CMTA Pushes Cost Allocation Proposal

By Loretta Macktal, Executive Assistant to the Vice President, Government Relations

Capitol Update, June 18, 2004 Share this on FacebookTweet thisEmail this to a friend

AB 2006 (Fabian Nunez, D-Los Angeles) addresses an array of electricity issues, including utility procurement and cost recovery. The bill also lifts the suspension of direct access and establishes a "core-noncore" retail electricity market, effective January 1, 2006. (A core-noncore market is one in which the market is bifurcated between core customers, typically residential and small-commercial customers with usage below 500 kilowatts, and large users, referred to as noncore customers.)

Included in the core-noncore provisions is a prohibition against cost-shifting between customer classes. A laudable goal in the abstract, this provision would actually serve to lock-in the current cost-shifting from residential to large customers that has been occurring for the better part of a decade and was exacerbated significantly by legislation enacted during the 2000-01 energy crisis which provided that until the Department of Water Resources fully recovers its costs of long-term power purchases, no rate increase would apply to residential load up to 130 percent of baseline usage. Electricity rates for large industrial customers are between 36 and 85% higher than pre-crisis levels (depending on the utility service area) while two-thirds of residential usage is charged rates that are lower than those in effect in 1996.

On June 16th, CMTA and the California Large Energy Consumers Association unveiled a cost allocation proposal which directs the California Public Utilities Commission to: (1) phase out the protection afforded by the repealed provision over a two-year period, ending no later than June 30, 2006; (2) conduct a cost-of-service analysis by no later than December 31, 2005 for the purpose of assessing the current allocation of the various categories of costs among the rate classes and determine whether such allocation conforms with sound cost causation and ratemaking principles; and (3) implement any changes in cost allocation policies consistent with the cost-of-service analysis by no later than December 31, 2007.

It is important that the cost assessment and reallocation occur prior to implementation of a core-noncore market. If utility rates for certain customer classes are higher than the actual costs to serve those classes, energy service providers will not have to offer their lowest prices to attract and retain customers. Reforming rates to remove the cost shift caused by the 130% of baseline exemption and other subsidies would move us in the right direction toward truly competitive pricing.
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