BILL ANALYSIS AB 1890 Page 1 PROPOSED CONFERENCE REPORT NO. 1 - August 28, 1996 AB 1890 (Brulte, Conroy, Martinez, Peace, Leonard, Sher) As Amended June 16, 1996 2/3 vote. Urgency ASSEMBLY: 73-0 (June 27, 1996) SENATE: 40-0 (June 24, 1996) ASSEMBLY CONFERENCE: 3-0 SENATE CONFERENCE: 3-0 Ayes: Martinez, Conroy, Brulte Ayes: Peace, Leonard, Sher Original Committee Reference: U. & C. SUMMARY: Restructures the electrical services industry in California in order to transition to competitive markets by December 31, 2001, to lower the cost of electricity, retain and attract jobs, and to reduce power outages. Maintains funding for benefits to many specified classes of providers and consumers of electricity. Reallocates existing funds within existing PUC ordered utility expenditures and PUC approved rates. Finances rate reductions through $5 to $10 billion in Rate Reduction Bonds. Does not expose taxpayers to "the full faith and credit" of the state because the bonds sold will be revenue, as opposed to general obligation bonds. Freezes rates from June 10, 1996 through December 31, 1996, reduces rates by 10 percent for residential and small commercial ratepayers by January 1, 1998, requires the Public Utilities Commission, PUC, to cut rates an additional 10 percent by June 30, 2002, cumulating in $3.2 billion in rate relief for residential and small commercial customers. Provides a "firewall" insulating residential customers from rate shifts from other classes of customers. Specifies retraining, retirement and other benefits for displaced utility workers and protects the investments of the shareholders of investor-owned utilities and the ratepayers of municipal owned utilities. Phases out and/or buys down existing subsidies for and seeks to move above market energy sources, such as renewables and Qualifying Facilities, QFs, toward a competitive market. Provides specified benefits and exemptions for particular irrigation districts, Bay Area Rapid Transit, BART, specified UC projects, the state water project, producers of above market energy from wind, solar, fuel cells, bio-mass, cogeneration and other sources, public benefit programs such as research and development, energy efficiency programs, and low income energy assistance. Specifies systems reliability standards to avoid power failures. Provides direct customer access to electricity through competitive generators and a competitive Power Exchange. Under a politically appointed Oversight Board, an Independent Systems Operator, ISO, AB 1890 Page 2 maintains the reliability and unbiased scheduling of electricity transmission over a statewide transmission grid composed of the transmission assets of investor-owned utilities and municipal utilities. Out of existing PUC ordered utility expenditures and approved rates, this bill designates certain nonbypassable Competitive Transition Charges, CTCs, on all customer bills. Segregated CTC funds are to be used by utilities to recover and/or reduce potential losses of having to sell, divest, or buy down certain uneconomic costs, "stranded" assets, such as above market contracts for power plants, fuel, or alternative sources of energy. Specifically, the conference committee amendments detail the transition from the current regulated monopolies to a competitive market by specifying recovery of transition costs, organization of the new market, funding of current public purpose programs and creating new consumer protections. This bill details the RECOVERY OF TRANSITION COSTS: 1) Defines "transition costs" as the "stranded" costs of utility power plants and power purchase contracts that cannot be recovered in a competitive generation market. 2) Provides for the recovery of these costs both because they are costs imposed by regulations and they are costs currently imposed and included in utility rates. 3) Accelerates the recovery of transition costs out of a nonbypassable charge, CTC, which is levied on all consumers according to their use of electricity, except that no customer shall pay higher rates than they paid on June 10, 1996, and that investor-owned utilities have through December 31, 2001, to complete the accelerated recovery of most of their uneconomic costs. 4) Authorizes publicly-owned utilities also to accelerate recovery of their uneconomic costs if they make their transmission available to statewide grid. 5) "Nonbypassable" assumes that everyone should share in paying for these stranded costs, with few exemptions in the statute. 6) Exemptions from CTCs are provided in a number of circumstances: an exemption for agricultural and state water project pumping; allowing certain Irrigation Districts to become electric utilities under megawatt and money limitations; allows the Merced district to sell to new retail customers from a substation constructed prior to the 12/20/96 PUC decision; extends CTCs for Qualified Facilities (QF's) beyond the December 31, 2001; deadline for collecting most CTCs; extended CTCs to pay for transitional employee costs; exempts planned "pipeline" co-generation projects; allows PUC to decide on other proposed AB 1890 Page 3 exemptions, micro-generation. This bill provides safeguards for RESIDENTIAL AND SMALL COMMERCIAL customers: 1) Immediately reduces rates for residential and small commercial consumers of no less than 10% from January 1, 1998, until March 31, 2002. 2) Funds rate reductions by monetizing a portion of the CTC through the California Infrastructure and Development Bank of Rate Reduction Bonds. 3) Provides that residential and small commercial customers receive a cumulative rate reduction of no less than 20% by April 1, 2002. 4) Establishes a "firewall" protecting residential and small business consumers from paying for any large business exemptions to the CTC. 5) Reduces CTC costs by as much as $500 million; provides capital for discounted buy-down of stranded long-term costs and funnels the savings of $600 million to residential and small commercial customers; retains interest rate float of $120 million; and provides the possibility of a savings of $875 million in interest and hoped tax-exemptions. This bill protects DISPLACED UTILITY EMPLOYEES by allowing reasonable employee costs for severance, retraining, early retirement, and outplacement. This bill RESTRUCTURES THE EXISTING MONOPOLY MARKET: 1) Accelerates the recovery of transition costs to transition sooner toward a competitive market structure, free of monopoly power with open market prices. 2) Provides that customers may choose among competing providers of electricity. 3) Establishes two new independent public benefit, non-profit market institutions, an Independent System Operator, ISO, and a Power Exchange, PX. 4) Requires the ISO to control the state-wide transmission grid and ensure efficient use and reliable operation of the transmission system. Allows municipals to join the ISO when equitably compensated for the use of their transmission lines as decided at the Federal Energy Regulatory Commission, FERC. 5) Requires the PX to provide an efficient, competitive, non-discriminatory electric energy auction and to match its auction prices to private direct access contracts for electricity. AB 1890 Page 4 6) Creates a five-member Oversight Board over the ISO and the PX, of three gubernatorial appointees subject to Senate confirmation, a non-voting member of the Senate appointed by the Senate Rules Committee, and a non-voting member of the Assembly appointed by the Speaker of the Assembly. 7) Provides the Oversight Board the authority to oversee the ISO and PX and appoint their governing Boards representative of California electricity users and providers. 8) Requires California's publicly-owned electric utilities and investor-owned electric utilities to commit control of their transmission facilities to the ISO and to advocate to FERC an equitable return on capital investment. 9) Authorizes direct transactions between competing electricity suppliers and electricity customers no later than January 1, 1998, provided that transactions require the payment of CTCs and an equitable PUC developed phase-in schedule. 10) Allows any person to aggregate individual customers to make direct sales to them, but provides that the incumbent supplier remain until a customer initiates a change to a new supplier. This bill takes steps to improve SYSTEMS RELIABILITY to prevent major power failures. 1) Directs the ISO to seek, and the PUC to support, authorization by FERC for the ISO to secure the rources to maintain reliability. 2) Requires both the ISO and the PUC to adopt standards for maintenance of the transmission facilities reliability. 3) Requires, in the event of a power failure that affects more than 10 percent of a service area, that the ISO conduct a review of the outage and consider levying sanctions. 4) Requires the ISO in consultation with the California Energy Commission (CEC), the PUC and Western states, to conduct a study of the interconnected transmission and report to the Legislature, recommending improvements to system reliability. 5) Expresses Legislative intent to enter into a compact with Western Region states to develop enforceable standards of reliability. This bill provides for the CONTINUATION OF PUBLIC PURPOSE PROGRAMS: 1) Preserves programs such as energy efficiency and conservation, in-state renewable energy resources, development and low income energy assistance. 2) Requires the PUC to administer energy efficiency and AB 1890 Page 5 conservation and public goods RD&D. 3) Requires the CEC to recommend market-based mechanisms for renewable energy and administers part of RD&D funds. 4) Allows publicly-owned utilities to retain their authority over these programs. 5) Unbundles, details the separate charges for continued funding of these programs on consumer bills. 6) Continues subsidies for renewable energy producers (solar, wind, biomass, geothermal, except small hydro) which they received in a regulated market, but encourages buy-outs, buy-downs, and movement toward market prices. 7) Requires the CEC to study market mechanisms and to recommends allocations of funds to renewable resources projects to encourage renewables to go close to market prices. 8) Sunsets all programs, other than low-income programs, on December 31, 2001. The bill creates NEW FORMS OF CONSUMER PROTECTION: 1) Requires that electricity consumers be provided with information to compare electric services. 2) Requires registration, not licensing, of sellers, marketers and aggregators to residential and small commercial customers. 3) Defines information provided to consumers, provides for the investigation of complaints, creates "anti-slammning", "cooling off" protections, and private attorney general entitlements. 4) Requires aggregators to use third party verification when signing up a customer to a new electric supplier which is the anti-slamming language used for telephone sales. 5) Assigns consumer protection to the PUC and sunsets these provisions on December 31, 2001. The Senate amendments were inconsequential. The Conference Committee product reflects the work of both houses in refining the Legislature's necessary role in guiding the PUC and the FERC in restructuring the electrical services industry. FISCAL EFFECT: Unknown EXISTING LAW vests the PUC with regulatory authority over public utilities. AS PASSED BY THE ASSEMBLY, this bill required the PUC's decision to restructure the electrical services industry, and the orders implementing that decision, comply with specific criteria, such AB 1890 Page 6 as: 1) establishing a definite period for the transition to a competitive market; and 2) establishing a methodology for CTC determination and recovery. BACKGROUND: Electricity is a $23 billion industry in California critical to the productivity, jobs and wealth of all Californians. All are threatened by some of the highest rates in the nation. The Congress began the deregulation process in 1992, the PUC ordered it on December 20, 1995, an industry-utility coalition proposed improvements to PUC actions, and the FERC recently issued Order 888 to accelerate the process. Over the last several years the California Manufacturers Association and other large energy consumers have conducted an education program around the Capitol attempting to inform the Legislature about the high cost of electricity as a major negative to California businesses. In recent weeks a broad coalition of stakeholders presented detailed proposals to the California Legislature. This conference report is a result of all these prior efforts. Buying out the "stranded" uneconomic assets of IOUs and Munis has been subject to much controversy. The utilities claim that without restructuring, these costs would be $36 billion. Under the PUC decision they would be $34 billion with $0.9 billion distributed to residential and small commercial and $1.1 billion to large commercial and industrial. Under this bill the distribution would be $29 billion, $3.2 billion, and $3.8 billion. ARGUMENTS IN SUPPORT: The Conference Committee has passed an historic restructuring of the Electrical Industry in California with major benefits to almost all energy producers and consumers. Without a rate freeze and phased-in rate reductions, consumers would be paying off those "stranded" costs for upwards of twenty years, instead of ten. This bill uses funds in existing PUC approved utility expenditures and rates for electricity; guarantees an immediate 10 percent rate reduction to residents and small business and guarantees a second rate reduction of 10 percent in five years, a total of 20 percent reduction in six years; provides an absolute rate cap during the transition period through December 31, 2001, when no electric rates will be increased; creates a market in which industrial users will receive unknown, but comparable cuts in their rates for electricity; protects the investments of shareholders, including institutional investors like pension funds, in the state's three investor-owned utilities; seeks to protect California jobs by giving a clear signal to Wall Street that our investor-owned utilities will remain viable entities, and thereby by discouraging hostile out-of-state take-over attempts; protects workers from displacements in a competitive market; protects consumers from "slamming" and other marketplace fraud; seeks the competitive commercialization of California produced alternative energy sources such as bio-mass, geothermal, wind, and solar; finances AB 1890 Page 7 the retraining or early retirement of displaced utility workers; and provides a competitive environment to lower energy costs to California industries to allow them to shop for the most competitive supplies of energy after a short transition period. The bill is widely supported by the utilities (IOU and Muni), large energy consumers, manufacturers, retailers, agriculture, independent energy producers, labor, and environmental groups. No organized group has expressed opposition. ARGUMENTS IN OPPOSITION: None Analysis prepared by: Roger Canfield / auc / (916) 445-4246 FN 029630