California Restructuring Comments from AWEA

[Lisa Marina Brooks <lbrooks@essential.org>]

  September 20, 1996 (revised) 
  
  To:       Friends and Colleagues
  From:     Nancy Rader, AWEA West Coast Representative
  Re:       Summary of California's Electric Restructuring Bill
  _________________________________________________________________
  
  As you have probably heard by now, the California legislature has
  passed a comprehensive electric utility restructuring bill, which
  is awaiting the Governor's expected signature.  This memo
  summarizes the outcome, focusing in most depth on the renewables
  segment of the bill.  I would not characterize it as a victory
  for consumers or the environment, nor does it contain good
  renewables policy.  As the small-consumer-group TURN said, this
  is not something that should be held up as a model for national
  legislation.[1]  
  
  While some have compared the overall legislative results as
  preferable to the results that might have come from the CPUC,
  this is faint praise.  And, in the case of renewables, the
  legislative results are worse than what might have happened,
  given the inclusion of the Renewables Portfolio Standard (RPS)
  concept in the CPUC's decision, and PG&E and SCE's willingness to
  work with that policy in that forum.
  
  Here is a summary of the bill (AB 1890, as it ended up), followed
  by some commentary. 
  
  I.  Provisions Related to Public Purpose Programs
  
  (1)  A total of about $1.5 billion is allocated from the
  investor-owned utilities (IOUs) over a four-year transition
  period (January 1, 1998, through December 31, 2001) to fund
  energy efficiency, renewable energy, and "public goods" R&D,[2]
  funded through a nonbypassable usage-based charge on customer
  bills (known to us as a "system benefits charge," SBC, but not
  identified as such in the bill).  
  
  The bill does not establish a uniform percentage charge for all
  utilities, but rather specifies dollar figures for each utility
  for each purpose.  When a weighted average is calculated,
  however, the funds amount to a 2.28% surcharge as compared to
  1994 utility revenues, far below the 3.3% surcharge sought by SBC
  advocates (amounting to about $764 million less than was sought
  for these programs over four years).[3]  Though these funds
  approximate current spending levels on energy efficiency and R&D,
  advocates had sought to achieve levels commensurate with those
  achieved as a result of Integrated Resource Planning (IRP) prior
  to the large cuts that have taken place since 1994 in
  anticipation of restructuring.  Also note that the percentage
  will shrink over time if total revenues grow. 
  
  Thus, the important policy principle that the SBC should be a
  uniform percentage for all utilities was lost, which would have
  helped sustain the policy beyond the transition period.  At one
  point, the committee chairman said, "you're in a dreamworld if
  you think that the system benefits charge will be sustained over
  time."  
  
  (2)  The PUC is instructed to determine how to utilize funds for
  energy efficiency  There is no requirement for independent
  administration of these funds.  Funds for public interest R&D and
  renewables are to be transferred to the California Energy
  Commission (CEC) "pursuant to criteria to be established by the
  Legislature." 
  
  (3)  For renewables, the bill provides a minimum of $465 million
  and a maximum of $540 million over four years through surcharge
  funds.  The $75 million difference will go to renewables
  depending on totally unrelated utility costs that may be paid
  from the total.  The total funding for renewables will likely be
  insufficient to maintain the state's existing level of renewables
  if gas prices stay low as expected, and the bill contains no
  coherent policy to account for their environmental and fuel price
  stability benefits that are likely to go unrecognized in
  competitive electric markets.  The bill strips the PUC's
  authority to collect a surcharge to support renewables beyond
  March 31, 2002.  Authority is not ended for the other programs.  
  
  The bill requires the CEC to report to the Legislature by March
  31, 1997, with recommendations on how to allocate these funds,
  including the following options and implementation mechanisms: 
  
  -- Reward the most cost-effective generation that:  supports the
  operation of existing and the development of new renewables;
  supports the operation of facilities which provide fire
  suppression benefits and reduce open-field burning (i.e.,
  biomass);  and that supports the operations of solar thermal
  peaking technologies (i.e., the former Luz plants). 
  
  -- "Implement a process for certifying eligible renewable
  resource providers."  (Successful execution of this will be
  important for verifying marketing claims regarding renewables.) 
  
  -- Use mechanisms such as the establishment of a "clearinghouse
  or a marketing agent to identify the most competitive renewable
  resource providers while fostering a market for renewable
  resources."
  
  -- "Allow customers to receive a rebate from the fund through
  mechanisms such as a reduction in their electricity bill or a
  direct payment from the fund for the transition charges (i.e.,
  CTC) that would otherwise apply to their purchases from renewable
  providers."
  
  -- "Allocate moneys between (A) new and emerging and (B) existing
  renewable resource technology providers, provided that no less
  than 40 percent of the funds shall be allocated to either
  category."
  
  -- "Utilize financing and other mechanisms to maximize the
  effectiveness of available funds."
  
  These provisions reflect disagreements within the renewables
  advocacy community that the committee could not resolve given the
  time constraint for getting the restructuring bill out.  Thus, we
  must spend the next six months at the CEC and go back to the
  legislature next year to finalize the renewables provision of the
  bill. 
  
  An additional provision requires each utility to "allow customers
  to make voluntary contributions through their utility bill
  payments" to support renewables.  This could be useful, but will
  require more specific legislation to be effective.  
  
  (4)  The bill includes funding for low-income programs at "not
  less than 1996 authorized levels," which, according to NRDC, is
  $324 million over the four-year transition period for the IOUs.
  Though funding is to be based on an assessment of customer need,
  these funds must be paid for by the utilities within an overall
  rate cap, and so utilities will have an incentive to try to get
  the assessed need reduced. 
  
  (5)  Municipal utilities are required to establish nonbypassable
  charges not less than the lowest expenditure level of the three
  IOUs (which, when low income funds are included, would be SCE's
  2.56% surcharge), to fund investments in energy efficiency, "new
  investment" in renewable energy resources, R&D, and low-income
  services.  The governing boards of the munis will decide which of
  these programs to spend funds on, and are not required to spend
  any funds on any particular program.
  
  II.  Competitive Market and Stranded Asset Provisions
  
  (1)  Lowers rates by 10%, beginning 1/1/98, and freezes them at
  that level for residential customers until 2001, with possible
  additional reductions after 2001.  But ratepayers are not
  "saving" money here any more than someone "saves" on their house
  payment by extending the term of their mortgage.  The lower rates
  stem from creative financing of the stranded assets, not from
  less than 100% recovery of those assets.  The utilities will pay
  off about $5 billion of their debt through revenue bonds to be
  secured by the "competitive transition charge" (CTC) paid by
  residential customers. Thus, the CTC will simply be stretched out
  over a longer time period, though at a lower interest rate.  This
  is not a big victory for consumers.  Moreover, rates would have
  come down by more than 10% under business-as-usual (as a result
  of QF contracts coming to the end of their 10-year fixed price
  contracts), according to TURN.  And the projected rate reductions
  assume that energy prices will stay low.  But SDG&E's rate cap
  will be adjusted along with gas prices (removing any incentive to
  acquire price-stable renewables), and, if gas prices were to rise
  sharply, the other utilities are likely to demand the same.
  
  (2)  Allows for 100% cost recovery of stranded assets--estimated
  at $28 billion, leaving final determination to the CPUC.  As Jim
  Caldwell of CEERT pointed out in an August 19 memo, this and
  other factors are a perfect recipe for market power.  Caldwell
  argues that utilities will raise the CTC rather than cut rates as
  costs fall, drive the apparent market price down, and thwart any
  real competition until after 2002.  In this case, direct access
  will be unprofitable and new investment will be uneconomic.  
  
  (3)  Provides a phase-in of direct access starting January 1,
  1998, with direct access for all consumers by the end of 2001. In
  addition, immediate direct access is available to customers
  who purchase at least 50% of their energy from renewables.  The
  bill does not require simultaneous direct access for all customer
  classes.  Rather, the schedule is left up to the CPUC, which may
  consider practical, operational and technological issues -- thus
  leaving open the possibility that small consumers may not get
  direct access until the end.  In addition, according to TURN, it
  overly restricts small consumer aggregation.  The bill codifies
  the principle of direct access but provides few operational
  details.  Notably, a recently-completed report of the CPUC's
  direct access working group contains almost no agreement among
  stakeholders on how to proceed beyond broad generalities.
  
  (4)  In freezing rates, $210 million/year in existing subsidies
  to large "interruptible" customers are also frozen, despite the
  fact that service for these customers is rarely interrupted. 
  (Estimate of subsidy calculated by JBS Energy.)
  
  (5)  Codifies the short-run avoided cost (SRAC) methodology that
  determines how much QFs are paid.  Under this methodology,
  avoided cost will be tied to gas prices until a "fair" pool price
  is established.  This works well for gas QFs but not very well
  for renewables.  Though it will help to keep SRAC from being
  unfairly adjusted downward between now and when the pool price is
  used (hopefully soon), it provides no fuel diversity or
  environmental credit to renewables, which would help enable
  existing projects to remain in operation, and eliminates any
  price stability benefit for consumers by paying renewable QFs
  whatever gas or
  market prices happen to be. 
  
  (6)  Provides funds for the buyout of QF contracts.  In the case
  of renewable QFs, this could result in many renewable projects
  being shut down, as investors take the buyout cash and close-up
  shop in the face of operating costs that are higher than market
  prices (which will be depressed as a result of the CTC and
  utility market power).  
  
  (7)  Creates an Independent System Operator and a power exchange.
  No guarantees that the rules will be fair.  The boards of these
  institutions will be appointed by political appointee "overseers"
  -- so it's a fair expectation that the powerful interests that
  shaped this bill will dominate these institutions as well. 
  
  (8)  Does not require divestiture of utility assets.  This will
  require over-burdened regulators to police anti-competitive
  behavior.  Separating generation from distribution is essential
  to removing conflicts of interest, reducing market power, and
  providing for fair competition.  
  
  III.  Conclusion
  
  In our view, this legislation represents a step backwards as
  compared to the substantial progress toward a more sustainable
  electric industry that the environmental and renewable energy
  community had been making with integrated resource planning (IRP)
  before the restructuring debates began.  What we have in its
  place in California is fundamentally "a deal," not good public
  policy that systematically addresses the environmental and long-
  term costs associated with the production of electricity.  
  
  Endnotes
  
  [1]  September 4, 1996, TURN News Release, "California Electric
  Restructuring: "Not a National Model."
  
  [2]  From the R&D funds, an amount to be determined by the CPUC
  will go to fund existing T&D R&D.  Assuming existing levels of
  T&D R&D, about 75% of R&D funds will go to public goods R&D. This
  assumption was figured into the total SBC percentage. 
  
  [3]  The percentages are defined as a fraction of 1994 electric
  revenues, which, according to NRDC, were $8.028 billion for PG&E;
  $7.799 billion for SCE; and $1.510 billion for SDG&E.   Using
  1994 revenues as a point of reference is consistent with AB 1123,
  the system benefits charge bill, which would have based
  percentages on 1994 revenues.  Contact me for a spreadsheet
  containing the amounts required by utility and program type.
  
  Note that 2.28% is lower than the 2.75% figure reported in a bill
  summary by Ralph Cavanagh and John White.  This is because
  they included low-income funds in the total for the surcharge,
  but low income programs were not included in the 3.3% surcharge
  contained in AB 1123.
  
  Nancy Rader
  1198 Keith Avenue
  Berkeley CA 94708
  Ph: 510/845-5077
  Fx: 510/548-4815
  
  
  *****************************************************************************
  
  For more information please contact Charlie Higley at (202) 546-4996 or higley@citizen.org
  
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