BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
SB 695 - Kehoe Hearing Date:
April 21, 2009 S
As proposed to be amended FISCAL B
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DESCRIPTION
Current law freezes the rates for investor-owned utility (IOU)
residential electric usage up to 130% of baseline quantities
until the California Department of Water Resources (CDWR) has
recovered all its cost of supplying power.
This bill replaces the freeze with two rate indexes, one for
residential customers and a different index for low-income
residential customers.
Current law freezes the participation in the direct access
program until CDWR no longer supplies power.
This bill abolishes the freeze if specified conditions are met,
allowing customers to purchase electricity from non-utility
providers up to specified quantities.
This bill requires electric utilities to target energy
efficiency and solar programs to heavy residential users of
energy and to multifamily customers. It also requires electric
utilities to develop programs that target new construction by,
and new and retrofit appliances for, nonprofit affordable
housing developers.
BACKGROUND
The 2000/2001 electricity crisis, brought about by the 1996
deregulation of electric markets, elicited a number of
legislative responses designed to bring some order to chaotic
markets and to protect residential customers from the worst of
the rate increases. Responding quickly to the crisis, the
Legislature authorized the CDWR to purchase electricity on
behalf of California's nearly broke utilities, froze residential
electric rates for specified quantities of usage, and suspended
direct access, the program which permitted customers to purchase
electricity from providers other than the utility. This bill
revises all three of those legislative actions.
Electric Rates - Since 2001 the rates and baseline quantities
for residential electric usage up to 130% of baseline have been
frozen until CDWR recovers the costs of power it has procured on
behalf of the utilities. (The baseline quantity of electricity
is the amount needed to meet roughly 60% of the typical
residential customer's usage, adjusted for climate and season.)
Without a change in law, the rate freeze will continue through
at least the middle of the next decade and perhaps into the
decade after that. This provision shielded some usage of all
residential customers from the worst effects of the electricity
crisis. But it has led to large rate differences within the
residential class because while overall costs have increased,
much of the residential usage is within the 130% of baseline
rate freeze, leaving those costs to be recovered only from the
upper tiers<1>:
CURRENT RESIDENTIAL RATES
cents per kwh PG&E SCE SDG&E
Tier 1 12 12 13
Tier 5 44 31 33
This is a rate design which encourages conservation, as the
Legislature intended. But the large rate disparity makes these
rate schedules a bit onerous to high users. And during a heat
wave when usage spikes customer bills go up very quickly as
customers get into the tier 4 and 5 rates. The 130% of baseline
quantity rate freeze also means that the residential customer
share of the increased costs resulting from the Renewable
Portfolio Standard implementation, AB 32 implementation, and new
transmission lines will be recovered solely from the higher
residential usage tiers.
Direct Access/Deregulation - The effects of California's
deregulation debacle have been largely managed. Customers have
figured out how to cope with much higher electric rates, the
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<1> For SCE in 2007, roughly 2/3 of their residential usage
was within the 130% of baseline quantity. Therefore, any
residential rate increase was born only by the remaining 1/3 of
residential usage.
IOUs have been returned to financial health, and adequate
electric supplies have been procured. This period of relative
calm is probably attributable to a number of actions including
the CDWR electricity contracts, the freezing of direct access,
better coordination of powerplant outages, longer term
electricity contracting by the IOUs, and the bankruptcy of Enron
and the imprisonment of many of its officers, to name the most
obvious. However, a comprehensive analysis of the causes of the
electricity crisis and the steps taken to avert a repeat has not
been performed by the CPUC. California will continue to rely on
the federal government, though the Federal Energy Regulatory
Commission, to intervene if electricity markets malfunction
again. Unfortunately, in 2001 our reliance on the FERC was
badly misplaced.<2>
Other states have deregulated electric markets with results that
are similar to California's. Maryland, Ohio, Pennsylvania,
Montana, Illinois, Delaware, Connecticut, and others have found
that deregulation increased rates, not decreased them.<3> When
asked to cite examples of where electric deregulation has worked
in a hearing of this committee last year, the witness from the
UC Energy Institute said he could not cite one in the United
States.<4> Huge rate increases have occurred as the rate
freezes, which were often a part of the deregulation "deal",
expire, leaving customers exposed to markets which are not
competitive.<5> The backlash has caused most of these states to
rethink the wisdom of deregulation.
COMMENTS
1. An Agreement - The IOUs have been concerned about the
consequences of the 130% of baseline residential rate
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<2> See, for example, Attorney General's Energy White Paper, A
Law Enforcement Perspective on the California Energy Crisis ;
Attorney General Bill Lockyer, April 2004.
<3> Shocking Electricity Prices Follow Deregulation , USA Today,
September 14, 2007. From 2002 to 2006 average prices rose 21%
in regulated states and 36% in deregulated states.
<4> March 4, 2008.
<5> Decade of Deregulation Felt in Climbing Bills , Washington
Post, April 18, 2008. In Maryland, customers of Baltimore Gas
and Electric, a subsidiary of Constellation Energy, received a
72% rate increase in 2007.
freeze on bills for large residential electric consumers.
The residential consumer representatives have been
concerned about the reopening of direct access and the
effect on electric prices and reliability. This bill
represents an agreement between the IOUs, the residential
consumer representatives, and some of the competitive
electric providers.
2. Proposed Amendments; Low Income Gas Customer Program -
The author will propose amendments in committee which are
reflected in this analysis. Those amendments are mostly
technical. However, there is one provision which deals
with low-income customers. The bill provides that the cost
of the low income electric customer program shall be
recovered from all classes of customers on an equal cents
per kilowatt-hour basis. The amendments expand this
provision to require that the cost of the low income gas
customer program shall also be recovered from all classes
of customers on an equal cents per therm basis for those
customers of combined electric and natural gas
corporations. The effect is to exempt Southern California
Gas from this provision. Recovery of these costs was the
subject of a recent CPUC case. Small consumer groups
wanted these costs recovered on an equal cents per therm
basis, as has been the case historically. The utilities
wanted to change the historic practice. The CPUC decision
kept the historic practice.
Large customers argue that the cost of low income programs
will expand under this bill, and prefer that the increased
cost of these programs be recovered exclusively from
residential customers. But under this bill the cost of the
low income programs won't increase, and could decrease, in
the medium term compared to current law because low income
rates could increase, thereby reducing the necessary
subsidy.
3. Electric Rates - The rate freeze for usage up to 130% of
the baseline quantity has protected lower usage residential
customers from rate increases by shifting costs to higher
usage residential customers. The intent was to establish a
rate design which encouraged conservation and provided some
additional protection to lower income customers. An
analysis of residential bills of SCE customers shows a
general correlation between high usage and income,
confirming that the intent of the legislation was achieved.
The other reason behind the 130% of baseline rate freeze
was the notion that the CPUC would be reluctant to raise
electric rates because the residential rate increases would
be concentrated on higher income customers. This notion
has proven false. Since 2001 rates for the highest tier of
electric usage have at least doubled and for some IOUs more
than tripled, while rates for usage up to 130% of baseline
have not changed. Some consider these large rate
differences unfair, and can cause bills to spike during
heat storms.
This bill replaces the rate freeze with rate caps and
indexes. For CARE (e.g. low-income) customers, the CPUC is
authorized to raise rates for usage up to 130% of baseline
quantities by the same percentage increase as the CalWORKs
grant, but not more than 3% per year. These provision
sunsets in 2019. In no event may the CARE rate exceed 80%
of the non-CARE residential rate.
For non-CARE residential customers, the bill authorizes the
CPUC to raise rates for usage up to 130% of baseline by the
rate of inflation, as measured by the CPI, plus 1%, but in
no event less than 3% or more than 5%. These provision
sunsets in 2019. A second limitation is that baseline
rates may not exceed 90% of the system average rate until
2019, and then 92.5% thereafter. This section puts the
CPUC in a bit of a bind in that it can choose to raise
rates by 3% or to not raise rates at all, but it cannot
raise rates any amount between 0% - 3%. The author and
committee may wish to clarify this odd point.
Note that this bill authorizes the CPUC to raise
residential rates for usage below 130% of baseline every
year and even if costs decline. However these rate
increases would be offset by rate reductions for usage
above 130% of baseline and be subject to the overall
limitation of 92.5% of the system average rate. The rate
cap provision will shift costs from heavy residential users
to light residential users. It should be revenue-neutral
to the IOUs.
4. Direct Access - This bill authorizes the CPUC to reopen
direct access but does not require it. Prior to reopening
direct access the CPUC is required to take specific steps
to ensure a level playing field between the direct access
sellers and the utilities. These provisions include
ensuring that all electric sellers are subject to the same
requirements regarding the Renewable Portfolio Standard, AB
32 greenhouse gas reduction compliance, and having adequate
electric supplies to meet the customers' needs.
This bill allows additional direct access sales up to the
historically highest amount of kilowatt-hours of annual
direct access sales for each utility. This provides
substantial new opportunities for direct access sellers;
with PG&E this means about a 50% increase. If the CPUC
decides to reopen direct access it must allow direct access
providers to sell up to the cap pursuant to a schedule that
phases in between three and five years, at the CPUC's
discretion.
5. Lessons Learned? - Though California's electricity
crisis, with the skyrocketing bills, shaky electric
reliability, and vanishing shareholder equity, is still a
recent memory, deregulation of electric markets has never
been completely rejected. The appeal of deregulation is
strong. There are countless examples of deregulated
markets that are a spectacular success, where lower prices,
many choices, and frequent innovation provide huge consumer
benefits (e.g. clothing, restaurants, electronics, home
building, travel). The policy question is whether
deregulation of electric markets can be a spectacular
success or a dismal failure, as it was in 2001. Have
regulators become smart enough to create and police
electric markets to ensure that competitive forces provide
benefits to customers without shifting costs to others, or
is electric deregulation the same folly as the financial
services deregulation, which is causing a global recession
of historic proportions?
Perhaps not accounted for in California's 1996 electric
deregulation debate was adequate consideration of a few
basic principles. A competitive market requires ease of
entry so that new companies can compete to provide a lower
price. Do California's tough environmental laws and
legendary NIMBYism make it possible for new, competitive
electric generation to be created? The deregulation
reinstated by this bill is the opening of retail markets to
competition. (Wholesale market competition was never
suspended.) One of the basic principles of competitive
markets is that buyers and sellers must be held accountable
for their actions, providing the discipline to ensure that
those market participants make responsible decisions. If a
customer makes a bad decision, say signing a contract with
an electricity seller who provides unreliable service or
who simply goes out of business, are we willing to let that
customer suffer the consequences?
The residential customer advocates are not supporters of
electric deregulation, but they believe that the trade off
of constrained low-income and residential customer rate
increases is a reasonable compromise. The IOUs, which were
so financially battered by deregulation, believe that the
bill contains adequate safeguards and fair competition
provisions, while relieving pressure on rates for the
highest residential users. And they believe that this bill
reduces their risk by eliminating the uncertainty of
whether, when, and how electric markets will be deregulated
again.
6. Recent History - Much of the content of this bill was
negotiated last year and contained in SB 1536 (Kehoe).
That bill was never heard in the Assembly.
POSITIONS
Sponsor:
Author
Support:
Pacific Gas and Electric Company
Sempra Energy
Southern California Edison
The Utility Reform Network
Oppose:
None on file
Randy Chinn
SB 695 Analysis
Hearing Date: April 21, 2009