BILL ANALYSIS Ó 1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
SB 672 - Fuller Hearing Date:
May 3, 2011 S
As Amended: March 21, 2011 FISCAL B
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DESCRIPTION
Current law authorizes individual retail non-residential end-use
customers to acquire electric service from other providers in
each electrical corporation's (IOU) distribution service
territory, up to the historically highest amount of
kilowatt-hours (kWh) of annual sales for each utility.
Increases authorized in 2009 require a phase-in period for new
customer enrollments of not less than three years and not more
than five years. The program is commonly referred to as "direct
access."
This bill expands the direct access cap for all customers to the
average provided by each IOU through January 1, 2012.
This bill eliminates the cap on direct access for all
non-residential customers that are non-profit organizations
which is undefined.
BACKGROUND
Deregulation - In 1996 the California State Legislature led the
nation by deregulating the sale of electricity to
non-residential customers. The reform was historic and intended
to transition the state to a more competitive electricity market
structure that allowed its citizens and businesses to achieve
the economic benefits of industry restructuring, create a new
market structure that provided competitive, low cost and
reliable electric service, provide assurances that electricity
customers in the new market would have sufficient information
and protection, and preserve California's commitment to
developing diverse, environmentally sensitive electricity
resources. Those goals were not achieved.
The practical effect of the program was that non-residential
customers could buy electricity direct from private sector
wholesale sellers and use the IOU only for distribution and
transmission services. As consequence the vertical monopoly of
electricity delivery provided by heavily regulated electric
utilities was upended and those utilities were largely required
to sell off power plants and transfer management of their
transmission systems to the newly created California Independent
System Operator. Within a few years the state suffered
electricity shortages which resulted in rolling blackouts,
skyrocketing prices, and bankrupt or nearly bankrupt utilities.
The Electricity Crisis - The effects of California's
deregulation debacle have been largely managed. Customers have
figured out how to cope with much higher electric rates, the
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
electricity purchases through long-term contracts by the
Department of Water Resources (for which ratepayers continue to
pay the costs), 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.<1>
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
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<1> See, for example, Attorney General's Energy White Paper, A
Law Enforcement Perspective on the California Energy Crisis ;
Attorney General Bill Lockyer, April 2004.
that deregulation increased rates, not decreased them.<2> When
asked to cite examples of where electric deregulation has worked
in a hearing of this committee in 2008, the witness from the UC
Energy Institute said he could not cite one in the United
States.<3> 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.<4> The backlash has caused most of these states to
rethink the wisdom of deregulation.
Direct Access Today - During the electricity crisis direct
access enrollment was suspended but preexisting contracts were
permitted to continue in effect accounting for approximately six
percent of the IOU's annual retail electric sales. In 2009,
after months of negotiation, comprehensive legislation
addressing many of the ongoing impacts of the electricity crisis
was adopted. Among the provisions of SB 695 (Kehoe) was an
increase in direct access transactions which roughly doubled the
permitted capacity of the program.
No later than July 1, 2010, the CPUC was authorized to adopt and
implement a schedule to begin the phase-in of authorized
increases in the maximum amount of direct transactions over a
period of at least three years, but not more than five years.
The new load eligible for direct access approximately doubled
enrollment in the IOU territories amounting to approximately 12%
of the entire load served.
The SB 695 cap was intended to limit any potential risk
associated with reopening of direct access by eliminating
uncertainty associated with load migration. The adopted phase-in
schedule will provide enough lead time for the IOUs to account
for small shifts in load and thereby avoid unwarranted cost
shifting and stranded costs.
Last year the CPUC adopted a four-year phase-in period with
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<2> 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.
<3> March 4, 2008.
<4> 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.
annual caps which was deemed to reasonably accommodate the
utilities' long-term procurement and resource planning needs,
while providing for timely implementation of new direct access
load consistent with the provisions of SB 695. The phase-in
will be complete in 2013.
COMMENTS
1. Author's Purpose . Creating a marketing opportunity for
schools, universities and other non-profits in order to
achieve budget certainty through resource management by
direct transactions will allow these organizations to
divert more of their precious budget dollars to the things
they are organized to fulfill, like teaching kids, thus
creating a win-win situation.
Years of pent-up demand for retail electricity supply
options received a modicum of relief in the wake of the
passage of SB 695. Incremental load growth in direct
transactions was allowed subject to a capped total to be
spread over three to five years. The yearly increment was
allowed to migrate through an open enrollment window on a
first-come, first-served basis. In the first enrollment
period the cap was reach within seconds of the enrollment
window opening. Many businesses, universities and
hospitals were not able to get a slot in the open
enrollment because the demand for more competitive options
overwhelmed the limited offering. The CPUC's Energy
Division did a review after the first enrollment window and
although they determined that the utilities had attempted
to facilitate the window fairly, they confirmed that the
capped amount of load was reached in seconds.
2. Are You Sure ? As a competitive product in the
marketplace, electricity is unique. The laws of physics
that govern electricity are inflexible, leaving economics
to adapt. The committee heard testimony in 2008 that
direct access has not been successful anyplace in the
United States. The CPUC has yet to fully implement the
expansion of direct access authorized under SB 695 and as a
consequence the impacts of doubling the capacity on grid
reliability, resource adequacy, and remaining IOU customers
have yet to be determined. Is it premature to consider
further expansion before the results are in?
3. Direct Access Expansion . The 50% expansion of direct
access authorized by SB 695 has yet to be fully implemented
under the terms of that measure and related proceedings of
the CPUC. Enrollment was allocated over four years
commencing in 2010 and ending with the last enrollment
cycle in 2013. The limited and gradual expansion of direct
access was managed over four years in order to reasonably
accommodate the utilities' long-term procurement and
resource planning needs in an attempt to avoid the
disastrous impacts on reliability in 2000-01, avoid
cost-shifting to remaining IOU customers and monitor
broader market and consumer impacts of expansion.
The impacts of direct access expansion under this bill
cannot be measured. Although not specified a back-door cap
is present given its limitation to "non-residential,
not-for-profit end-use customers." It appears that the
author's intent is to include all local, state, and federal
agencies including K-12 schools, colleges and universities
along with all non-profit organizations. The aggregated
electrical load of those institutions represented by those
entities is unknown at this time. Also not clear is
whether government and non-profit entities currently
enrolled in direct access would be moved over to the
separate, uncapped program thus freeing up room in the
current program for more agricultural, commercial and
industrial customers.
The author indicates that it is her intent to the permit
the CPUC to set a maximum total annual amount of eligible
load that may migrate to direct access in each IOU
territory for the expansion in this bill.
4. Enrollment Eligibility . The author reports that it is
her intention to permit expansion of direct access to all
governmental institutions but limit non-profit enrollment
to charitable organizations described in Section 501(c)(3)
of the federal Internal Revenue Code.
POSITIONS
Sponsor:
Commercial Energy
Support:
University of California
Oppose:
Southern California Edison
The Utility Reform Network (TURN)
Kellie Smith
SB 672 Analysis
Hearing Date: May 3, 2011