Nunez Energy Bill Moves Along

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

Capitol Update, July 2, 2004 Share this on FacebookTweet thisEmail this to a friend

AB 2006 (Fabian Nunez, D-Los Angeles) squeaked out of the Senate Energy, Utilities and Communications Committee on June 29 and will likely be significantly amended before it is taken up by the Senate Appropriations Committee sometime in August.

The bill was approved by a 5-3 vote, the bare minimum to get out of committee. Several committee members expressed concerns about various provisions of the bill, including committee chairwoman Debra Bowen (D-Marina Del Rey) who said, "We have a lot to do."

AB 2006 deals with an array of issues, including utility procurement and cost recovery, retail direct access (DA) and resource adequacy.

The bill provides new and expansive cost recovery provisions for utility investments in generation that may or may not have been chosen during a competitive solicitation. This would encourage utilities to avoid such solicitations, creating a high degree of doubt whether customers are paying for the most cost-effective resources.

Since the 2000-2001 electricity crisis, California has taken an important step in establishing a robust and competitive wholesale market. AB 57 (Wright, Ch. 835, Stat. 2002) created competitive and transparent electricity procurement rules to spur investment in new generation and lower energy costs for both bundled utility and DA customers. To encourage this approach, AB 57 provides upfront utility cost recovery for the wholesale electricity costs incurred in this process. AB 2006 undermines AB 57 by providing increased cost recovery assurances for projects that were not necessarily chosen through a competitive solicitation.

Current DA customers would also be adversely impacted by the bill's provisions requiring the "full recovery of existing direct access customers’ energy cost obligations on a schedule comparable to the recovery of comparable costs from core customers." This would substantially increase the DA cost responsibility surcharge from the current capped rate of 2.7 cents per kilowatt-hour (kWh) and would make DA uneconomic, thereby eliminating an essential cost-controlling tool for DA customers.

The bill also establishes overly restrictive rules for noncore service (for large energy users), including a one-time election to remain with the utility or to purchase electricity from a nonutility energy service provider, thereby eliminating customer choice beyond the one-time election.

The bill authorizes the CPUC to adopt rules and regulations to implement a core-noncore market structure on or after Jan. 1, 2006, and to phase in a limited amount of new DA (based on increases in demand and expiration of Department of Water Resources' power contracts) over a transition period of no fewer than five years. At the end of the transition period, noncore customers would be required to make a one-time election to receive bundled utility or DA service.

Finally, the bill fails to address the current cross-class subsidies between customer classes. Legislative and regulatory mandates, including the statutory protection of residential usage up to 130 percent of baseline levels, have caused a massive shifting of costs from residential users to other classes of customers. Industrial customers were hit hard with massive rate increases three years ago and desperately need lower electricity rates to stay competitive in California. Rates for the largest industrial customers are still 36 percent to 85 percent higher than before the 2000-2001 electricity crisis. In contrast, two-thirds of residential users actually pay rates that are lower than rates in effect in 1996.

The CPUC should be directed to assess the cost of service levels for the various customer classes as soon as possible and prior to implementation of a core-noncore structure. The CPUC also should be directed to completely eliminate the cost shift caused by the 130 percent limitation by no later than June 30, 2006, and to implement any changes in cost allocation policies consistent with the cost-of-service analysis by no later than December 31, 2007. These changes are necessary to allow customers to make fully informed choices about their status as core or noncore customers during the transition period. If bundled rates for large customers are overstated due to these cost shifts, such customers may decide to leave bundled service for DA service when the former is the proper economic choice based on the actual cost of service.
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