BILL ANALYSIS
SB 888
Page 1
Date of Hearing: July 7, 2003
ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE
Sarah Reyes, Chair
SB 888 (Dunn) - As Amended: July 1, 2003
SENATE VOTE : 21-16
SUBJECT : Public utilities: electrical restructuring.
SUMMARY : Repeals provisions relating to implementing a market
based electric industry structure under AB 1890 (Brulte),
Chapter 854, Statutes of 1996, including modifying the existing
definitions that govern regulatory policy for investor owned
utilities. Specifically, this bill : Repeals the following
provisions relating to implementing a market based electric
industry structure under AB 1890:
1)Repeals the legislative findings and declarations for
electricity deregulation under AB 1890. This bill deletes
obsolete language governing the powers and duties of the
bankrupt Power Exchange (PX). Deletes provisions requiring
the bylaws governing the Independent System Operator (ISO),
the Electricity Oversight Board (EOB) and PX to be consistent
with the statutory responsibilities of the Federal Energy
Regulatory Commission (FERC).
2)Deletes obsolete reporting requirements for ISO to the
Legislature and EOB. Repeals legislative findings and intent
language governing the ability of PX to perform its duties,
including the Legislatures goals for PX.
3)Deletes the requirements for the California Public Utilities
Commission (PUC) to help create ISO and PX, develop a cost
recovery mechanism for the state's electrical corporations in
a competitive market environment and authorize direct
transactions between electrical corporations and end use
customers subject to a nonbypassable charge. This bill
deletes a customer's ability to aggregate their electricity
loads on a voluntary basis through direct transactions.
Furthermore, this bill deletes all forms of customer
verification for selecting an alternate energy service
provider and other PUC directives toward implementing a market
based electric industry structure.
SB 888
Page 2
4)Deletes provisions in existing law that relates to payment of
specified competition transition charges (CTC) that were due
by March 2002, including the calculations for determining the
value of an investor owned utilities (IOUs) stranded
investments and how those costs were to be recouped from
ratepayers. These costs and charges were established under AB
1890 to pay for the stranded assets of IOUs that became
uneconomic as a result of a competitive market.
5)Deletes charges that consumers have an obligation to pay under
CTC established by
AB 1890, including the ability for an IOU to apply to PUC to
not collect CTCs for a particular class or category of
electrical consumption.
6)Deletes the ability for PUC to determine cost recovery and
valuation of IOU assets for purposes of determining the
competition transition charge. Furthermore, this bill deletes
PUC's ability to allocate charges among various classes of
customers, rate schedules, and tariff options to ensure that
costs are recovered from these classes, rate schedules,
contract rates, and tariff options.
Establishes:
1)That electrical corporations and gas corporations that serve
retail customers have an obligation to serve those customers
with reliable service at just and reasonable rates. This
obligation to serve includes a duty to furnish and maintain
adequate, efficient, just and reasonable service,
instrumentalities, equipment, and facilities that are
necessary to promote the safety, health, comfort and
convenience of customers, employees, and the public while
promoting a sustainable environment.
2)That this obligation to serve definition for electrical
corporations and gas corporations include the obligation to
plan for and provide sufficient, affordable and reliable
resources, which includes utility owned and procured
generation resources, renewable generation resources,
transmission and distribution resources, and cost effective
energy efficiency resources.
SB 888
Page 3
3)A rate of return for electrical corporations to meet their
obligation to serve that includes a reasonable opportunity to
fully recover from all customers, in a manner determined by
PUC.
4)Cost recovery language for electrical corporations to recover
reasonable costs to operate and maintain those resources,
reasonable compensation for employees, a return of and a
reasonable return on prudent investments in utility owned
generation, transmission, and distribution resources necessary
to meet the obligation to serve.
5)Requires ISO, in consultation with PUC, to adopt and
periodically review and update inspection, maintenance,
repair, and replacement standards for transmission facilities.
PUC shall adopt and review maintenance standards for
distributions systems of investor owned electrical utilities
and review the standards set by ISO for transmission
facilities.
6)Prohibits ISO from entering into a multi state regional
transmission organization unless it is approved by EOB and the
Legislature by concurrent resolution.
7)Requires PUC to develop and submit to the Legislature a
proposal for implementing a core/noncore model of retail
electric service that permits customer choice in selecting an
energy service provider outside of an IOU subject to all costs
being fully recoverable for core portfolio customers and IOUs.
Energy service providers will also be required to meet the
twenty percent renewable energy goal set in the Renewable
Portfolio Standards Program (RPSP). Furthermore, PUC shall
limit noncore customers from returning to bundled service. If
service is provided to noncore customers it must be at fully
compensatory rates and subject to contract terms that prevent
cost shifting. Under this proposal core customers will also
be able to purchase renewable power at cost from an IOU.
8)Prohibits any new direct access contracts from being
authorized until the enactment of the core/noncore proposal by
PUC. Allows for the continuation of existing direct access
contracts prior to April 1, 2003.
9)Establish a Ratepayer Refund Account for each electrical
SB 888
Page 4
corporation. IOUs are to deposit any excessive costs during
the energy crisis for wholesale electricity that are recovered
in the Ratepayer Refund Account.
10)Requires PUC to regulate public utility owned generating
facilities to ensure that the service provided is
environmentally clean, efficient, cost effective to
ratepayers, and adequate. Furthermore, IOUs must make direct
investments in or contract with any entity dedicated to serve
customers connected to an electrical corporation distribution
system or grid consistent with procurement plans approved by
PUC.
11)Requires all metering of customers usage to be performed by
the electrical corporation and no customer with an average
usage of less than 1,000 kilowatthours per month is required
to take service under a time of use rate.
12)Requires an incentive mechanism to be developed consistent
with existing incentive mechanisms for market or PUC
authorized benchmarks for power procurement for demand
reduction resources and ensures a timely recovery of all costs
for demand reduction incurred by IOU.
13)Requires PUC 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 consistent
with provisions for long term contracts for IOUs and existing
air emission and renewable resource goals for generators.
14)Requires PUC when implementing its procurement plan for IOUs
to first acquire all available cost effective energy
efficiency resources or demand reduction resources compared to
long term resource options.
15)Specifies that reasonable expenditures by transmission owners
that are electrical corporations to plan, design, reconfigure,
replace or expand transmission facilities or other cost
effective transmission alternatives, including demand side
alternatives for the purpose of delivering lower cost power to
ratepayers are in the public interest and deemed prudent.
16)Requires electrical corporations to provide service that is
SB 888
Page 5
environmental clean, efficient and cost effective for
ratepayers consistent with provisions of the renewable
portfolio standard program, IOU long term procurement
contracts, air emission standards and the integrated energy
policy report.
17)Requires PUC to approve rates that provide an electrical
corporation a reasonable opportunity to recover its reasonable
costs of operating, its reasonable investment in, and a
reasonable return on its investments on its generation plants.
18)Adds declaratory language saying that is the intent of the
Legislature to reaffirm, without requiring revision,
California's doctrine, as reflected in regulatory and judicial
decisions, regarding electrical corporation's reasonable
opportunity to recover costs and investments.
EXISTING LAW :
1)Established provisions for restructuring the electric industry
in California and provided for the following:
a) ISO to manage the transmission grid in IOU service
territories, subject to regulation by FERC;
b) PX, providing an auction system to determine wholesale
electric prices;
c) EOB to oversee ISO and PX;
d) Market valuation of IOU owned generation to facilitate
divestment and enhance competition in the generation
market;
e) Direct retail transactions for electricity and
registration of Electric Service Providers (ESPs) marketing
electricity to retail customers;
f) Unbundling of generation, transmission, and distribution
services, reflected in separate charges on consumers'
electric bills;
g) Four year rate freeze for residential and small
commercial customers during a transition period ending in
SB 888
Page 6
2002;
h) CTC to pay amortization costs of stranded utility
generation assets;
i) Rate reduction bond to finance a 10 percent rate
reduction for residential and small commercial customers
during the transition period;
j) Public goods charge (PGC) to provide for competitively
neutral assessment of subsidies for energy efficiency,
conservation, and low income programs;
aa) Authorization for publicly owned utilities (POUs) to
implement retail competition.
2)Specified the framework, responsibilities and functions of
EOB.
3)Provided for additional consumer protections for ESP
customers, through third party verification and other forms of
disclosure when switching to another entity than an IOU for
electric service.
4)Replaced the stakeholder governing board of ISO with a five
member board appointed by the Governor and confirmed by the
Senate.
5)Prohibited divestment of any IOU retained generation assets
until January 1, 2006, eliminated market based valuation of
IOU retained generation, and retained cost of service
regulation over IOU generation assets.
6)Required PUC to suspend direct transactions.
7)Required PUC to develop and enforce generator maintenance and
performance standards cooperatively with ISO.
8)Required IOUs to meet the renewable portfolio standard (RPS)
as specified.
FISCAL EFFECT : Unknown.
COMMENTS :
SB 888
Page 7
"Repeal of Electricity Deregulation Act of 2003:" Most of the
provisions of this bill repeal the existing law that establishes
the structure of a market based electric industry and the duties
and powers of agencies like ISO, EOB and PX to administer and
run this new system. Other provisions being deleted in this
bill give guidance to PUC in developing the cost recovery
mechanisms and its ancillary functions (i.e., Transition Cost
Balancing Account (TCBA) and (CTC)).
This bill contains language that adds new provisions to an IOU
obligation to serve, rate of return and cost recovery, while
also deleting specified language in existing law affecting these
definitions. Furthermore, this bill contains language that
places a higher priority on the demand side reduction programs
compared to long term procurement contracts, including elevating
an IOUs environmental responsibilities to the same level as
ratepayer responsibilities.
Environmental provisions: One of the areas of focus for this
bill is to promote and prioritize demand reduction programs,
including strengthening references to existing law on RPS and
new service standards for electrical corporations to provide
environmentally clean, efficient power that is cost effective to
ratepayers. The inclusion of demand side reduction as well as
prioritizing it over long term procurement options is somewhat
consistent with existing policies on decreasing energy
consumption by consumers through incentives, rebates and
education. The committee may want to note that this bills focus
on highlighting additional environmental/renewable language
seems to start moving the definition of obligation to serve away
from ratepayers to other broader social issues.
Obligation to serve: Traditionally, obligation to serve
requirements originated from common law doctrine in England. In
the United States the concept of an obligation to serve for
entities other than common carriers began to emerge after the
United States Supreme Court spoke in Munn v. Illinois in 1876,
which stated that government can regulate property that becomes
"clothed with a public interest" and when used in a manner to
make it of public consequence, and affects the community at
large. This bill adds renewable generation resources,
transmission and distribution resources to the existing
definition for an IOUs obligation to serve definition.
SB 888
Page 8
Cost recovery and rate of return: This bill says an IOU, as a
condition of meeting its obligation to serve, has a reasonable
opportunity to fully recover from all customers, reasonable
costs to operate and maintain those resources, reasonable
compensation for employees, a return of and a reasonable return
on prudent investments in utility owned generation,
transmission, and distribution resources. The concern is
whether this definition is sufficient enough to enable all cost
recovery for an IOU as it relates to utility undercollections,
stranded costs, employee transition costs, and Department of
Water Resources (DWR) power costs. Furthermore, this bill
deletes the calculation mechanism and the language specifying
that cost recovery can be collected in rates from existing law.
Does this deletion pose any problems for PUC in determining cost
recovery for an IOU?
Direct Access (DA): This bill grandfathers in direct access
customers as of April 1, 2003. This bill is silent on what
types of "exit fees" will be conferred on certain classes of DA
customers that received bundled utility service during the
period of time that DWR was procuring power for IOUs. The
committee recommendation is to include all PUC decisions on
direct access cost responsibility surcharges for DA customers
who received bundled service in the past.
Generation/Procurement: This bills' main focus is to put to bed
the idea of a deregulated energy marketplace and replace it with
a more stable, but historically more costly and inefficient,
energy policy that relies on IOU generation under a consistent
rate of return. The committee may want to note that, under this
bill, there is no requirement to change the current ratios for
IOUs on their reliance on retained generation, long term
contracts and spot market purchases. Energy procurement ratios
for IOUs shifted dramatically after the passage of AB 1890 and
PUC decisions, placing less of a priority on retained generation
and more of a priority on purchasing contracts through PX. It
is important to note, that under a strict rate of return
regulatory environment IOUs have made investments in costly
nuclear power plants, which the ratepayers have paid for as
stranded costs in CTC. Under this bill there is no clear
direction for PUC in approving procurement ratio's for IOUs as
it relates to placing more of a priority on retained generation
(including certain types like renewable generation), long term
SB 888
Page 9
contracts and/or spot market purchases.
HISTORY
How did the deregulation effort commence: Deregulation of the
electricity industry in the United States began in 1978 when
Congress passed the Public Utility Regulatory Policies Act,
which opened wholesale power markets to nonutility producers of
electricity. Even greater competition in the bulk power market
was created when Congress passed the Energy Policy Act of 1992,
which was supervised by FERC.
In 1996, FERC proceeded to implement the objective of the Energy
Policy Act with Orders 888 and 889. Order 888 allowed newly
deregulated utilities to recover Stranded Costs-costs that had
been prudently incurred by utilities under the previously
regulated regime to serve their customers but cannot be
recovered if the consumers choose other electricity suppliers.
This bill removed impediments to competition in the wholesale
power market with the intention to bring more efficient, lower
cost power to the electricity consumers. Order 889 established
an Open Access Same-Time Information System (OASIS), which
required utilities to provide both customers and potential
customers with information, electronically, about available
transmission capacity, prices, and other information that
enabled them to obtain open access non-discriminatory
transmission service. These orders facilitated states'
restructuring of the electric power industry, which enabled
customers to have direct access to retail power generation.
What was the shape of the electricity market in California prior
to restructuring : Prior to restructuring, the electricity
sector was highly regulated, vertically integrated and
monopolistic. Large vertically integrated investor owned
utilities supplied generation, transmission and distribution
services. Regulation was provided by both state and local
boards, which set reliability standards and service conditions,
along with a specified rate for return for utilities. Rates for
electricity services were consequently highly regulated. The
state's transmission system was largely owned and operated by
IOUa. Local distribution lines were operated by the existing
electric utilities. Power customers were restricted to buying
power from a single source--their local utility company.
Service was dependable, but relative to other regions, prices
SB 888
Page 10
were rather expensive, with rates higher than the US average.
For example, in 1996 residential consumers paid 36 percent more
than the average US residential consumer, and industrial users
paid 52 percent more than the average.
Utilities and their regulators made virtually all decisions
about how the electricity system was structured, operated and
paid for, including how many power plants were built, who may
build them, which technologies to use and how much consumers
must pay for them.
How did deregulation start in California: Electricity
deregulation began in California when the California State
Legislature passed AB 1890 on September 23, 1996. AB 1890
received broad support from customers, utilities, labor and
environmentalists, as these stakeholders were extensively
involved in the deregulation process. The implementation of the
law was left primarily to PUC. The objective of competition was
to provide cheaper, more efficient, and better served power to
retail and commercial consumers.
Wholesale Market: AB 1890 set the framework for a new means of
electricity exchange to be constructed through the creation of
PX and an ISO (both non-profit and subject to FERC
jurisdiction). Prices in the wholesale market were set
according to market rules developed by ISO and PX, both of which
were launched in March 1998.
The law required that the state's three dominant IOUs, Southern
California Edison (SCE), Pacific Gas & Electric (PG&E) and San
Diego Gas & Electric (SDG&E) divest at least 50 percent of their
generation portfolios. Regulators and legislators encouraged
the utilities to sell all of those plants. The utilities were
required to sell electricity generated by any remaining
generation plants into the state wholesale market, PX, and
purchase all of their electricity requirements for its customers
from PX, which by this time was nothing more than a spot market.
In addition, utilities were prevented from negotiating
long-term supply contracts.
Transmission and Distribution : ISO was given the mandate to
operate the high-voltage transmission lines owned by the three
utilities, accounting for 75 percent of the California grid.
The three utilities still owned the transmission lines, in
SB 888
Page 11
accordance with FERC Order 888. Distribution facilities
continued to be operated by the three utilities and regulated by
PUC.
Retail Market : For retail sales, AB 1890 provided customer
choice by allowing more than 70 percent of California's
electricity customers to change providers. By the time the
retail market was opened to competition in 1998, 250 power
marketing companies had signed up to sell electricity directly
to California consumers.
A transition period to March 31, 2002 was established to allow
utilities to recover Stranded Costs; during which time retail
rates would be frozen (unless the Stranded Costs were recovered
in advance, which would enable retail prices to be freed). In
addition, retail customers received a 10 percent rate reduction
during this period of transition. Where rates were capped, the
consumer did not see the effect of higher power acquisition
prices - instead the provider absorbed the higher costs (i.e.,
PG&E, SCE). Where rates were not capped, the consumer paid the
higher costs (i.e., SDG&E).
What were the goals of deregulation of the electricity market :
The overall goal of deregulation was an increase in the economic
efficiency of the electricity market, which in turn would make
the state better off and provide consumers with cheaper, more
efficient, and better-served power. This increase in economic
efficiency was intended to lead to:
(a) Lower utility rates;
(b) Choice of electricity providers;
(c) Ability to demand specific services;
(d) Efficient, cost based pricing (as opposed to a single
bundled rate);
(e) Development of new technologies (such as wider use of
renewable energy sources);
(f) Development of new kinds of services and products;
(g) Reduction of PUC's regulatory burden concerning new
SB 888
Page 12
power plants;
What failed in the deregulated California market:
A variety of factors are believed to have contributed to the
energy crisis in California.
Lack of Investment:
There has been little investment in the sector and many new
investments have been delayed due to uncertainties with the new
market, regulatory situation and environmental concerns.
Investment in new power generation capacity has not kept pace
with the increasing demand for electricity, as no new generation
capacity has been constructed in the state for over a decade.
During the period from 1990 through 1999, overall demand in the
state increased by 11.3 percent, while electric generating
capacity decreased by 1.7 percent during the same period. In
addition, there has also been a limited amount of investment in
transmission and gas pipeline transmission, which has led to
constraints on the transmission network. Path 15, the high
voltage transmission line connecting southern California to
northern California, has become congested at times, reducing the
flow of surplus electricity capacity in southern California to
meet shortages in northern California.
Market Weaknesses :
Shortcomings of the wholesale electric market rules established
under the state's restructuring plan contributed to the increase
in wholesale prices. Long term contracts are essential to risk
management. Because electricity cannot be stored, and
consequently generated/transmitted/consumed instantaneously, it
is the most volatile commodity on the market. Gas, which fuels
much of the power generators, is the second most volatile
commodity traded. Futures markets allow companies to lock in at
long term, stable priced, and hedge against the price volatility
that California saw in the first months of deregulation.
Because PG&E, SCE, and SDG&E were required to buy all of their
power through PX, they could not enter into forward long-term
contracts for energy. When spot market wholesale prices
increased because of power shortages and increasing generation
costs, the utilities had no option but to purchase the
high-priced power. Utilities paid high wholesale prices for
SB 888
Page 13
their power, but were unable to recover their costs because
retail electricity prices were frozen. Moreover, since retail
consumer prices were capped, consumers had little incentive to
reduce demand as prices escalated or to use electricity during
cheaper times, such as in the evening. This situation resulted
in the utilities accumulating enormous debts. Exacerbating the
power shortages, many independent power generators were
reluctant to sell power to financially strapped PG&E and SCE due
to the uncertainty of receiving payment for the power sold.
Assorted Tribulations:
Beginning in May 2000 natural gas prices reached unprecedented
levels--as much as 20 times higher than expected by December.
California also experienced a reduction in supply of electricity
from other states. California relies on about 7 to 11 gigawatts
of out-of-state generation capability, of which a significant
portion is produced by hydroelectric power in the northwestern
United States. Reduced hydroelectric power generation caused by
unusually low water levels in the northwest resulted in a
reduction of imports to northern California. In addition, the
price of pollution permits required covering emissions from
power plants in the Los Angeles area increased by a factor of
nearly ten over the summer of 2000. Consequently, approximately
10 gigawatts of generation capability were out of operation
during times of some of the highest demand in 2000. Meanwhile,
average demand for electricity increased significantly
throughout the Western US in the summer of 2000 due to
abnormally hot weather. The combination of tight supply and
inelastic demand led many to argue that opportunities were
created for suppliers to exercise market power by withholding
supply, which drove prices even higher.
What was the rationale behind banning long-term forward
contracting in wholesale markets:
AB 1890's exclusion of contracts and hedging options in its
market design was believed to be the only way that an
effectively functioning wholesale market could be assured. When
AB 1890 was formulated, it contained many provisions that were
designed to benefit or protect each of the many stakeholders
(residential consumers, utilities, generating companies,
industrial consumers). Since California's rates were higher
than the national average, there was some concern that if long
term contracts were put into place, high prices would be locked
SB 888
Page 14
in. Moreover, requiring the utilities to purchase power through
PX at the market clearing prices would limit their ability to
exercise market power. It addition, smaller customers would be
protected from "cream-skimming": the fear that generators would
enter into long-term contracts with large customers first who
could use their purchasing power to lock in supplies at
favorable rates, at the expense of the smaller customers.
Additionally, many utilities may have been discouraged with
long-term contracts, based on their past experience in
California. California regulators had forced utilities in both
gas and electric forward contracts to absorb any losses stemming
from the contract prices exceeding wholesale market prices while
not permitting them to reap the benefits when contractual prices
were lower.
For these reasons virtually all energy for retail sale in the
state since deregulation has been purchased and sold in the spot
market, ignoring the benefits of hedging through forward
purchases.
How did utilities hedge themselves from spot market risk, or why
didn't they: It appears that the utilities made significant
miscalculations of risk, especially concerning how high the
price of power could rise and how exposed they would be.
Because of this exposure, high wholesale power prices, and the
imposition of retail price caps restricting recovery of these
costs, California's three major utilities are experiencing
severe financial problems. The worst case is PG&E, which on
April 6, 2001 filed for protection under Chapter 11 of the US
Bankruptcy Code. PG&E estimates that since June 2000 they have
spent $9 billion for wholesale power with no reimbursement for
those expenditures (referred to as unrecovered power costs).
SCE is in a similar situation to PG&E with respect to power
purchase costs. In November 2000, SCE estimated their
unrecovered power purchase costs at $2.6 billion. SDG&E
estimates their unrecovered power costs are $447 million.
What were the forecasts for electricity markets? Were the
utilities aware of the impending crisis, and if so, when :
According to the California Energy Commission (CEC), the
increase in demand that California has experienced in recent
years had been anticipated and forecasted as early as 1988, and
the main source of the energy crisis was that power plants were
not being built in the 1990s to keep pace with the forecasted
SB 888
Page 15
demand.
The following table represents CEC's 1988 Electricity Report on
actual peak electricity demand and forecasted electricity
demand.
-------------------------------------------------------------
|Year |Actual Electricity Peak |Electricity Report |
| |Demand |Forecast |
| |(megawatts) |(megawatts) |
|--------+----------------------------+-----------------------|
|1995 |47,813 |50,561 |
|--------+----------------------------+-----------------------|
|1996 |50,189 |51,683 |
|--------+----------------------------+-----------------------|
|1997 |52,195 |52,757 |
|--------+----------------------------+-----------------------|
|1998 |45,658 |53,914 |
|--------+----------------------------+-----------------------|
|1999 |53,335 |55,033 |
|--------+----------------------------+-----------------------|
|2000 |53,257 |56,673 |
-------------------------------------------------------------
CEC determines forecasts through the use of average weather
(once-in-two-year temperature levels). Yet, California's
electricity system is quite sensitive to temperature, with high
temperatures producing high electricity loads. Under extreme
conditions demand can increase by roughly 4,000 megawatts above
what would be expected under normal weather conditions. CEC
began including sensitivity analysis for temperature extremes in
their forecasts in 1998.
Where did the money the utilities received from selling
generators go : Under PUC deregulation rules, the utilities were
to use profits from the sale of their generating plants to
retire debt and reduce equity associated with building the
plants and pay off state-mandated long-term contracts. PUC
allowed the utilities to recover only the book value on the
sales of their generating plants. The utilities were only
required to sell half of their generating capacity, but many
utilities sold off all of their capacity, often at three times
the book value of the plants.
SB 888
Page 16
What are the details of the bond issue Governor Davis is
negotiating? Will the terms affect investment in power
generation in the state : The $13.4 billion bond issue-the
biggest municipal bond issue in US history-is intended to
replenish the state general fund for $7 billion DWR has already
spent buying electricity on behalf of financially troubled
utilities to limit blackouts. The bond issue is expected to
generate immediate cash to bridge that gap until long-term power
contracts kick in and planned new power plants come into
operation, expanding supplies and lowering prices. The bonds,
being sold by DWR, will entail higher retail rates, as they will
be backed by revenue from electric -utility bills DWR levies on
consumers and businesses, rather than by the full faith and
credit of the state.
Since late spring 2001, however, wholesale electric prices have
declined sharply due to favorable weather and as existing
generators have come back on line after completion of scheduled
maintenance. This, along with conservation measures, have
reduced the state's cost of purchasing power and led to a
surplus of power in July 2001, during which the state has sold
extra power back in to the market. Currently the state is
negotiating with energy suppliers to reopen energy contracts
made during the energy crises in order to get a better deal and
minimize power purchases that the state is locked in to but
doesn't use.
What actions have been taken to mitigate future price spikes and
black outs: Several actions have recently been taken to
alleviate California's electricity market problems:
In March 2001 PUC agreed to raise retail electricity prices to
customers of PG&E and SCE to pay for energy purchases made on
their behalf. Overall retail rates will increase an average of
19 percent, but low-income customers, medical baseline
customers, and residential customers using power below 130
percent of baseline usage amounts will not have a rate increase.
In April of 2001 FERC announced a plan to bring more stability,
better control, and price relief to California's energy market.
The plan gives ISO more control of power plant outages,
establishes price mitigation measures based on market
principals, and requires new reporting obligations that will
allow FERC to better monitor the energy market in California.
SB 888
Page 17
In addition, FERC streamlined regulatory procedures for
wholesale power sales and for certification of natural gas
projects. It also urged all hydroelectric licensees to assess
the potential for increased generation capacity at their
respective facilities.
Governor Davis signed SB X1 6 (Burton), Chapter 10, First
Extraordinary Session, Statutes of 2001, on May 16, 2001
creating the California Consumer Power and Conservation
Financing Authority (the Authority). The Authority will have
broad powers to construct, own and operate electric power
facilities, and finance energy conservation projects. In
addition, on May 22, 2001 Governor Davis signed SB X1 28 (Sher),
Chapter 12, First Extraordinary Session, Statutes of 2001, which
is designed to shorten the times for reviewing an application
for a new power plant and upgrading an existing power plant.
The law also allows new owners to pay emission mitigation fees
in lieu of obtaining actual emission offsets when the owner can
show that emission offsets are not available.
On May 28, 2001, the US Department of Energy Secretary Abraham
ordered the Western Area Power Administration, a 15 state
power-marketing arm of the Department, to complete planning and
to seek outside financing for increasing California's
transmission capacity. This action aims at reducing power
transmission bottlenecks on Path 15, the high-voltage power line
connecting northern and southern California. PUC in May of this
year approved, in a 3-2 vote, PG&E's ability to participate in
the Federal plan to expand Path 15.
ISO established a warning system in the spring of 2001 that
issues 24-hour warnings of where and when power blackouts can be
expected and has established several programs in order to reduce
demand. ISO and the utilities have established incentives for
customers to reduce consumption during peak conditions and
programs in which customer volunteer to reduce their energy
demand during critical periods. For example, the Optional
Binding Mandatory Curtailment Program allows customers who
commit to reduce their demand by a specified percentage every
time ISO issues a firm load curtailment to be exempt from
curtailment of their entire firm load.
How is this affecting the US economy and deregulation efforts in
other states : California's experience with electricity
SB 888
Page 18
deregulation could have repercussions for many states that are
seeking to achieve electricity reform. About 24 US states have
passed electricity sector reform legislation, yet, only about
half of these states have proceeded very far with the
restructuring of their electricity industries. It is expected
that many states will delay further reform initiatives until
they are confident that reforms will not lead to significant
price increases or reliability problems. For instance, New
Mexico recently postponed its decision to begin unbundling its
electricity operations due to the problems that California has
faced. Other states, such as Arkansas, have extended the
timeframe for deregulation in order for markets to fully
develop, while Texas, which is currently in the process of
implementing deregulation, has repeatedly delayed implementation
in an attempt to catch issues before the state is fully
deregulated.
Previous legislation enacted during and after the energy crisis:
AB X1 5 (Keeley), Chapter 1, Statutes of 2001-2002, and SB 47
(Bowen), Chapter 766, Statutes of 2001, provided for
gubernatorial appointment and Senate confirmation of ISO
board.
AB X1 6 (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
PUC-regulated procurement planning and cost recovery process
for IOUs.
SB X1 6 (Burton), Chapter 10, Statutes of 2001-2002,
established the Power Authority to facilitate public
investment in cost-based electricity resources.
SB X2 39 (Burton), Chapter 19, Statutes of 2001-2002,
authorized PUC 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 PUC.
SB 888
Page 19
SB 1389 (Bowen), Chapter 568, Statutes of 2002, required CEC
to prepare an Integrated Energy Policy Report every two years
based on its assessment of trends in energy markets, including
electricity.
Related legislation:
AB 428 (Richman) - This bill would establish a core/noncore
retail structure for electricity. This bill passed the Assembly
Committee on Utilities and Commerce on April 30th of this year
and will be heard in Senate Energy, Utilities and Communication
Committee on July 8th.
AB 816 (Reyes) - This bill would reinstate direct access under
specified conditions and includes intent language regarding
municipal departing load. This bill passed the Assembly
Committee on Utilities and Commerce on April 7th of this year
and will be heard in Senate Energy, Utilities and Communication
Committee on July 8th.
REGISTERED SUPPORT / OPPOSITION :
Support
California Teamsters Public Affairs Council
California Labor Federation
Consumer Federation of California
Opposition
AES Pacific, Inc.
Alliance for Retail Energy Markets
Alliance for Retail Marketing
Automated Power Exchange
Bay Area Economic Forum
Boeing Company, Inc.
BP
BP Energy
BP, La Palma
Burney Forest Products
California Biomass Energy Alliance
California Business Properties Association
California Business Roundtable
California Chamber of Commerce
SB 888
Page 20
Californians For Energy Stability
California Manufacturers and Technology Association
California Steel
California Wind Energy Association
California Black Chamber of Commerce
California CoGeneration Council
Calpine Corp.
CalWind
Carpinteria Valley Chamber of Commerce
California Farm Bureau Federation
Callaway Golf
Caithness Energy
CH2M Hill
City of Lindsay
Civil Justice Association of California
Clean Power Campaign (unless amended)
Concordia Resources
Constellation NewEnergy
Consumers Coalition of California
Consulting Engineers and Land Surveyors of California
Consumers Coalition of California
Dollar Tree Stores
Economic Council of Pass Area Communities
EMS
Energy Consulting
Enpower Corp.
Greater Antelope Valley Economic Alliance
GWF Energy, LLC
Hall & Company
Hewlett Packard Company
Honeywell International
Hyde, Miller, Owen & Trost
Inland Empire Manufacturers Council
IBM
Independent Energy Producers Association
Jazz Semiconductors, Inc.
Kings County Economic Development Corp
Los Angeles Unified School District (unless amended)
Marriott Hotels
MJPawlicki Advocacy
National Energy Marketers Association
Northrop Grumman
NRG Energy, Inc.
Ojai Valley Chamber of Commerce and Visitors Center
SB 888
Page 21
Palmdale Chamber of Commerce
PG&E
Porterville Chamber of Commerce
PPG
Proctor and Gamble
Raytheon Company
RealEnergy
Ridgecrest Chamber of Commerce
Saint Gobain Containers
San Diego Regional Chamber of Commerce
School Project for Utility Rate Reduction
Simpson Timber Company
Smurfit Stone Container Corp.
Strategic Energy
Surveyors of California
TAMCO Steel
Trend Offset Printing
TRW, Inc.
USSPOSCO
Visalia Chamber of Commerce
Western Power Trading Forum
Wheelabator
Wine Institute
YMCA Corona-Norco
3 individuals
Analysis Prepared by : Daniel Kim / U. & C. / (916) 319-2083