BILL ANALYSIS                                                                                                                                                                                                    Ó

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          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  

          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  


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          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  

           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  


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            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  
             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  


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               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. 


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            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  


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            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)  

                                                                FN: 0000652


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