Section 33). Both may be desirable general policies, but
there are exceptions. For example, the divestiture prohibition
limits an IOU's ability to undertake projects which may very
well be in the public interest, such as decommissioning of
uneconomic hydroelectric facilities to achieve water quality
and aquatic habitat goals, without first receiving legislative
authorization. The author and committee may wish to consider
whether these provisions should be amended to reflect the fact
that there may be appropriate exceptions.
5.Basis of regulatory compact. Section 6 of this bill describes
the terms of a "regulatory compact" between IOUs and the CPUC.
The regulatory compact has previously been an implied
agreement which suggests utilities are entitled to a
territorial monopoly on service and allowed to earn a limited
profit in exchange for the obligation to provide service to
all customers in that territory. The duties of the IOUs and
the CPUC in this section are drawn from the American Law
Institute's Restatement of the Law, Second, Agency, which
describes the legal duties of agents to principals, and
vice-versa.
6.Holding company provision. When it authorized the formation
of IOU holding companies, the CPUC enumerated a number of
conditions in its decisions, including the so-called "first
priority" condition, which requires IOU holding companies to
give first priority to the capital requirements of the IOU
necessary to meet its obligation to serve. In response to the
CPUC's investigation into the applicability of the "first
priority" condition, IOUs have argued that the CPUC has no
jurisdiction to enforce such conditions. In Section 45, this
bill clarifies that the CPUC indeed retains the authority to
monitor and enforce the conditions it imposed on the formation
of IOU holding companies.
SB 429 (Morrow) contains an IOU holding company provision
similar to this bill. The author and the committee may wish
to consider whether this bill should be amended to be
consistent with SB 429 or whether this provision should be
removed from this bill in favor of addressing it in SB 429.
SB 429 is pending in the Senate Appropriations Committee.
7.Support and Opposition. This bill is supported by consumer
groups, labor groups and municipal utilities. It is opposed
by electricity generators and marketers, IOUs, and direct
access customers. Supporters and opponents make some similar
observations, but reach different conclusions.
In general, supporters argue: The state lacks a coherent
energy policy direction, which has contributed to the delay in
necessary infrastructure investments. Phase out of direct
access is vital because direct access discourages long-term
planning and investment by IOUs. Supporters state that cost
shifting to bundled customers is inevitable under direct
access, as demonstrated by recent CPUC decisions, and that
direct access is anathema to restoring the obligation to
serve. This bill builds on recent progress in the wake of the
energy crisis.
In general, opponents argue just the opposite: This bill
interferes with recent progress, destabilizes the electricity
market, creates uncertainty, and discourages investment.
Regulation is inefficient and costly, better to assign
investment risks (and rewards) to the private sector. Direct
access providers and customers argue for the preservation of
direct access, and argue the CPUC is dealing effectively with
cost shifting.
8.Related Legislation. AB 428 (Richman) and AB 816 (Reyes)
repeal the suspension of direct access. AB 428 and AB 816 are
pending in the Assembly Appropriations Committee.
POSITIONS
Sponsor:
Authors
Support:
California Labor Federation, AFL-CIO
California Municipal Utilities Association
City of Roseville
Coalition of California Utility Employees
Congress of California Seniors
Consumer Federation of California
Consumers Union
Foundation for Taxpayer and Consumer Rights
Northern California Power Agency
Southern California Edison (if amended)
Southern California Public Power Authority
The Utility Reform Network (TURN)
Utility Consumers' Action Network
61 individuals
Oppose:
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|AES Pacific | |
|Alliance for Retail Energy Markets | |
|APS Energy Services | |
|Automated Power Exchange | |
|Caithness Energy | |
|California Biomass Energy Alliance | |
|California Business Properties Association | |
|California Business Roundtable | |
|California Chamber of Commerce | |
|California Independent Petroleum Association | |
|California Manufacturers and Technology | |
|Association | |
|California Retailers Association | |
|California Wind Energy Association | |
|Callaway Golf Company | |
|Calpine Corporation | |
|City of Corona | |
|Clean Power Campaign | |
|Covanta Energy | |
|Dynegy | |
|Enpower Corporation | |
|Heraeus Metal Processing, Inc. | |
|Independent Energy Producers | |
|Los Angeles Unified School District (unless | |
|amended) | |
|Minnesota Methane | |
|National Energy Marketers Association | |
|NRG Energy, Inc. | |
|Pacific Gas and Electric Company | |
|Public Buildings Service of the U.S. General | |
|Services Administration | |
|Qualcomm | |
|School Project for Utility Rate Reduction | |
|Sempra Energy | |
|Silicon Valley Manufacturing Group | |
|Strategic Energy | |
|Sweetwater Union High School District | |
|Ultra-Tool International, Inc. | |
|USAA Realty Company | |
|Verizon | |
|Western Power Trading Forum | |
|Western States Petroleum Association | |
|Whitewater Energy Corporation | |
|Wintec Energy | |
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Lawrence Lingbloom
SB 888 Analysis
Hearing Date: May 6, 2003