BILL ANALYSIS � 1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
AB 1755 - Perea Hearing Date:
June 11, 2012 A
As Amended: June 6, 2012 FISCAL B
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DESCRIPTION
Current law requires the California Public Utilities Commission
(CPUC) to establish the California Alternate Rates for Energy
(CARE) program to discount rates for low-income gas and electric
customers defined as those with incomes no greater than 200
percent of the federal poverty level and permit no more than
three rate tiers.
Current law caps annual rate increases for CARE customers to the
increase in benefits under CalWorks with a hard cap of three
percent through 2018. Beginning in 2019 CARE rates would be
capped at a rate no higher than 80 percent of the corresponding
rates charged for non-CARE residential customers. The cap is
inclusive of increased fixed and volumetric charges.
Current law caps rate increases on the first two tiers of
electric and gas rates for non-CARE residential customers to the
annual percentage change in the Consumer Price Index plus one
percent with a restricted range of no less than three percent
and no more than five percent through 2018. The cap is
inclusive of increased fixed and volumetric charges.
This bill permits the CPUC 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.
BACKGROUND
Residential Electric Rates - Residential electric rates are
generally designed in a four or five-tiered structure based on
the customer's quantity of electricity usage. Within prescribed
usage tiers, the amount of electricity consumed is priced at
increasing per-unit rates. Under current rate structures, energy
charges for residential customers are based on the quantity of
electricity used by a customer, and each successive block of
electricity usage is billed at increased per-unit prices. Each
block is referred to as a tier. Tier 1 is the customer's
"baseline" - the level deemed necessary to supply a significant
portion of the reasonable energy needs of the average
residential customer; Tier 2 applies to usage between the
baseline and 130% of that amount. Baseline levels vary
depending on the climate of the region (e.g. hotter regions have
a higher baseline). This multi-tiered conservation pricing
structure grew out of the energy crisis. Prior to that time, a
two-tier pricing structure was common.
Rate Freezes - During the energy crisis in 2001, the Legislature
passed ABx1 1 (Keeley, 2001) to protect California ratepayers
from rampant price fluctuations due to a dysfunctional wholesale
electricity market. ABx1 1 authorized the Department of Water
Resources (DWR) to issue revenue bonds to purchase power at such
prices the department deemed appropriate, on behalf of the
cash-strapped investor-owned utilities (IOUs) which couldn't
keep up with the volatile wholesale prices. Among other
stabilizing efforts, ABx1 1 included a provision that prohibited
the CPUC from increasing rates for usage under 130% of baseline
until DWR bond charges were paid off. Those charges continue.
Because rates in the lowest tiers were frozen, increased costs
such as rising fuel prices, and legislatively mandated and
CPUC-created programs, have been disproportionately borne by
those customers whose electricity usage fell in the upper tiers.
For example, in Pacific Gas & Electric's territory, the 130% of
baseline quantities cost was about $0.11 per kilowatt hour
(kWh), while the top tiers went as high as $0.49 per kWh in
2010.
Similar impacts have been experienced in the territories of
Southern California Edison and San Diego Gas & Electric.
Freeze Lifted - In 2009 SB 695 (Kehoe) was signed into law as an
urgency statute. Among other provisions, the bill removed the
freeze on tier 1 and tier 2 rates and was designed to allow for
gradual rate increases for all tier 1 and tier 2 rates through
2018 at which time the formula for those increases will sunset.
A separate formula was established for CARE customers.
As a consequence, beginning January 1, 2010, the CPUC could
grant increases in rates charged to non-CARE residential
customers for tier 1 and 2 rates by the annual percentage change
in the Consumer Price Index from the prior year plus one
percent, but not less than three percent or more than five
percent per year. Increases in tier 1 and 2 rates for the
residential CARE program were linked to annual cost of living
adjustments for the CalWork's program not to exceed three
percent per year.
The effect of SB 695 was that the IOUs implemented a five
percent increase effective January 1, 2010, in tier 1 and 2
rates (excluding CARE customers) which resulted in a
commensurate decrease in tier 3, 4, and 5 rates pursuant to the
provisions of SB 695. The rate adjustments, overall, were
revenue neutral to the IOUs. The rates for CARE customers have
not increased due to the suspension of COLAs for the CalWork's
program.
California Alternate Rates for Energy (CARE) - The CARE program
was designed to provide a 20 percent discount on monthly gas and
electric bills to income-qualified customers at their primary
residence and is funded through a rate surcharge paid by all
other utility customers. The income cap on CARE eligibility is
up to 200% above Federal Poverty Guidelines, which are updated
annually in June.
However, due to the rate freezes imposed during the energy
crisis, CARE rates have remained frozen for more than ten years
and resulted in assistance to CARE customers far greater than
intended.
PG&E Rate Case - In the spring of 2010 PG&E, as part of its
triennial rate case, applied to the CPUC to establish a fixed
customer charge of $3 for all non-CARE residential customers,
and $2.40 for all CARE customers. Although the CPUC recognized
a growing disparity in rates, they rejected the charge on legal
and policy grounds and characterized it as "the most significant
change in residential electric rate design in the last decade."
Legally the CPUC opined that the statutory caps on rate
increases for tier 1 and 2 residential customers included any
new or increased fixed rate charges. They specifically found
that the commission was "prohibited by law from approving PG&E's
customer charge to the extent the total bill impacts exceed
these statutory limitations on baseline rate increases."
The CPUC also rejected the residential charge on policy grounds
concluding that the "proposed customer charge would produce
unacceptable rate impacts on those customers least able to
afford it. The customer charge also would conflict with price
signals that encourage conservation and utilization of
alternative resources such as solar."
CPUC Rate Deliberations - Unofficially, the CPUC has announced
that it will open rulemaking on policy guidance for rate design
this summer. They will consider how the state's energy policy
goals for 2020 are affected by retail rate design and how rate
design policies can and should be sued to meet our long-term
climate and energy policy goals in an effort to align rates with
policy objectives. One significant element of that discussion
will be fixed charges.
COMMENTS
1. Author's Purpose . The author reports that since the
imposition of rate freezes on tier 1 and 2 customers in
2001, the increased cost of electricity service has shifted
completely to the upper tiers (over 130 percent of
baseline) usage, setting those rates at levels far above
the actual cost of providing service to those customers.
The increase in the cost of service has been a result of
several factors including investment in reliability and
safety, infrastructure replacement, inflation and various
policies such as public purpose programs including
discounts to CARE customers, funding for energy efficiency
and increases in renewable procurement under the Renewable
Portfolio Standard (RPS). The inequities in the rate
structure undermine the sustainability of environmental
programs such as the RPS, greenhouse gas reduction programs
and others.
In addition, Tier 1 and 2 rates are not keeping pace with
the increased costs mentioned above. Without an ability to
keep pace with the increase in costs in the lower tiers,
the upper tier usage is saddled with the additional cost
burden resulting in those rates being even higher than the
costs to serve the customers paying those rates. For
example, the gap between Tier 2 and Tier 3 rates actually
grew after enactment of SB 695 going from 13.0 cents per
kWh to 15.3 cents per kWh currently.
The original tiered rate structure prior to the 2001 AB X1
rate freeze was created to provide incentives for
conservation. As a result of the 2001 AB X1 rate freeze
and limitations on rate changes to the lower tiers of
usage, the conservation message has been lost and upper
tier rates are exorbitantly higher than the marginal costs
of electricity. Customers with usage in the lower tiers of
usage do not receive accurate price signals on the price of
power and thus have minimal incentive to take action to
reduce their usage. In the case of CARE customers, their
average rate has actually gone down compared to the average
rate paid in 1993.
2. Two Fundamental Issues . At the heart of this bill are
two issues. First, what, if anything should be done to
address the impacts of rate freezes in place for tier 1 and
2 customers on upper tier residential customers? It is
undisputed that upper tier customers have borne nearly all
increases for residential customers while tier 1 and 2
customers have been insulated from those increasing costs.
At the same time the original purpose of the CARE program
which was to provide low-income customers with a 20%
reduction in rates has been overridden by the rate freeze
and those customers now receive discounts in service
between 50 and 60% of the cost of service which results in
the full impacts of system costs increases being borne by
non-CARE residential customers and non-residential
customers.
The second issue concerns rate design and whether customers
should pay for the fixed costs of their electric service in
proportion to their use of the grid (volumetric) or whether
the costs of the transmission and distribution system are
fixed costs and should be shared equally among customers
regardless of how much electricity they pull from the grid.
Proponents (IOUs) of fixed charges argue that the use of
volumetric based rates distorts both utility and customer
incentives and over time increases implicit cross-subsidies
across subsets of customers.
In its opposition to this bill, the Natural Resources
Defense Council finds that volumetric billing without fixed
charges allows "customers to retain the ability to control
their bills through energy efficiency and conservation
measures, where fixed charges reduce this capacity." The
Utility Reform Network argues that the impacts of these
fixed charges will be "highly burdensome to the struggling
poor" and ineffective in solving the problem of high
air-conditioning costs for the Central Valley customers."
They further opine that this bill "takes one piecemeal
approach to a broader discussion of rate structure - the
least fair and least effective approach to rate design."
They argue that this measure is premature and the
Legislature should delay action in this area until the CPUC
concludes its review of rate design at which time the
Legislature can consider the issues more comprehensively.
3. Rate Design v Rate Reform . It is important to note this
bill does not affect the overall revenues of the electric
utilities and is therefore an issue of rate design, not
rate reform. Under this bill some customers will pay more
(tier 1 and 2 customers) and some customers will pay less
(tier 3, 4, and 5 customers). At the end of the day
utility revenues will remain constant.
The last time rates were fundamentally redesigned was at
the time of the energy crisis when tiered rates were
instituted for the largest IOUs utilizing as many as 5
tiers. The premise of that design was first to protect low
usage customers from spiraling rates and ensure that those
customers could meet fundamental needs at a reasonable
price (thus the institution of the freeze) and to also
institute a conservation pricing model to discourage high
use (thus increasingly high rates for tier 3, 4, and 5
customers).
4. Everybody Else is Doing It . Over the last several years
several California municipal utilities have instituted flat
charges on residential customers. As an example, the
author reports that "SMUD recently adopted an increase in
their fixed system charge moving from $7.20 per month for
residential customers to $10 with additional $2 per year
increases starting in 2013 until the charge reaches $20 per
month in 2017. SMUD's volumetric rates will decrease over
that same period of time to corresponding amount of revenue
generated by the fixed charge." It is important to note
that municipal utilities were generally unaffected by the
energy crisis and didn't freeze rates. Rate structures for
POUs also typically rely on only 2 or 3 rate tiers.
5. Solar Impacts . The rate design changes proposed by this
bill could have an effect on current and potential rooftop
solar customers. First, current solar customers that rely
on the full retail net energy metering tariff would be
subject to the same flat charge as all other residential
customers. The charge would not however be related to the
impacts of solar. Second, some many solar advocates argue
that high costs in the upper rate tiers encourage the
adoption of rooftop solar and, to the degree that flat
charges relieve the costs on upper tier customers, it would
discourage growth in the rooftop solar market. They have
found a direct correlation between customers in highest
tiers and usage and installation of rooftop solar.
ASSEMBLY VOTES
Assembly Floor (60-7)
Assembly Appropriations Committee (17-0)
Assembly Utilities and Commerce Committee
(9-1)
POSITIONS
Sponsor:
Pacific Gas and Electric
Support:
California Chamber of Commerce
Palm Desert Area Chamber of Commerce
San Diego Gas & Electric Company
Southern California Edison
Oppose:
AARP California
Division of Ratepayer Advocates
Natural Resources Defense Council
Sierra Club of California
The Greenlining Institute
The Utility Reform Network
Kellie Smith
AB 1755 Analysis
Hearing Date: June 11, 2012