BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
MARTHA M. ESCUTIA, CHAIRWOMAN
SB 641 - Campbell Hearing Date:
April 26, 2005 S
As Introduced: February 22, 2005 FISCAL B
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DESCRIPTION
Existing law:
1. Authorizes retail competition (direct access) within the
service areas of the investor-owned utilities (IOUs).
(AB 1890 (Brulte), Chapter 854, Statutes of 1996)
2. Requires the California Public Utilities Commission
(CPUC) to suspend the right of IOU customers to acquire
direct access service until the Department of Water
Resources (DWR) no longer supplies power to IOU customers.
The CPUC suspended direct access as of September 20, 2001.
(AB 1X (Keeley), Chapter 4, Statutes of 2001)
3. Declares the intent of the Legislature that all
customers taking service from an IOU after the enactment of
AB 1X bear a fair share of specified DWR costs and that any
cost shifting between customers be prevented.
(AB 117 (Migden), Chapter 838, Statutes of 2002)
This bill:
1. Repeals the provisions of AB 1X suspending direct access
during the term of DWR contracts and instead requires the
CPUC to permit direct access, pursuant to a "core/non-core"
structure to be defined by the CPUC.
2. Requires the CPUC's core/non-core structure to require
direct access customers to bear a fair share of DWR's
electricity costs or to accept a proportionate allocation
of the electrical generation resources used by the IOU to
serve the departing customer.
BACKGROUND
The "core/non-core" approach to utility service is derived from
natural gas service, where customers are divided into core and
non-core classes according to consumption. Gas utilities are
required to procure and deliver a portfolio of gas supplies
sufficient to serve their core (residential and small
commercial) customers. Non-core customers must arrange for
procurement and transportation of their own gas supplies.
As part of the restructuring of the electric industry, AB 1890
authorized direct access. While customers were allowed to
choose alternate providers of energy, the IOUs' obligation to
serve all customers remained and customers large and small were
entitled to remain with, or return to, bundled IOU service.
Historically, IOU electric customers have been entitled to the
portfolio of supplies procured to serve them without regard to
their size.
To avoid the dysfunctional spot market that financially
decimated the IOUs and threatened catastrophic rate increases,
AB 1X established a structure to permit 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 has grown since that time
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.
Meanwhile, the CPUC has dedicated a share of bundled customer
rates to a loan program to defer direct access customers'
payment of DWR and IOU procurement costs. In a decision issued
in November 2002 (Decision 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 reasoned such a
cap was necessary to maintain the viability of existing direct
access contracts.
The 2.7 cent charge doesn't cover 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.
According to the CPUC, the current direct access
under-collection is about $833 million statewide. This
under-collection is projected to grow to about $1.3 billion
before it begins to get paid down. Over time, as DWR costs
decline, direct access customers' payments are projected to
catch up and pay off this under-collection. The CPUC estimates
the under-collection will be paid off in 2011 in PG&E territory,
2016 in SCE territory, and 2006 in SDG&E territory. In the
meantime, IOU customer rates must be maintained at artificially
high levels to support this "forced loan" to direct access
customers.
COMMENTS
1. Cost shifting provisions duplicative of and weaker than
existing law. This bill requires direct access customers
to bear a fair share of DWR's electricity purchase costs
(or to accept a proportionate allocation of the energy).
Existing law already provides that all customers taking
service from DWR, including those who later depart for
direct access, should bear a fair share of DWR's
electricity purchase costs, as well as existing DWR and IOU
contract obligations. Existing law further expresses the
intent of the Legislature to prevent any cost shifting
between customers. While the CPUC relied on these
provisions to impose a cost responsibility surcharge on
direct access customers, it ignored their clear intent when
it capped the surcharge and created the "forced loan" cost
shift from direct access customers to bundled customers.
This bill's "cost shifting" protections are incomplete and
significantly weaker than those already in current law,
which have been insufficient to prevent cost shifting
decisions by the CPUC.
2. Core/non-core undefined, left to CPUC. This bill
doesn't specify any of the terms of the core/non-core
structure it requires. It doesn't even define
"core/non-core." Given the CPUC's record of abusing the
limited discretion granted by AB 1X and AB 117 in its
effort to sustain direct access through ratepayer
subsidies, the author and the committee may wish to
consider the wisdom of granting the CPUC unfettered
discretion over the design of a core/non-core structure.
3. Fewer customers to carry forced loan. This bill doesn't
address the burden on bundled customers resulting from the
CPUC's current direct access program. If the forced loan
is left in place, and additional customers are allowed to
move from bundled service to direct access, the
per-customer share of the forced loan will increase. To
avoid increasing the burden of direct access customer costs
on bundled customers, the author and the committee may wish
to consider postponing additional direct access until the
forced loan is repaid.
4. Mixed signals to IOUs regarding investments. AB 57
(Wright), Chapter 835, Statutes of 2002, requires IOU
procurement plans to "enable the (IOU) to fulfill its
obligation to serve at just and reasonable rates." The
IOUs are currently expected to meet load growth and replace
the DWR contracts over the next several years via the
procurement process initiated by the CPUC pursuant to AB
57. The CPUC has recently approved contracts for new power
plants to serve IOU customers which will be completed in
the 2006-2009 timeframe. The IOUs are required to buy
additional renewable power under long-term contracts
pursuant to SB 1078 (Sher), Chapter 516, Statutes of 2002,
the Renewable Portfolio Standard (RPS). The Governor, the
energy agencies and pending legislation have endorsed
accelerating the RPS schedule. Under the CPUC's long-term
procurement decision, IOUs will be obligated to build or
buy resources to meet a 15-17 percent reserve margin by
2006. The energy agencies have adopted a goal of
decreasing per capita energy consumption.
The IOUs, and their customers, are the primary vehicle to
deliver all of the above. These initiatives, on top of
existing obligations for utility generation, qualifying
facilities, and DWR contracts, will make the IOUs'
portfolios stable, but also fairly inflexible.
Against this backdrop, this bill permits the IOU customers
who would support all these initiatives to leave for direct
access. The author and the committee may wish to consider
how an expansion of direct access can be reconciled with
other policy goals embodied in existing law and the Energy
Action Plan.
POSITIONS
Sponsor:
Constellation New Energy
Support:
Sempra Energy (if amended)
Oppose:
Coalition of California Utility Employees
The Utility Reform Network
Lawrence Lingbloom
SB 641 Analysis
Hearing Date: April 26, 2005