BILL ANALYSIS 1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
AB 2638 - Calderon
Hearing Date: August 18, 2000 A
As Amended: August 18, 2000 FISCAL
B
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6
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DESCRIPTION
Current law permits an irrigation district (ID) to sell and
distribute electricity both inside and outside its
boundaries.
Current law permits an ID to act as 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 IDs and
investor-owned utilities (IOU) and creates a process for
establishing exclusive service areas for each.
This bill permits IDs to build and operate electric
facilities in the service territory of an IOU only upon
approval of the California Public Utilities Commission
(CPUC) or pursuant to a service area agreement between an
ID and an IOU. The CPUC may only approve an ID's request
to offer electricity service if it finds that:
The ID will provide universal service to all
retail customers requesting service within the
area to be served at reasonable,
non-discriminatory rates comparable to that
provided by the existing retail electric
service provider.
Construction of electric facilities by the ID
won't have a significant adverse environmental
impact.
Service by the ID won't adversely affect the
reliability of electric service.
Service by the ID won't adversely impact the
ability of the IOU to provide adequate service
at reasonable rates.
Service by the ID prevents or eliminates
economic waste.
The ID has implemented public purpose and low
income programs.
The ID's electric rates are at least 15% below
the IOU's tariffed rates, exclusive of the
commodity charges and public purpose program
charges.
Allowing the ID to provide electricity services
is in the public interest.
This bill provides that CEQA review of any new electrical
facilities outside an ID's boundaries shall be conducted by
the board of supervisors of the county in which the
majority of the construction occurs.
This bill bars an ID from providing service to a customer
that's already connected to an IOU unless the ID pays the
IOU an exit fee to reimburse the utility for its costs
incurred to provide electric transmission and distribution
service. The amount of such a fee would be determined by
the CPUC. This provision doesn't apply to 90 megawatts of
load served by the Merced Irrigation District that's within
the boundaries of the Merced Irrigation District and Castle
Air Force Base.
This bill gives the CPUC the authority to adjudicate
complaint cases brought against an ID by an interested
party for violations of all of the above provisions.
This bill exempts an ID from all the above provisions if
the ID acquires substantially all the electric facilities
of the IOU that has the obligation to serve customers
within the ID's boundaries, and if the CPUC approves a
service area agreement between the ID and the IOU.
This bill bars an ID from exercising the power of eminent
domain to acquire property owned by an IOU if the ID
intends to put the property to similar use.
This bill provides pricing flexibility for an IOU by
permitting it to discount its electric service to its
"marginal cost" in order to compete with an ID. 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 ID. Such lost revenues may not be recovered from small
ratepayers. This provision does not apply to 75 megawatts
of load served by the Merced Irrigation District where the
load is located within the district's boundaries or Castle
Air Force Base.
This bill requires the CPUC to require the Pacific Gas &
Electric Company (PG&E) to consolidate its agricultural and
commercial rate schedules.
Current law requires a county board of supervisors to
approve the formation of an ID.
This bill requires the county board of supervisors to
reject the formation of the ID if it's not for the primary
purpose of providing irrigation services.
BACKGROUND
Irrigation Districts . While there are over sixty IDs 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 IDs are preparing to enter the electricity
market in the near future.
A Little History . In 1998, 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 IDs and the IOUs because
it allows for competition between them. This has recently
surfaced in disputes between PG&E and three IDs located in
central California: Modesto Merced, and TID.
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 ID 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 IDs 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:
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 ID, 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 IDs
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 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 inhibit or end
the ability of IDs to provide electric services?
2.Should the IOU cost recovery portions of the bill be
altered to better ensure that the IOU ratepayers are
completely protected against possible rate hikes?
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 universal service mandate created by this bill
for retail customers be expanded to include residential
customers as well?
5.Is it appropriate to mandate that the rates offered by
IDs be 15% below the tariffed rates offered by an IOU
provider?
6.Are the restrictions on the use of eminent domain
appropriate?
7.Is it appropriate to require the CPUC to consolidate
agricultural and commercial rate schedules only in the
PG&E territory?
8.Is it appropriate to set aside a certain amount of load
in the Merced Irrigation District where customers
wouldn't have to pay an exit fee to leave an IOU and/or
the IOU wouldn't be able to discount its rates to compete
with the ID?
COMMENTS
1)Distribution Competition . As noted in the "Background"
section, competition between IDs 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 IDs and
IOUs as legitimate in some cases.
2)Exit Fee . This bill requires an ID to pay an "exit fee"
to an investor-owned utility for every retail customer
the ID acquires from the IOU - both inside and outside of
the ID's boundaries - with important exemptions for
Merced. That exit fee, which would be established by the
CPUC, is intended to cover the IOU's 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 ID 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 ID 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 in a manner to
guarantee that the customers who remain with the IOU
aren't harmed and don't see their rates go up.
3)Special Benefits For Merced . This measure provides a
pair of exemptions for certain amounts of load in the
Merced Irrigation District.
The first is in Section 1, subsection (b) of the bill,
where an IOU wouldn't be able to discount its tariffed
rate to its marginal cost in order to compete with Merced
for 75 megawatts of load, thus giving Merced a
competitive advantage in offering service to 75 megawatts
of load in its service territory (Merced has acquired
about 45 megawatts of load to date).
The second is in Section 3, subsection (f) of the bill,
where businesses making up 90 megawatts of load wouldn't
have to pay an exit fee if they decide to leave the IOU
and receive service from the ID.
The author and committee may wish to consider whether
these exemptions are appropriate and what the
repercussions of granting them are. Do these exemptions
have the effect of giving certain commercial customers a
competitive advantage based on when they choose to
receive service from an ID? Does the lack of an exit fee
payment for 90 megawatts of load leave the IOU with a
certain amount of "stranded costs" and if so, who will
pay for those stranded costs - the IOU or its commercial
and residential ratepayers?
4)Cherry Picking - Part 1 . "Cherry picking" is the
practice whereby an ID, 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.
The bill is silent on an ID cherry picking within its
service territory. The author and committee may wish to
consider whether an ID should be required to extend the
benefits of the service it provides to all customers
within its service territory before being permitted to
offer service to customers outside of its service
territory.
5) Cherry Picking - Part 2 . Section 9607(a)(1) permits
cherry-picking in that it allows an ID to choose the
areas where it intends to compete. In all likelihood,
IDs will choose to compete in areas with high usage
customers; they almost certainly won't choose to compete
for residential customers. While the anti-cost-shifting
provisions in the bill protect residential customers in
such instances, the author and committee may wish to
consider whether this type of cherry-picking should be
permitted. The author and committee may wish to consider
whether, if an irrigation district wants to provide
service to a particular entity outside of its boundaries,
the CPUC should 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)Rate Setting . Section 3 of the bill precludes the CPUC
from allowing an ID to provide electricity services to
people outside of its service territory unless, among
other things, the rates offered to customers are 15%
below the tariff rate offered by the IOU. 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 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, as noted above,
to require the CPUC to establish a universal service
policy for irrigation districts that want to provide
electricity services to all customers - retail and
residential - in a given area. 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.
7)CEQA Review . Under current law, an ID 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 ID 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 would still serve 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 IDs 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.
8)Complaints . In cases where the ID provides service to an
entity outside of the district boundaries, this bill
provides the CPUC with jurisdiction to adjudicate
complaints brought against the ID by interested parties
regarding universal service adequacy and the
reasonableness of rates. The bill doesn't provide the
CPUC with jurisdiction to resolve service quality
disputes. The author and committee may wish to consider
whether the CPUC should be given this jurisdiction.
IDs 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
in the district would have their complaints handled by
the ID 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 ID
doesn't have the ability to vote for any member of the ID
and as such, may be deserving of a neutral third party to
resolve disputes. Currently, all IOU customers can take
their complaints to the CPUC for resolution and this bill
attempts to extend that same benefit to customers of IDs
who are located outside of the district's boundaries.
9)Eminent Domain . Section 5 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 to limit a public
agency's ability to exercise its 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.
10) Rate Schedule
Consolidation . Current agricultural rates are relatively
high due to the relatively uneven and seasonal usage by
many agricultural customers. This bill requires the CPUC
to combine those schedules with commercial rate schedules
in the PG&E service territory - a move that will probably
cause agricultural rates to drop and commercial rates to
rise slightly.
Because the CPUC is currently considering this matter,
the author and committee may wish to consider whether
it's appropriate to intervene in the middle of the CPUC
review and effectively decide the measure for the
Commission by effectively setting a rate schedule for one
provider (PG&E) in statute.
11) Technical Amendments .
The language in Section 1(a) of the bill regarding the
"firewall" fails to clearly create such a firewall to
protect residential consumer from potential rate hikes
should an IOU discount its rate to its marginal cost in
order to compete with an IOU for a particular customer.
The author and committee may wish to consider correcting
this by ending the sentence in (a) at "Section 9607"
beginning a new sentence by replacing "and if" with
"Further,". Also, the reference in Section 454.1 (c)
should be to "paragraph (b)(1)," not just to "paragraph
(1).".
12) Related Legislation . SB
1939 (Alarcon) requires municipal utilities and IDs to
provide low-income assistance programs in much the same
way the IOUs have to provide them and repeals the
requirement that ID board members be landowners of the
district they represent. SB 1939 is pending before the
Assembly Appropriations Committee.
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 pending on the Assembly floor.
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
*Northern California Power Agency
Office of Ratepayer Advocates
*Turlock Irrigation District
*Prior version
Randy Chinn
AB 2638 Analysis
Hearing Date: August 18, 2000