BILL ANALYSIS � 1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
SB 1090 - Fuller Hearing Date:
April 1, 2014 S
As Introduced: February 19, 2014 FISCAL B
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DESCRIPTION
Current law requires that all rates for any service or product
charged by an electrical corporation (investor-owned utility or
IOU) be just and reasonable. (Public Utilities Code � 451)
Current law permits IOUs, with approval of the California Public
Utilities Commission (CPUC), to offer residential customers the
option of receiving electric service pursuant to "time-variant
pricing," which includes time-of-use rates (TOU), critical
peak-pricing, and real-time pricing. Beginning in 2018, an IOU
can employ default TOU pricing as long as the customer is
provided with a rate comparison for one year of all billing
options (commonly referred to as shadow-billing) and associated
customer education. Subsequently, the customer must be
guaranteed for one year that the total amount paid for electric
service will not exceed the amount that would have been due
under the customer's previous rate schedule (commonly referred
to as bill protection). (Public Utilities Code � 745)
Current law requires the CPUC to ensure that any TOU rate
schedule does not cause unreasonable hardship for senior
citizens or economically vulnerable customers in hot climate
zones. (Public Utilities Code � 745)
This bill restricts the CPUC from requiring or authorizing TOU
electric rates for residential customers unless specific
findings are made and reported to the Legislature 12 months
prior to requiring or authorizing an IOU to initiate default TOU
rates.
BACKGROUND
Residential Rate Re-Design - In 2012 the CPUC initiated a
rulemaking to examine residential electric rate design,
including the tier structure in effect for residential customers
(also known as volumetric pricing), the state of time variant
and dynamic pricing, potential pathways from tiers to time
variant and dynamic pricing, and preferable residential rate
design to be implemented when statutory restrictions were
lifted. The CPUC also developed ten rate design principles to
guide its efforts:
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
decision-making;
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.<1>
Subsequently, after more than a decade of statutory restrictions
on residential rates including a rate freeze on tiers 1 and 2,
the Legislature repealed those limits in 2013 and largely
returned statutory ratemaking authority to the CPUC (AB 327
[Perea]). The CPUC quickly responded and released a staff
proposal for residential rate reform with both a recommended
residential rate structure and a tool for evaluating proposed
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<1> R.12-01-013
residential rate designs which has formed the foundation of its
rulemaking to reform residential rates.<2> The CPUC goal is to
reach a decision this year implementing wholesale rate redesigns
for the large IOUs, likely based on TOU rates, to take effect
January 1, 2018, with a phase-in commencing in 2015.
Time-of-Use Rates - With time-based rates, utilities charge
different prices based on the time of day electricity is used.
The different charges should reflect the ups and downs of
wholesale power prices due to supply and demand. The generation
of electricity is typically most expensive for the IOUs during
times of peak demand. In hot climates such as the San Joaquin,
Sacramento, and Imperial valleys, during late summer afternoons
and early evening hours, heavy air-conditioning use causes
spikes in electricity use and therefore peak demand. With
time-based pricing customers are charged higher rates during the
hours of peak demand but lower rates at other times. This
creates financial incentives for consumers to shift energy use
to the less expensive off-peak hours, which relieves the strain
on electricity supplies. However, customers in the hot climates
cannot shift air conditioning use to another time of the day
like they can their laundry.
Peak demand dictates the size of generators, transmission lines,
transformers and circuit breakers for utilities even if that
amount lasts just a few hours a day. Power generation which is
able to quickly ramp-up for peak demand often uses more
expensive fuels, is less efficient and has higher marginal
carbon emissions. Most natural gas plants in California's fleet
are older and lack the fast-start technology, consequently they
must idle until needed to meet peak demand and in that stand-by
mode continue to produce emissions.
TOU rates are advocated by many environmental groups who argue
that the rates help rein in peak demand and avoid building new
power plants. Some electrical utilities (e.g. SMUD) similarly
advocate for TOU because the rate reflects the principle of
cost-causation and requires customers to make decisions about
energy use when it has the highest cost and encourages customers
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<2> Staff Proposal for Residential Rate Reform in Compliance
with R.12-06-013 and Assembly Bill 327, Energy Division,
California Public Utilities Commission, January 3, 2014, at
http://docs.cpuc.ca.gov/PublishedDocs/Efile/G000/M084/K817/848175
77.PDF
to shift significant amounts of energy use away from the peak
hours when power is most costly.
COMMENTS
1. Author's Purpose . While current law limits the
imposition of default TOU rates through 2018 it does not
provide any required analysis of the potential differential
impacts of TOU pricing on the hot climates of the state,
nor does it set any conditions on the CPUC's decision to
make this dramatic change in rate structure. This bill
seeks to make sure that the full extent of impacts of any
new TOU rate structure are analyzed and taken into account
at the CPUC when they make any decisions about
implementation of TOU pricing.
2. Real Impacts May Be Masked . The CPUC seems to be
squarely on track to implement default TOU rates. However
the true impacts of TOU rates, compared to current
volumetric rates, will likely be masked on implementation
because it will coincide with the elimination of any
constraints on rates for tier 1 and 2 customers. As a
consequence utility costs will be shared across more
customers. Some will argue that those customers in hot
climates will have rate relief with TOU rates, but that
impact is relative to what they paid under volumetric rates
and ignores the separate issue raised by this bill - what
is the impact of TOU rates on customers in hot climates
regardless of the impact of other rate changes. It is
important to note that the basis for the CPUC's redesign of
rates is that "rates should generally avoid
cross-subsidies, unless the cross-subsidies appropriately
support explicit state policy goals." This bill would
constitute imposition of state policy that the needs of
ratepayers in hot climates at least be explicitly analyzed.
3. Proceedings to Date . Although some stakeholders may
have commented to the CPUC about the impacts of TOU on
customers in hotter climates, very little discussion of
this concern has been included in the CPUC's staff report
or scoping memo for the rulemaking. Although some
represent that an improvement in costs for those in hot
climates is implicit in the proposed change in residential
rate design from volumetric rates to TOU rates, the
question is not explicitly discussed or analyzed in the
staff report. When the CPUC initiates a rulemaking the
assigned commissioner or administrative law judge issues a
scoping memo which typically outlines the schedule for the
proceeding and poses a series of policy questions to the
parties for comment. The scoping memo for TOU rates and
implementation of AB 327 does not address the issue of hot
climates.
4. Opt-Out Enough ? Committee staff discussed the rate
design proceeding with parties central to the proceeding to
discuss how the issue of hot climates was being treated in
the proceeding and this bill. The general response was
that bill is not necessary because if a customer thinks
that the impacts of TOU rates will be adverse, then they
can opt-out of the rate structure and subscribe to the
minimum two-tier volumetric rate that the utilities are
still required to make available under AB 327. It is not
clear from the proceedings that this would be a beneficial
choice for a customer; it could be worse. This choice is
referenced in the staff proposal as well which states
"customer-friendly opt-out provisions and a well-designed
and implemented education campaign could address these
concerns." Thus far reliance on opt-out as a solution to
TOU rates in hot climates is not well supported by the
record in the rulemaking.
5. Scope of Bill beyond Scope of Problem . During the
deliberations on AB 327 last year, provisions specifying
principles of rate design to be followed by the CPUC were
specifically rejected. The only policy limits expressed
for TOU rates were that the rates don't cause hardship to
seniors or economically vulnerable customers. This bill
requires the CPUC to consider issues far beyond the impacts
of a TOU rate structure for ratepayers in hot climates
which the author reports is her intent. The bill
specifically directs the commission to consider the balance
of revenue collections between different territories (the
author intended regions or climate zones), the potential
consequences of excess electricity generation on the grid
(which is speculative and hasn't yet occurred) and the
impacts on renewable integration costs (which have not been
fully analyzed by the CPUC and are therefore not known).
There are many issues of concern whenever a rate structure
is modified. The author has included just a few but the
list is not exhaustive and may inappropriately emphasize
those issues as a priority. The author and committee may
wish to consider amending the bill to ensure that it
squarely focuses on the issue of concern to the author -
the impacts of TOU on ratepayers in hot climates - and
strike the additional findings at page 3, lines 34-36, and
page 4, lines 1 through 6.
6. Report to the Legislature . This bill also requires that
the CPUC report its findings to the Legislature 12 months
prior to requiring or authorizing TOU rates. Under current
law customers must get one year of shadow billing and one
year of bill protection, for a total of two years, before a
TOU rate tariff could take effect. This reporting
requirement may be an unnecessary delay in implementation.
7. Ratepayer Impact . This measure would not increase
revenue to the IOUs. It could, however, result in
cost-shifting between customers within the residential
ratepayer class. The cost shifts are not necessarily a
subsidy but the work of balancing the policy goals of
ratemaking.
POSITIONS
Sponsor:
The Utility Reform Network
Support:
The Greenlining Institute
Oppose:
None on file
Kellie Smith
SB 1090 Analysis
Hearing Date: April 1, 2014