BILL ANALYSIS Ó AB 327 Page 1 ASSEMBLY THIRD READING AB 327 (Perea) As Amended April 23, 2013 Majority vote UTILITIES & COMMERCE 15-0 APPROPRIATIONS 17-0 ----------------------------------------------------------------- |Ayes:|Bradford, Patterson, |Ayes:|Gatto, Harkey, Bigelow, | | |Bonilla, Buchanan, | |Bocanegra, Bradford, Ian | | |Chávez, Fong, | |Calderon, Campos, | | |Beth Gaines, Garcia, | |Donnelly, Eggman, Gomez, | | |Gorell, | |Hall, Rendon, Linder, | | |Roger Hernández, Jones, | |Pan, Quirk, Wagner, Weber | | |Quirk, Rendon, Skinner, | | | | |Williams | | | | | | | | ----------------------------------------------------------------- SUMMARY : Modifies statutory requirements specific to residential rate design applicable to the customers of Investor Owned Utilities (IOUs). Specifically, this bill : 1)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. 2)Requires PUC to consider specified principles in approving any changes to electric service rates. 3)Requires 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. 4)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. FISCAL EFFECT : According to the Assembly Appropriations AB 327 Page 2 Committee: 1)Unknown, potentially significant rate increase or decreases among IOU customers. 2)Minor, absorbable costs to PUC to establish new rates. COMMENTS : 1)Author's Statement . "The energy crisis is long over, but laws meant to protect residential rate users are now preventing 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 2000-01. During the energy crisis, AB 1 X1 (Keeley), Chapter 4, Statutes of 2001, protected ratepayers from rampant price fluctuations due to a dysfunctional wholesale electricity market. AB 1 X1 authorized the Department of Water Resources (DWR) to issue revenue bonds to purchase power on behalf of the cash-strapped IOUs who could not keep up with the volatile wholesale prices. Among other stabilizing efforts, AB1 X1 prohibited 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), Chapter 337, Statutes of 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 AB 327 Page 3 customers. SB 743 (Steinberg and Padilla) of 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, this bill removes the prescriptive statutes that restrict rate design, establishes principles of rate design for PUC to follow, and directs the PUC to develop the rates. Prior to the energy crisis, this is how PUC designed and implemented IOU rate structures. 3)PUC Residential Rate Design Proceeding Underway . On June 28, 2012, 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 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. In 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 AB 327 Page 4 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 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 and Electric (SDG&E), and Pacific Gas and Electric (PG&E). Yet some ratepayers 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. 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. This bill 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 Page 5 This bill 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." This bill places responsibility for rate design outcomes, consistent with specified principles, on PUC. 5)Rate Reform Impacts on Low Income households . This bill does not alter existing residential rates. Rather, this bill provides 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 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. 6)AB 327 specifies Rate Design Principles . This bill 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 PUC's March 19, 2013, ruling in its rate design proceeding, PUC adopted rate design principles based on PUC's consideration of stakeholder suggestions and comments. The PUC's principles are identical to the principles in this bill. These principals include explicit protections for low income and medical baseline customers and provides for transitions to new rate structures, if adopted, to appropriately minimize bill impacts. 7)No Action is Action . For residential customers, rate increases must be disproportionately placed on the price paid for electricity by residential customers whose usage exceeds their Tier 2 allocation. SCE historical rate data shows the disproportionate 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. AB 327 Page 6 Until the statute restricting rate design is modified, this will continue. 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. 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. For SCE CARE customers, Tier 1 and 2 rates have decreased 16% and 11%, respectively. Those customers who are not CARE customers, or have usage within 130% of baseline, or who do not have self-generation must then pay PUC approved utility expenses. In addition to CARE, the Legislature has authorized several ratepayer funded programs to assist low income households, procure energy efficiency, and develop new technologies and business models. These include the Self Generation Incentive Program (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, 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). Analysis Prepared by : Susan Kateley / U. & C. / (916) 319-2083 FN: 0000652 AB 327 Page 7