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 ?1 CONTINUED AB 1890 Page 2 resources. See attached analysis for details. By: Senate Committee on Energy, Utilities & Communications John Rozsa ?2 CONTINUED AB 1890 Page 3 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) . ?3 CONTINUED AB 1890 Page 4 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. ?4 CONTINUED AB 1890 Page 5 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 ?5 CONTINUED AB 1890 Page 6 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 ?6 CONTINUED AB 1890 Page 7 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. ?7 CONTINUED AB 1890 Page 8 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. ?8 CONTINUED AB 1890 Page 9 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 ?9 CONTINUED AB 1890 Page 10 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 ?10 CONTINUED AB 1890 Page 11 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 **** END **** ?11 CONTINUED