BILL ANALYSIS Ó AB 327 Page 1 Date of Hearing: April 15, 2013 ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE Steven Bradford, Chair AB 327 (Perea) - As Amended: February 13, 2013 SUBJECT : Electricity: natural gas: rates. SUMMARY : This bill modifies statutory requirements specific to residential rate design applicable to the customers of Investor Owned Utilities (IOUs). Specifically, this bill : a)Requires the California Public Utilities Commission (PUC), when it approves changes to electric service rates charged to residential customers, to determine that the changes are reasonable, including that the changes are necessary in order to ensure that the rates paid by residential customers are fair, equitable, and reflect the costs to serve those customers. b)Requires the PUC to consider specified principles in approving any changes to electric service rates. c)Requires the PUC to report to the Legislature its findings and recommendations relating to tiered residential electric service rates in a specified rulemaking by January 31, 2014. d)Recasts and revises limitations on electric and natural gas service rates of residential customers, including the rate increase limitations applicable to electric service provided to California Alternate Rates for Energy (CARE) customers. EXISTING LAW 1)Requires the PUC to allocate a 'baseline quantity of electricity based on 50% to 60% of average residential electricity consumption for customers served with both gas and electricity or 60% to 70% for all electric residential customers and to take climatic and seasonal variations into account. (Public Utilities Code 739(a)(1) 2)Requires the PUC to set rates for the baseline quantity to be the lowest rate and to allow increasing rates for usage in excess of the baseline quantify. (Public Utilities Code 739(d)(1)) AB 327 Page 2 3)Requires the PUC to avoid excessive rate increases for residential customers and to establish an appropriate gradual differential between the rates for the respective blocks of usage (Public Utilities Code 739(d)(1)) 4)Requires the PUC to retain an appropriate inverted rate structure for residential customers and that if the PUC increases baseline rates revenues resulting from those increases they are to be used exclusively to reduce nonbaseline residential rates. (Public Utilities Code 739.7) 5)Allows the PUC to make higher allocations for persons with medical needs, such as emphysema, pulmonary patients, or persons on life-support equipment. (Public Utilities Code 739(c)) 6)Restricts the PUC from approving IOU rates that increase the residential rates for electricity usage up to 130 percent of the baseline quantities, by the annual percentage change in the Consumer Price Index from the prior year plus 1 percent, but not less than 3 percent and not more than 5 percent per year. The annual percentage change in the Consumer Price Index is calculated using the same formula that was used to determine the annual Social Security Cost of Living Adjustment on January 1, 2008. This restriction sunsets January 1, 2019. (Public Utilities Code 739.9(a)) 7)Restricts approval of mandatory or default time-variant or real time pricing, or critical peak pricing for residential customers and establishes these as opt-in programs only. In addition, requires that customers be provided with one year of data and one year of bill protection and caps billings to no more than they would otherwise have been under the customer's previous rate schedule. Also exempts medical baseline customers. (Public Utilities Code 745) 8)Further restricts rates charged residential customers for electricity usage up to the baseline quantities, including any customer charge revenues, to not exceed 90 percent of the system average rate prior to January 1, 2019, and not exceed AB 327 Page 3 92.5 percent after that date. (Public Utilities Code 739.9(b)) 9)Establishes a program of assistance to low-income residential customers with annual household incomes no greater than 200% of federal poverty guidelines which reflects discounts based on level of need and allows limited rate increase of up to 3% annually, subject to limitations. CARE rates cannot exceed 80% of the corresponding rates charged to non-CARE customers (excluding non-bypassable charges). (Public Utilities Code 739.1(b)(4) 10)Allows low income customers to be exempt from paying Department of Water Resources bond charge imposed pursuant to Division 27 (commencing with Section 80000) of the Water Code, the CARE surcharge portion of the public goods charge, any charge imposed pursuant to the California Solar Initiative, and any charge imposed to fund any other program that exempts CARE participants from paying the charge. (Public Utilities Code 739.1(g), 2851(d)(3), 379.6(h) FISCAL EFFECT : Unknown COMMENTS : 1)Author's Statement . "The energy crisis is long over, but laws meant to protect residential rate users are now preventing the CPUC from governing the rate structure and making necessary changes for the thousands of middle to low income families struggling to pay high energy costs. For example, the gap between Tier 2 and Tier 5 increased from 5 cents per kWh to 15 cents per kWh today. Absent rate reform, the gap between Tier 2 and Tier 5 will double to nearly 29 cents per kWh by 2022 causing tens of thousands of customers to pay rates significantly higher than the actual cost of electricity. Without legislative changes, the CPUC has only very limited ability to fix this unfair residential electric rate structure." 2)Energy Crisis of 2000-2001. During the energy crisis, AB1 x1 (Keeley, 2001) protected ratepayers from rampant price fluctuations due to a dysfunctional wholesale electricity market. AB1 x1 authorized the Department of Water Resources AB 327 Page 4 (DWR) to issue revenue bonds to purchase power on behalf of the cash-strapped investor-owned utilities who couldn't keep up with the volatile wholesale prices. Among other stabilizing efforts, AB1 x1 prohibited the PUC from increasing rates for usage under 130% of baseline until DWR bond charges are paid off. These restrictions did not apply to customers of publicly owned utilities, about 25% of electricity customers in California. SB 695 (Kehoe, 2009) was intended to minimize spikes in electricity rates and provide relative stability and predictability. Among its provisions, the bill removed the freeze on Tier 1 and Tier 2 rates and replaced it with formulas intended to allow gradual rate increases through 2018 at which time the caps for those increases would sunset. Different formulas were created for CARE and non-CARE customers. SB 743 (Steinberg & Padilla, 2013) would eliminate CalWorks as the index for CARE rate increases and in its place tie increases to the annual percentage change in the Consumer Price Index with a maximum cap of 4% per year. SB 743 does not currently address the restrictions applicable to non-CARE customers. Instead of the approach used by SB 743, AB 327 removes the prescriptive statutes that restrict rate design, establishes principles of rate design for the PUC to follow, and directs the PUC to develop the rates. Prior to the energy crisis, this is how the PUC designed and implemented IOU rate structures. 3)PUC Residential Rate Design Proceeding Underway. On June 28, 2012, the PUC initiated a proceeding to examine current residential electric rate design, including the tier structure in effect for residential customers, the state of time variant and dynamic pricing, potential pathways from tiers to time variant and dynamic pricing, and preferable residential rate design. This PUC proceeding is open to the public and allows interested parties opportunities to participate by making comments on PUC rulings, making rate design proposals, commenting on proposals made by others, commenting on proposals made by staff, and commenting on any decision made by the PUC. According to the public schedule, final rounds of comments are due mid-summer 2013. This would be followed by a draft decision, which is also open to comments. AB 327 Page 5 In the PUC's decision to open the residential rate design rulemaking, it noted the following: "For example, in Southern California Edison's (SCE's) service territory, 66 percent of residential sales are in Tiers 1 and 2.As a result, the remaining revenue requirement is borne by the remaining 34 percent of their sales. However, currently 51 percent of their non-CARE, non-coastal customers end up in Tier 4 or above, compared to 37 percent of their non-CARE, coastal customers. The end-result is that non-coastal customers are responsible for a greater portion of the residential revenue requirement not recovered from Tiers 1 and 2 than coastal customers, although adjustments to the baseline quantities for the various climate zones could alter this relationship? "Without being able to exceed the statutory limits on the rates in Tiers 1 and 2, a greater percentage of a utility's revenue requirement must be borne by customers in Tiers 3 and 4, especially those that do not participate in NEM [Net Energy Metering]. This results in a subsidy as customers in Tiers 3 and 4 pay a higher average price for the same kilowatt-hour of electricity than Tiers 1 and 2, regardless of when or where that kWh is consumed. "As evidenced by SCE's experience, it appears that customers living away from the coast who tend to use more electricity have borne the brunt of rate increases to meet utilities' revenue requirements, even accounting for the use of baselines." According to the PUC testimony provided to the Assembly Rural Caucus, IOU electricity rates have roughly tracked inflation since 2003 and average between $0.14 and $0.16 among SCE, San Diego Gas & Electric (SDG&E), and Pacific Gas and Electric (PG&E). Yet some ratepayers, because they use more than their Tier 1 and 2 allocations, will pay more than double this because of current restrictions on rate design. In testimony provided to the Assembly Rural Caucus, SCE showed that residential rates are currently deviating significantly from cost and that a customer who uses 1,200 kilowatt-hours per month is paying more than $1,000 over cost each year to subsidize low-usage customers. AB 327 Page 6 SCE also provided historical rate data showing the percent change in rates for each of its 5 rate tiers. While Tier 1 and Tier 2 rates have increased 7% and 12.8% between 2000 and 2013, Tiers 3, 4, and 5 have increased 107%, 132% and 156% over the same period. For SCE CARE customers, Tier 1 and 2 rates have decreased 16% and 11 percent, respectively. 4)The Subject is Residential Electricity Rate Design . According to the author this bill is intended to address limitations that impact residential electricity rate structures. In other words, residential gas rates and general provisions that ensure affordable energy bills for low income ratepayers were not intentionally included in the revisions to the rate design statutes. To the extent that rate design applicable to CARE customers is included, it is specific to rate design: AB 327 includes language to maintain protections for low income ratepayers to ensure affordable energy bills. It is important to make a distinction between rate design and the customer's bill . Redesigning rates does not necessarily result in a change in the customer's bill. AB 327 specifies that the PUC should approve rates that are "reasonable, including determining that the changes are necessary in order to ensure that the rates and charges paid by residential customers are fair, equitable, and reflect the costs to serve those customers." AB 327 places responsibility for rate design outcomes, consistent with specified principles, on the PUC. 5)Rate Reform Impacts on Low Income households. AB 327 does not alter existing residential rates. Rather, AB 327 provides the PUC the authority and principles to design and set residential electricity rates, including providing protection and affordability for low income households. Currently, CARE customers receive a 20% discount off of their electric and gas bills. However, because of the cap on Tiers 1 and 2, the effective discount can be much higher if the CARE customer is using more than 130% of the baseline allocation. In some instances, PG&E has reported providing discounts in the range of 60% off of the otherwise applicable bill. AB 327 Page 7 In addition to the CARE discount, federal energy assistance programs fund the local Home Energy Assistance Programs (HEAP), and provide free weatherization and up to $300 per year to assist with energy bills if they meet the income qualifications, have a high energy burden, or have a resident in the household that is part of a vulnerable population (i.e. seniors over 60 years of age, disable persons, and children under 5 years of age). 6)AB 327 specifies Rate Design Principles . AB 327 includes 'rate design principles' to direct the PUC's development of new residential rate designs. These include protections for low-income customers, encouraging energy conservation, clarity, simplicity, avoidance of cross-subsidization, and transparency if those cross-subsidies are to advance residential electricity policy goals. In the PUC's March 19, 2013 ruling in its rate design proceeding, the PUC adopted rate design principles based on the PUC's consideration of stakeholder suggestions and comments. The PUC's principles are similar to the principles in AB 327: a) Low-income and medical baseline customers should have access to enough electricity to ensure basic needs (such as health and comfort) are met at an affordable cost; b) Rates should be based on marginal cost; c) Rates should be based on cost-causation principles; d) Rates should encourage conservation and energy efficiency; e) Rates should encourage reduction of both coincident and non-coincident peak demand; f) Rates should be stable and understandable and provide customer choice; g) Rates should generally avoid cross-subsidies, unless the cross-subsidies appropriately support explicit state policy goals; h) Incentives should be explicit and transparent; i) Rates should encourage economically efficient decisionmaking; j) Transitions to new rate structures should emphasize customer education and outreach that enhances customer understanding and acceptance of new rates, and minimizes AB 327 Page 8 and appropriately considers the bill impacts associated with such transitions. 1)Spiking the bill. The result of changing rate design could be that some individual household energy bills would be lower and some could be higher. For a household receiving significant discounts it might be the more significant impact. AB 327 provides that the PUC would address the bill impacts of transitioning to a new rate design. 2)No action is action. Every three years the IOUs file their General Rate Cases and request authority to recover expenses and collect revenues to cover those expenses. In these rate cases the costs are separated by each customer class (residential, commercial, agriculture, industrial, and street lighting) so that no class subsidizes the other, with the exception of CARE expenses. These expenses include the cost of generation (utilities do not earn a rate of return from energy sales) and the cost of building and maintaining the transmission and distribution system and emergency response. Additional expenses include public purpose programs, such as the CARE program, energy efficiency incentives, the California Solar Initiative, the Self Generation Incentive Program (SGIP), and charges related to the 2000-2001 energy crisis (the Department of Water Resources Bond Charge and the Competitive Transaction Charge). Each year the IOUs must file requests to recover their expenses. For those expenses related to serving residential customers, the majority of those expenses must be placed on the price paid for electricity by residential customers whose usage exceeds their Tier 2 allocation. Until the statute restricting rate design is modified, this will continue. One of the growing expenses for utility customers are support for CARE customers. CARE support has grown, particularly during the recent recession, from which California is beginning to emerge. In SCE service area, CARE participation represented 32% of all SCE residential customers. Together, they received $342 million in discounts from their energy bills. For PG&E and SDG&E, CARE participation represents 30% and 25% of their residential customers. In addition to CARE, the Legislature has authorized several programs to develop new technologies and business models. AB 327 Page 9 These include the SGIP, the California Solar Initiative (CSI), Energy Efficiency Incentive Programs (EEIP), the Energy Savings Assistance Program (ESAP, free weatherization and appliances for qualified low-income homes), and Net Energy Metering. These programs are funded by California IOU ratepayers. In addition to these Legislatively-authorized programs, the PUC has authorized ratepayer funding for an energy research center at Lawrence Livermore Nuclear Laboratory and the Electric Program Investment Program (energy research and development). As more customers elect to reduce electricity consumption through energy efficiency measures or on-site self-generation, fewer customers will remain to recover service costs. This will result in even higher rates for those customers in the higher tier usage. Those customers who are not CARE customer, or have usage within 130% of baseline, or who do not have self-generation must then cover PUC approved utility expenses. 3)Rate protections for low income customers, monthly charges, and time of use rates . Opponents to AB 327 voice several concerns: a) Discounts for low-income families could be substantially reduced and monthly bills for many CARE customers could skyrocket. AB 327 provides direction to the PUC that discounts for low income and medical households should have sufficient affordable electricity. b) AB 327 imposes large monthly fixed charges with no limitations. AB 327 does not have a provision regarding monthly fixed charges. c) Customers could be forced onto default "Time of Use" rates. AB 327 does not modify the current statutory requirements that restrict approval of mandatory or default time-variant or real time pricing, or critical peak pricing for residential customers nor does AB 327 require time of use rates. 1)Current rate design isn't working. According to supporters of AB 327 they suggest that: a) Current rate designs create "punitive, discriminatory rates that at the top tier rate exceed PG&E's cost by over 200%, for "normal" power AB 327 Page 10 consumption." b) Families of all incomes who live in hotter, inland are being penalized c) Current rate design results in subsidies for Coastal households that are paid for by Central Valley households. d) Reforms adopted in 2009 (SB 695, Kehoe) allowed limited rate reforms and continued restrictions on the PUC to implement rate design reforms. 2)Suggested amendments . The author may want to consider the following amendments to clarify the intent to address electricity rates rather than both gas and electric, reinforce existing provisions in AB 327 that provide low-income ratepayer protection, and, the author may wish to revise AB 327's principles so that they are identical to the principles in the PUC's March 13, 2013 rate design ruling. On Page 3, beginning at line 34 through line 4 on Page 4: (3)Beginning January 1, 2019,the commission shallmay, subject to the limitation in paragraph (4),establish rates for CARE program participants thatpursuant to this section and Sections 739 and 739.9, subject to both of the following: (A) The requirements of subdivision (b) of Section 382 that the commission ensure that low-income ratepayers are not jeopardized or overburdened by monthly energy expenditures. (B) The requirement that the level of the discount for low-income electricity and gas ratepayers correctly reflects the level of need as determined by the needs assessment conducted pursuant to subdivision (d) of Section 382. Page 6, line 22 through 25: (g) It is the intent of the Legislature that the commission ensure CARE program participantsare afforded the lowest possiblereceive affordable electric and gasratesservice that does not impose an unfair economic burdenand, to the extent possible, are exempt from additional surcharges attributable to the energy crisis of 2000-01 . Beginning on Page 8, line 30: 739.9. (a) In approving changes to the rates and charges to residential customers for electricity usage pursuant to this part, the commission shall determine that the changes are reasonable, including determining that the changes are necessary in order to ensure that the rates and charges paid AB 327 Page 11 by residential customers are fair, equitable, and reflect the costs to serve those customers. (b) In approving any changes to the rates and charges to residential customers for electricity usage pursuant to this part, the commission shallconsiderbe consistent with the following principles:(1) Low income and medical baseline customers should have access to a supply of electricity that is sufficient to ensure basic needs at an affordable cost, including a reasonable implementation schedule for changes in rates to ensure that the implementation of rate changes to residential customers do not unfairly burden low income customers and that sufficient outreach and education is provided to the customers affected by the changes. (2) Rates should be based on marginal cost and cost causation. (3) Rates should encourage conservation and energy efficiency, including reduction of both coincident and noncoincident peak demand. (4) Rates should be understandable to consumers and provide stability, simplicity, and customer choice. (5) Rates should avoid cross-subsidies, unless the cross-subsidies are reasonable, transparent to customers, and support explicit state residential electricity policy goals.(1) Low-income and medical baseline customers should have access to enough electricity to ensure basic needs (such as health and comfort) are met at an affordable cost; (2) Rates should be based on marginal cost; (3) Rates should be based on cost-causation principles; (4) Rates should encourage conservation and energy efficiency; (5) Rates should encourage reduction of both coincident and non-coincident peak demand; (6) Rates should be stable and understandable and provide customer choice; (7) Rates should generally avoid cross-subsidies, unless the cross-subsidies appropriately support explicit state policy goals; (8) Incentives should be explicit and transparent; (9) Rates should encourage economically efficient decisionmaking; (10) Transitions to new rate structures should emphasize customer education and outreach that enhances customer understanding and acceptance of new rates, and minimizes and appropriately considers the bill impacts associated with such transitions. AB 327 Page 12 1)Related Legislation. AB 1755 (Perea, 2012) authorized the PUC to approved fixed per-customer charges for residential customers beyond the statutory caps on rate increases for tier 1 and 2 customers to cover the fixed costs of electric service if commission finds the charges are just and reasonable and will provide rate relief to upper tier customers. SB 743 (Steinberg and Padilla, 2013) would eliminate CalWorks as the index for CARE rate increases and in its place tie increases to the annual percentage change in the Consumer Price Index with a maximum cap of 4% per year. Status: Passed from Senate Energy Utilities & Communications Committee. REGISTERED SUPPORT / OPPOSITION : Support 100 Black Men of Long Beach 1st Guaranty Mortgage and Realty Age Well Senior Services American Family Housing Antelope Valley Board of Trade Assured Coin and Loan Barstow Community Hospital Auxiliary Barstow Unified School District Blong Xiong, Councilmember, City of Fresno Border Transportation Council Building Industry Association of Fresno/Madera Counties Building Industry Association of the Greater Valley Business Resource Group C&C Development (Affordable Housing) California Asian Pacific Chamber of Commerce California Black Chamber of Commerce California League of Food Processors California Manufacturers & Technology Association (CMTA) California Retailers Association (CRA) CAPC, Inc. Cement Masons (Local 500) Central Valley Opportunity Center, Inc. City Fabric (Business) City of Coalinga City of Livingston AB 327 Page 13 City of Mendota City of Reedley Community Advocates for People with Choices (CAPC), Inc. Community Women of San Gabriel Valley Congress of California Seniors Cortez Communications, LLC. Costa Mesa Chamber of Commerce County of Tulare Board of Supervisors CTI Environmental, Inc. Cyber Risk Insurance Brokers Delhi Center Donald Garcia, Former Mayor and Councilmember, City of Aliso Viejo Ed Gallo, Council Member, City of Escondido El Concilio Ernest Ewin, Council Member, City of La Mesa FOCUSCOM, Inc. Fresno Barrios Unidos Fresno Metro Black Chamber of Commerce Gardena Valley Chamber of Commerce Gary Kendrick, City Council, City of El Cajon Gi and Associates GRCN Connecting Communities, Inc. (Child and Youth Services) H.O.P.E. of the Mountain Empire Harvey L. Hall, Mayor, City of Bakersfield Hawthorne Chamber of Commerce Helpline Youth Counseling (HYC) Hilltop Group, Inc. Hispanic Outreach Task Force Independent Energy Producers Association (IEP) Individual Letters- 9 International Brotherhood of Electrical Workers (IBEW Local 465) International Brotherhood of Electrical Workers (IBEW Local 47) International Brotherhood of Electrical Workers (IBEW Local 569) James Dahl, Former Mayor and Councilmember, City of San Clemente Jess E. Van Deventer, Sweetwater Authority Board John F. Simon, Lumber Estimating Service Kern County Taxpayers Association Ledford Enterprises (LE) Leticia Perez, Supervisor, Kern County LifeHOUSE Management Services Mark Muir, Council Member, City of Encinitas Martinez Supply Mary England, Former Councilmember, City of Lemon Grove Meals on Wheels West (Los Angeles) AB 327 Page 14 Mercado Business Association Mike Murphy, Council Member, City of Merced Mountain Health & Community Services Oliver L. Baines, Council Member, City of Fresno Orange County Hispanic Chamber of Commerce Orange Senior Center Pacific Gas and Electric Company (PG&E) Pringle Insurance Services, Inc. Saddleback College Foundation Sam Abed, Mayor, City of Escondido San Diego Gas & Electric Company (SDG&E) San Diego Habitat for Humanity San Diego Regional Minority Supplier Development Council San Joaquin Valley Clean Energy Organization Santa Ana College Foundation Save our Rural Community (S.O.R.E.) SELAC Educational Foundation Senior Advocates of the Desert Sepulveda Group Enterprises, Inc. Shirley Horton, Former Assemblymember 78th AD, and Mayor of Chula Vista Sierra Dawn Estates (Mobile Home Park) Southern California Edison (SCE) Stalwart Communications The Center Long Beach The San Fernando Valley Green Team Thomas W. Amend Drywall Contractor Trilogy PR Group United Association of Food Trucks of San Diego United Association of Plumbers and Steamfitters, Local Union 230 United Cambodian Community (UCC) United Communities Network Whittier Uptown Association Opposition AARP California Division of Ratepayer Advocates (DRA) The Greenlining Institute The Utility Reform Network (TURN) Analysis Prepared by : Susan Kateley / U. & C. / (916) 319-2083 ` AB 327 Page 15