BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 2638 - Calderon Hearing
Date: August 8, 2000 A
As Amended: August 7, 2000 FISCAL B
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DESCRIPTION
Current law permits an irrigation district to sell and
distribute electricity both inside and outside its
boundaries.
Current law permits an irrigation district to be the lead
agency under the review mandated by the California
Environmental Quality Act (CEQA) for new electric facility
construction projects it undertakes - even when the project
is outside of the district's boundaries.
Current law discourages competition between irrigation
districts and investor-owned utilities (IOU) and creates a
process for establishing exclusive service areas for each.
This bill finds it is essential that California have a
rational energy policy related to electric service by
irrigation districts within the service territory of an
investor-owned utility on or after May 1, 2000.
This bill establishes numerous conditions on the ability of
irrigation districts to sell electricity both inside and
outside the boundaries of the district, including:
The irrigation district shall offer service to
customers within the district boundaries on a
just, reasonable, non-discriminatory basis.
The irrigation district may not offer service to
a customer that is already connected to an IOU
unless the irrigation district pays the IOU an
exit fee which reimburses the utility for its
costs incurred to provide electric transmission
and distribution service. The amount of such a
fee would be determined by the California Public
Utilities Commission (CPUC).
If the irrigation district offers rates to
commercial and industrial customers which are
less than the rates charged by the IOU currently
providing service, then the irrigation district
must also discount its rates to agricultural and
residential customers by the same percentage.
Service by the irrigation district may not
adversely affect the reliability of electric
service to others.
The irrigation district may not provide electric
service to any retail customer located outside of
the district's boundaries unless, in addition to
the above requirements, the irrigation district
also provides service to at least 50% of the
residential and agricultural customers within its
boundaries. Furthermore, a minimum of one-third
of the electricity sold by the irrigation
district outside of its boundaries must be
associated with residential and/or agricultural
customers.
This bill provides that CEQA review of any new electrical
facilities outside of the irrigation district boundaries
shall be conducted by the board of supervisors of the
county in which the majority of the construction occurs.
This bill gives the CPUC the authority to adjudicate
complaint cases brought against an irrigation district by
an interested party located outside the irrigation
district's boundaries.
This bill exempts an irrigation district from all the above
provisions if the irrigation district acquires
substantially all the electric facilities of the IOU that
has the obligation to serve customers within the irrigation
district's boundaries, and if the CPUC approves a service
area agreement between the irrigation district and the IOU.
This bill bars an irrigation district from exercising the
power of eminent domain to acquire property owned by an IOU
if the irrigation district intends to put the property to
similar use.
This bill changes the burden of proof when the CPUC
evaluates a proposed service agreement between an
irrigation district and an IOU by presuming such an
agreement is reasonable unless the CPUC finds it's not in
the public interest.
This bill provides pricing flexibility for IOUs by
permitting the utility to discount its electric service to
its marginal cost in order to compete with an irrigation
district. The electrical corporation may recover the lost
revenues from remaining customers up to the amount that the
revenues would have been recoverable had the customer been
lost to the irrigation district.
BACKGROUND
Irrigation Districts . While there are over sixty
irrigation districts in the state, the California Municipal
Utilities Association (CMUA) states that only four of them
- Modesto Irrigation District (Modesto), Turlock Irrigation
District (TID), Merced Irrigation District (Merced), and
Imperial Irrigation District (IID) - are providing
electricity services at this time. According to CMUA, the
Patterson and Laguna irrigation districts are preparing to
enter the electricity market in the near future.
A Little History . In 1998, Pacific Gas & Electric (PG&E)
agreed to sell its facilities in the Central Valley cities
of Oakdale, Riverbank, Ripon, and Escalon to Modesto. The
CPUC, which has the authority to veto any such sale,
exercised that power in this case, arguing the agreement
was anti-competitive and that PG&E's stockholders, not the
ratepayers, would be the primary beneficiaries of the sale.
According to PG&E, it's losing about $22 million in revenue
- out of an $8 billion pie - each year as a result of
decisions by customers to switch to the Modesto and Merced
Irrigation Districts for their electrical service.
However, if distribution competition continues to grow, a
much greater amount of money would be at risk.
The Economic Conflicts . Current law creates an economic
conflict between the interests of irrigation districts and
the IOUs because it allows for competition between them.
This has recently surfaced in disputes between PG&E and
three irrigation districts located in central California:
Modesto Irrigation District (Modesto), Merced Irrigation
District (Merced), and Turlock Irrigation District
(Turlock).
The nature of the disputes have two distinct variations.
The first is the case of Modesto, where it is the sole and
long-time provider of electric service within its
territorial boundaries. Modesto now wants to offer
service, as permitted under existing law, to customers
outside of its boundaries who are now served by PG&E.
The second case is Merced, where PG&E is the long-time
provider of electric service within the irrigation district
boundaries. In this case, Merced has chosen to compete
with PG&E by providing electric service to selected areas
within its boundaries and also to offer service outside of
its boundaries. Merced has invested $55 million over the
last few years in building an electric transmission and
distribution system and is now attempting to acquire
customers to pay for that investment.
The Legal Conflicts . Current law allows irrigation
districts and IOUs to compete for customers, but the law
tries to discourage, not encourage, competition in this
area. This is articulated in Public Utilities Code Section
8101, which was created in 1951 to read:
8101. Under certain conditions the sale and
distribution of electric power and energy in the same
geographical area both by an electrical utility and by
an irrigation district, results in duplication of
service, waste of materials, increase in costs, waste
of manpower and economic loss, and is detrimental to
the efficiency and best interests of such districts.
It is the policy of this State to induce such
utilities and irrigation districts to prevent or
remove such economic waste and to adopt more efficient
and economic methods of distribution of electric power
and energy, and to that end encourage the definition
of areas to be served or not to be served by each.
While this section of law discourages competition, it
clearly doesn't preclude it from taking place. Article XI,
Section 9(a) of the California Constitution provides that:
(a) A municipal corporation may establish,
purchase, and operate public works to furnish its
inhabitants with light, water, power, heat,
transportation, or means of communication. It may
furnish those services outside its boundaries,
except within another municipal corporation which
furnishes the same service and does not consent.
KEY QUESTIONS
1.Will the restrictions imposed by this bill on irrigation
districts that provide electric service inhibit or end
their ability to provide that service?
2.Should the IOU cost recovery portions of the bill be
amended to ensure that the IOU ratepayers are completely
protected?
3.Should the "exit fee" proposed by this bill be made more
uniform instead of being established on a case by case
basis?
4.Should the mandate to ensure that service be provided to
certain customer classes be altered to ensure that the
service be offered to those customer classes?
COMMENTS
1)Distribution Competition . As noted in the "Background"
section, competition between irrigation districts and
IOUs for electrical customers is discouraged, but not
banned, by California law. Arguably, the electric
restructuring statutes created by AB 1890 (Brulte),
Chapter 854, Statutes of 1996, implicitly recognized
competition between irrigation districts and IOUs as
legitimate in some cases.
2)Exit Fee . Page 5, Lines 1-18, require an irrigation
district to pay an "exit fee" to an investor-owned
utility for every retail customer the irrigation district
acquires from the IOU - both inside and outside of the
irrigation district's boundaries. That exit fee, which
would be established by the CPUC, covers the IOUs costs
of providing electric transmission and distribution
service. This is intended to make the IOU whole for the
loss of the customer, protecting IOU customers by
eliminating the need for a rate increase to make up any
lost revenue.
However, because this exit fee won't be known in advance,
it makes it difficult, if not impossible, for an
irrigation district to know if competing for a customer
is a financially viable proposition.
As such, the author and committee may wish to consider
whether the CPUC should instead be required to establish
a generic or uniform exit fee that an irrigation district
will be able to rely on and factor in as a "cost of doing
business" should it choose to offer electrical service to
retail entities. That fee should be designed to ensure
that the customers who remain with the IOU aren't harmed
and don't see their rates go up.
3)IOU Price Flexibility . Page 2, Line 3, through Page 3,
Line 2 of the bill permit IOUs to discount their rates to
the marginal cost of serving a customer if that customer
is offered service by an irrigation district. The bill
permits any revenue lost as a result of the "discount"
given to the customer to be recovered from the IOU's
other ratepayers to the extent that such revenue would
have had to be made up had the IOU lost the customer.
This provision illustrates how competition between
irrigation districts and IOUs can hurt other captive IOU
customers by shifting costs. Under this bill, an IOU
ratepayer would be better off if the irrigation district
won the customer because the irrigation district would
pay an exit fee, thereby minimizing any cost shift. By
including this "rate recovery" section in the bill, the
IOU is indifferent to the outcome because it's made whole
either from the ratepayers left in its system or from the
exit fee. However, the IOU's remaining ratepayers aren't
made whole.
To ensure that IOU ratepayers - not just the IOU - are
protected, the author and committee may wish to consider
altering this section to align the IOUs incentives with
those of its ratepayers by ensuring that any loss in
revenues is shared equally between IOUs and their
customers.
4)Cherry Picking - Part 1 . "Cherry picking" is the
practice whereby an irrigation district, because it
doesn't have a universal service mandate to provide
electricity services to everyone in a given territory,
could simply choose to provide service to those entities
where the district would be likely to turn the largest
profit. In general, that would mean providing services
to large industrial and commercial customers instead of
to small, residential customers.
Page 5, Lines 19-27 require an irrigation district that
offers a large customer a rate that's lower than the rate
offered by the IOU to also offer a rate that's discounted
by the same percentage to residential and agricultural
customers. In other words, if an irrigation district
provides a rate to an industrial consumer that's 20% less
than the IOU industrial consumer rate, it also must offer
a rate to residential and agricultural customers that's
at least 20% less than the IOU residential and
agricultural customer rates.
It's unclear why it's appropriate to impose an arbitrary
rate structure for irrigation districts that's based on
the rates of the IOU. Irrigation districts are made up
of publicly elected boards that are charged with setting
rates. If customers don't think the rates are low enough
or enough of a savings over the rates they're paying to
the IOU, they don't have to opt to receive service from
the irrigation district.
If the goal of this section is to prevent unfair
competition by preventing an irrigation district from
"cherry picking" certain customers or customer classes,
that goal is arguably already being achieved by the
section of this bill that requires irrigation districts
to pay an "exit fee."
An alternate approach to this section that the author and
committee may wish to consider would be to require the
CPUC to establish a universal service policy for
irrigation districts who want to provide electricity
services to customers within their boundaries. The
policy could, for example, require the district to offer
services to all customers within a certain distance from
their facilities and/or require that any "service area"
include a certain percentage of residential customers who
must be offered service.
While it could be argued that a district could discourage
residential customers from asking for service by
"offering" it at prices above what they're currently
paying for service from an IOU, that appears to be
precluded by Page 4, Lines 37-40, which requires
districts to offer service to customers at "published
tariff rates and on a just, reasonable, and
nondiscriminatory basis."
5)Cherry Picking - Part 2 . Page 5, Line 31, through Page
6, Line 19 deals with "cherry picking" IOU customers
located outside of the irrigation district's boundaries.
Under this section of the bill, before an irrigation
district can offer or provide service to any entity
outside of its boundaries, it must first provide electric
service to no less than 50% of the residential and
agricultural customers within its boundaries. Once that
hurdle is cleared, the irrigation district must ensure
that at least one-third of the electricity sold outside
of the district boundaries is sold to residential and
small commercial customers.
The concern about cherry picking is it unfairly shifts
costs to those customers who stay with the IOU system and
may not have an opportunity to leave the system -
typically residential and small commercial customers.
However, the author and committee may wish to consider
whether it's fair or feasible to require an irrigation
district to provide service to a certain number of small
customers in exchange for being able to offer service to
large customers. An irrigation district can't compel
businesses or residential customers to leave their
existing IOU service provider, so the 50% and 33.3%
service mandates in the bill may effectively bar
distribution competition from irrigation districts.
As an alternative, the author and committee may wish to
consider requiring an irrigation district, before it can
offer to service customers outside of its territory, to
offer to provide service at reasonable rates to every
small and large customer inside of its territory. After
all, if irrigation districts can offer rates that are
below those charged by IOUs, shouldn't all residents of
the district have the option to receive such a rate
before the district offers it to entities outside of the
district boundaries? Once that hurdle has been cleared,
the author and committee may wish to consider replacing
the 33.3% service mandate with a requirement similar to
the one suggested in Comment 4. That is, if an
irrigation district wants to provide service to a
particular entity outside of its boundaries, the CPUC
would be charged with establishing a service area outside
of the district boundaries that contains a certain
percentage of small and residential customers. The
irrigation district would then be required to offer
service to everyone in that service area at costs
comparable to those paid by the district customers within
its boundaries.
6)CEQA Review . Under current law, an irrigation district
proposing to build and install electrical service lines
and equipment serves as its own lead agency under CEQA.
By contrast, an IOU wishing to install the same equipment
to provide the same services obviously can't serve as its
own lead agency for CEQA because it's not a public
entity. Instead, the IOU has the CPUC serving as its
lead agency for CEQA.
This bill precludes, for irrigation district electric
construction projects outside of the district's
boundaries, the district from serving as its own lead
agency under CEQA. Instead, the county in which the
majority of the construction is to occur would serve as
the lead agency under CEQA. For an IOU engaged in a
major construction project, the CPUC serves as the lead
agency under CEQA. As such, the author and committee may
wish to consider whether the CPUC should also perform
this function for irrigation districts or whether it's
appropriate to, as the bill does now, award the CEQA lead
agency function to the county where a majority of the
construction project will take place.
7)Complaints . In cases where the irrigation district
provides service to an entity outside of the district
boundaries, this bill provides the CPUC with jurisdiction
to adjudicate complaints brought against the irrigation
district by that customer.
Irrigation districts are headed by an elected board, so
it could be argued that this provision of the bill usurps
local control and creates a "two-tiered" system whereby
customers located the district would have their
complaints handled by the irrigation district board but
customers located outside of the district would have
their complaints handled by the CPUC.
On the other hand, the customer located outside of the
irrigation district doesn't have the ability to vote for
any member of the irrigation district and as such, may be
deserving of a neutral third party to provide protection
for consumers. Currently, all IOU and municipal utility
customers can take their complaints to the CPUC for
resolution and this bill attempts to extend that same
benefit to customers of irrigation districts who are
located outside of the district's boundaries.
8)Eminent Domain . Page 7, Line 37, through Page 8, Line 2
of the bill bars an irrigation district from exercising
its right of eminent domain to acquire property owned by
an IOU if the irrigation district intends to put the
property to similar use.
Article I, Section 19, of the California Constitution
provides public agencies with the right to exercise the
powers of eminent domain and establishes how compensation
is to be awarded:
Private property may be taken or damaged for public
use only when just compensation, ascertained by a jury
unless waived, has first been paid to, or into court
for, the owner. The Legislature may provide for
possession by the condemnor following commencement of
eminent domain proceedings upon deposit in court and
prompt release to the owner of money determined by the
court to be the probable amount of just compensation.
It's unclear why it's appropriate, or whether it's even
constitutional, to limit a public agency's ability to
exercise its constitutionally-granted eminent domain
authority based on the use of the property if the agency
meets the "just compensation" test. As such, the author
and committee may wish to consider removing this section.
9)Joint Powers Agencies . The limitations imposed by this
bill also apply to joint powers authorities (JPA) that
include irrigation districts (Page 7, Lines 6-11). The
author believes this is necessary to prevent irrigation
districts from forming JPAs to evade the restrictions on
irrigation districts created by this bill. Opponents
argue that the formation of a JPA can't and won't relieve
an irrigation district of its obligations and in any
event, this "problem" is speculative at best.
10) Technically Speaking .
Items (b)(6) (Page 3, Lines 35-38) and (b)(9) (Page 4,
Lines 10-13) in the intent section of the bill aren't
addressed in the operative sections of the measure and as
such, the author and committee may wish to consider
deleting them.
11) Related Legislation . SB
1939 (Alarcon) requires municipal utilities and
irrigation districts to provide low-income assistance
programs in much the same way the IOUs have to provide
them and repeals the requirement that irrigation district
board members be landowners of the district they
represent. When SB 1939 was heard by this committee, it
contained a provision conceptually similar to the one
embodied in AB 2638. However, that provision was
removed at the request of the Chair so it could be dealt
with in the context of AB 2638. SB 1939 is scheduled to
be heard in the Assembly Utilities & Commerce Committee
on August 7, 2000.
SB 1571 (Costa) changes the voting requirements in the
James Irrigation District and the Corcoran Irrigation
District to require all voters in district elections to
be landowners. It also eliminates the requirement that
those landowners actually have to live in the district in
order to vote. SB 1571 is scheduled to be heard in the
Assembly Appropriations Committee on August 9, 2000.
ASSEMBLY VOTES
Assembly Utilities & Commerce Committee(11-0)*
Assembly Floor (73-3)*
* Votes were cast for a substantially different version of
the bill.
POSITIONS
Sponsor:
Pacific Gas and Electric
Support:
American GI Forum
City of Oakdale
Latino Issues Forum
Oppose:
California Municipal Utilities Association
City of Redding
Merced Irrigation District
Modesto Irrigation District
Northern California Power Agency
Turlock Irrigation District
Randy Chinn
AB 2638 Analysis
Hearing Date: August 8, 2000