BILL ANALYSIS                                                                                                                                                                                                    




               CONFERENCE REPORT COMMITTEE ANALYSIS
                                                              
                                                        .
Bill No:   AB 1890
Author:    Brulte, Conroy, Kuykendall, & Martinez

(Principal Assembly Coauthors:  Conroy, Kuykendall, &  
Martinez)
(Principal Senate Coauthors:  Leonard, Peace & Sher)
(Assembly Coauthors: Ackerman, Alby, Alpert, Baca, Baldwin,  
Battin, Baugh, Boland, Brown, Bustamante, Cunneen, Davis,  
Ducheny, Escutia, Frusetta, Gallegos, Goldsmith, Harvey,  
Hauser, Hawkins, House, Kaloogian, Katz, Knowles, Machado,  
Margett, Mazzoni, McPherson, Miller, Morrissey, Morrow,  
Kevin Murray, Willard Murray, Napolitano, Olberg,  
Poochigian, Pringle, Rainey, Richter, Rogan, Takasugi, and  
Woods)
(Senate Coauthors:  Alquist, Ayala, Calderon, Costa,  
Craven, Dills, Haynes, Hughes, Johannessen, Johnston,  
Kelly, Killea, Knowles, Kopp, Leslie, Maddy, Marks,  
Monteith, Petris, Polanco, Rosenthal, Russell & Solis)

RN:        9628401
Report date:August 27, 1996
                                                              
                                                        .

 SUBJECT:   Electric Industry Restructuring

Were the Conference amendments heard in committee?   Yes.
If yes, were they defeated?   No.

 SUMMARY:  This bill provides the legislative foundation for  
transforming the regulatory framework of California's  
electric industry.

Through this bill, the Legislature wishes to ensure that  
California's transition to a more competitive electricity  
market structure allows its citizens and businesses to  
achieve the economic benefits of industry restructuring at  
the earliest possible date, creates a new market structure  
that provides competitive, low cost and reliable electric  
service, provides assurances that electricity consumers in  
the new market will have sufficient information and  
protection, and preserves California's commitment to  
developing diverse, environmentally sensitive electricity  
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resources.

See attached analysis for details.

By:    Senate Committee on Energy, Utilities &  
Communications
     John Rozsa




































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SENATE RULES COMMITTEE                           AB 1890
Office of Senate Floor Analyses
1020 N Street, Suite 524
(916) 445-6614         Fax: (916) 327-4478
                                                              
                                                          .

                    CONFERENCE COMPLETED
                                                              
                                                          .

Bill No:  AB 1890
Author:   Brulte (R), et al
Amended:  Conference Report No. 1, 8/27/96
Vote:     21
                                                              
                                                             
  .

 SENATE ENERGY, U. & C. COMMITTEE:   7-0, 6/11/96
AYES:  Alquist, Hughes, Kelley, Leonard, Mountjoy,  
  Rosenthal, Russell, Peace
NOT VOTING:  Hayden

 SENATE APPROPRIATIONS COMMITTEE:   Senate Rule 28.8

 SENATE FLOOR:  40-0, 6/24/96
AYES:  Alquist, Ayala, Beverly, Boatwright, Calderon,  
  Costa, Craven, Dills, Greene, Hayden, Haynes, Hughes,  
  Hurtt, Johannessen, Johnson, Johnston, Kelley, Killea,  
  Kopp, Leonard, Leslie, Lewis, Lockyer, Maddy, Marks,  
  Mello, Monteith, Mountjoy, O'Connell, Peace, Petris,  
  Polanco, Rogers, Rosenthal, Russell, Sher, Solis,  
  Thompson, Watson, Wright

 CONFERENCE COMMITTEE VOTE:  6-0, 8/27/97
AYES:    Conroy, Brulte, Martinez , Peace, Sher, and  
  Leonard

 ASSEMBLY FLOOR:  73-0, 7/24/95 (Passed on Consent)
                                                              
                                                          .

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SUBJECT:    Public utilities:  restructuring of the  
electric industry

 SOURCE:     Author
                                                              
                                                          .

DIGEST:    This bill provides the legislative foundation  
for transforming the regulatory framework of California's  
electric industry.

 Conference Committee Amendments delete the legislative  
intent language and insert all provisions providing for the  
restructuring of the electric industry.

 ANALYSIS:    The restructuring of the California  
electricity industry has been driven by changes in Federal  
Law intended to increase competition in the provision of  
electricity. Through this bill, the Legislature wishes to  
ensure that California's transition to a more competitive  
electricity market structure allows its citizens and  
businesses to achieve the economic benefits of industry  
restructuring at the earliest possible date, creates a new  
market structure that provides competitive, low cost and  
reliable electric service, provides assurances that  
electricity consumers in the new market will have  
sufficient information and protection, and preserves  
California's commitment to developing diverse,  
environmentally sensitive electricity resources.

This bill provides the legislative foundation for  
transforming the regulatory framework of California's  
electric industry. Under the current framework, electric  
energy is sold to retail customers principally by regulated  
utilities with exclusive service monopolies. This framework  
is partially responsible for California's electricity rates  
being some 50% higher than the national average.  This bill  
would help create a new electricity market structure,  
ending the utility monopoly on generation and opening the  
generation market to competition, so that retail customers  
could choose among alternative electric energy suppliers.  
The transmission and distribution of electric energy would  
continue to be regulated monopoly services.
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The key issues in the transition from the current  
regulatory framework to a competitive market structure are:  
 (1) how to handle the recovery of transition costs; (2)  
how the new market structure should be organized; (3) how  
system reliability should be ensured, (4) how the funding  
of current public purpose programs should be continued, and  
(5) how consumers should be protected in the new  
electricity market.

 Transition Costs:
 
Transition costs, also known as stranded costs, consist  
primarily of continuing obligations for past utility power  
plant investments and power purchase contracts that will  
not be recovered in a competitive generation market.  The  
bill finds that these costs should be recovered because  
utilities assumed the original obligations under the  
previous regulatory structure in which they had the  
exclusive obligation to provide electric service to all  
consumers in their territories.  These costs are currently  
included in utility rates.

The bill provides that such transition costs shall be  
subjected to accelerated recovery through a nonbypassable  
charge, called the Competition Transition Charge (CTC),  
levied on all consumers in proportion to the amount of  
electricity they use, subject to two broad restrictions.   
The first restriction is that no customer shall pay a  
higher rate for electricity than they paid on June 10,  
1996.  The second restriction is that investor-owned  
utilities have through December 31, 2001 to complete the  
accelerated recovery of all but a few of their uneconomic  
costs.  Publicly-owned utilities are also authorized to  
accelerate recovery of their uneconomic costs within a  
framework and schedule that comports with their unique  
governance and fiscal circumstances.

To further safeguard the interests of the residential and  
small commercial customers of investor-owned utilities,  
This bill does the following:

1.Provides for immediate rate savings for residential and  
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  small commercial consumers by mandating a no less than  
  10% rate reduction beginning January 1, 1998 and lasting  
  until March 31, 2002.

2.Makes these rate reductions possible by creating a unique  
  financing mechanism that will permit "securitization" of  
  a portion of the CTC amounts that are already being paid  
  by customers.  This portion of CTC will be financed over  
  approximately 10 years, producing immediate savings for  
  residential and small commercial customers without  
  creating a debt or liability for the state of California.  


3.Provides that securitization of the CTC creates  
  significant additional benefits for residential and small  
  commercial customers that could total more than $2  
  billion by:  (a) reducing their total CTC costs by at  
  least $500 million; (b) providing capital for the  
  restructuring by investor-owned utilities of stranded  
  long-term obligations and funneling savings from such  
  restructurings, conservatively estimated at $600 million,  
  directly to residential and small commercial customers,  
  (c) guarding against the imposition of hidden financing,  
  transaction and service fees; (d) retaining interest rate  
  float benefits, conservatively estimated at $120 million,  
  and (e) providing the opportunity to achieve additional  
  savings of up to $875 million through variable interest  
  provisions and possible federal tax-exempt treatment.

4.Establishes a "fire wall" that completely protects  
  residential and small business consumers from having to  
  pay for any statewide policy exemptions to the CTC that  
  are necessary for reasons of equity or business  
  development  and retention.

5.Through implementation of this bill, ensures that  
  residential and small commercial ratepayers will receive  
  a total cumulative rate reduction of no less than 20% by  
  April 1, 2002 from rates in effect on June 10, 1996,  
  excluding the costs of energy and monetization.

6.Protects the interests of utility employees who might  
  otherwise be economically displaced in a restructured  
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  industry by allowing the recovery of reasonable employee  
  costs for severance, retraining, early retirement, and  
  outplacement.
 
Market Structure:
 
Critical to realizing the benefits of electric industry  
restructuring and the justification for allowing the  
accelerated recovery of transition costs is the  
establishment of a competitive market structure, free of  
monopoly power, with transparent market prices, in which  
customers are able to readily choose among competing  
providers of electric energy while at the same time  
continuing to receive reliable electricity service.  To  
accomplish this objective, the bill establishes two new  
independent, public benefit, non-profit market  
institutions, an Independent System Operator and a Power  
Exchange. 

The Independent System Operator will be responsible for  
providing centralized control of the state-wide  
transmission grid and charged with ensuring the efficient  
use and reliable operation of the transmission system.  The  
Power Exchange is charged with providing an efficient,  
competitive electric energy auction, open on a  
non-discriminatory basis to all providers, to meet the  
electricity loads of exchange customers.  The Power  
Exchange will provide the results of its auction to the  
Independent System Operator . The Independent System  
Operator will combine the results of the Power Exchange  
auction with schedules for private direct access contracts  
in a manner that provides for the most efficient and  
reliable use of the transmission system.

A five-member Oversight Board, comprised of three  
gubernatorial appointees who are 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, will  
oversee the two new institutions and appoint governing  
boards that are broadly representative of California  
electricity users and providers.

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The bill requires California's publicly-owned electric  
utilities and investor-owned electric utilities to commit  
control of their transmission facilities to the Independent  
System Operator and to jointly advocate a pricing  
methodology for the Independent System Operator to FERC  
that provides an equitable return on capital investment to  
all participants.

The bill further authorizes direct transactions between  
electricity suppliers and end-use customers, commencing  
with the operation of the Independent System Operator and  
the Power Exchange, but not later than January 1. 1998.   
Direct transactions are subject to the payment of relevant  
transition costs and the development by the Public Utility  
Commission of an equitable phase-in schedule.

 System Reliability:
 
1.The bill directs the Independent System Operator to seek,  
  and the Public Utilities Commission to support,  
  authorization by FERC to perform its system functions and  
  be able to secure the generation and transmission  
  resources needed to achieve specified planning and  
  operational reliability reserve criteria.  

2.To reduce the potential for system-wide outages such as  
  those that occurred on July 2, 1996 and on August 10,  
  1996, this bill requires both the Independent System  
  Operator and the Public Utilities Commission to adopt  
  inspection, maintenance, repair and replacement standards  
  for transmission and distribution systems, respectively.   


3.In the event of a major power outage that affects more  
  than 10% of the customers in a given service area, the  
  Independent System Operator is required to conduct a  
  review as to the causes of the outage, the response time  
  and effectiveness of the response, and the extent to  
  which an electric utility's operation and maintenance  
  practices enhanced or undermined the timely restoration  
  of service. The Independent System Operator will be  
  authorized to levy appropriate sanctions on  
  non-performing participants.
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4.The bill requires the Independent System Operator, in  
  consultation with the California Energy Commission, the  
  Public Utilities Commission, and concerned regulatory  
  agencies in other Western states, to conduct an  
  exhaustive reliability study of the interconnected  
  transmission and generation system that provides  
  electricity to California. It is to provide a report to  
  the Legislature, within six months after it receives FERC  
  authorization, recommending cost-beneficial improvements  
  to electric system reliability for the citizens of  
  California.

5.This bill expresses Legislative intent to enter into a  
  compact with Western Region states that would require the  
  utilities located within those states that sell energy to  
  California retail customers to adhere to enforceable  
  standards and protocols to protect the reliability of the  
  interconnected regional transmission and distribution  
  system.

 Public Programs:
 
The bill preserves California's commitment to developing  
diverse, environmentally sensitive electricity resources  
which enhance system reliability by continuing support  
consistent with historic levels for cost-effective energy  
efficiency and conservation activities, for in-state  
renewable energy resources, and for public goods research,  
development and demonstration (RD&D) that would otherwise  
not be provided by electricity markets.  The bill also  
extends the provisions covering expenditures for services  
provided to low-income electricity customers.

The Public Utilities Commission is authorized to determine  
how best to utilize funding for cost-effective energy  
efficiency and conservation and public goods RD&D directed  
towards transmission and distribution.  The California  
Energy Commission is directed to recommend to the  
Legislature how best to utilize market-based mechanisms to  
allocate resources for in-state renewable energy and  
authorized to administer the remainder of RD&D funds.   
Publicly-owned utilities retain their authority to collect  
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and direct the expenditure of comparably intended funds.  
Charges for continued funding for these programs are  
unbundled on consumer bills in the same manner as are other  
continuing service charges including those for  
competitively acquired energy, competition transition  
charges, transmission charges and distribution charges. All  
provisions, other than those relating to low-income  
programs, sunset on December 31, 2001.

 Consumer Protection:
 
The restructuring of the electricity industry will create a  
new electricity market with new marketers and sellers  
offering new goods and services, many of which may not be  
readily evaluated by the average consumer.  This bill  
requires that electricity consumers be provided with:  (1)  
sufficient and reliable information to be able to compare  
and select among available products and services, and (2)  
mechanisms to protect themselves against unfair or abusive  
marketing practices.

The Consumer Protection provisions of the bill require  
registration of sellers, marketers and aggregators of  
electricity service to residential and small commercial  
customers, define information to be provided to consumers  
and by whom, provide for the compilation and investigation  
of complaints, extend "anti-slamming" and contract recision  
protections to electricity consumers, and extend private  
attorney general entitlements for consumer damages.

Responsibility for Consumer Protection is vested with the  
Public Utilities Commission and sunsets December 31, 2001  
pending legislative review of any continuing need.

 FISCAL EFFECT:   Appropriation:  No   Fiscal Com.:  No    
Local:  No
 
SUPPORT:  (Verified  8/28/96)

Calaveras Cement Company
California Cogeneration Council
California Industrial Users 
California Independent Petroleum Association
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California Farm Bureau Federation 
California Municipal Utilities Association
Ceert Coalition
Coalition Of California Utility Employees
Fresno Unified School District
Independent Energy Producers
Independent Oil Producers' Agency
Kaiser Cement
Merced Irrigation District
Modesto Irrigation District
Natural Resources Defense Council
Northern California Power Agency -- A Joint Power Comprised  
     of
  the Following Entities:
       Cities of Alameda, Biggs, Gridley, Healdsburg, Lodi,  
Lompoc,
          Palo Alto, Redding, Roseville, Santa Clara, and  
Ukiah
       Plumas-Sierra Rural Electric Cooperative
       Port Of Oakland
       Truckee-Donner Public Utility District
       Turlock Irrigation District
Oil, Chemical & Atomic Workers International, Union
Pacific Gas And Electric Company
Regional Energy Management Coalition
Sacramento Municipal Utility District
Western States Petroleum Association
John L. Wimberly, Chula Vista
University Of California

NC:lm  8/29/96  Senate Floor Analyses
                SUPPORT/OPPOSITION:  SEE ABOVE
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