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HomeMy WebLinkAbout1996-09-26 City CouncilCity of Palo Alto City Manager’s Report TO:HONORABLE CITY COUNCIL FROM: DATE: SUBJECT: CITY MANAGER DEPARTMENT: UTILITIES SEPTEMBER 26, 1996 CMR:411:96 SUMMARY OF CALIFORNIA LEGISLATURE’S ELECTRIC RESTRUCTURING BILL, AB 1890 RECOMMENDATIONS This report is informational only and requires no action from the City Council at this time. EXECUTIVE SUMMARY BACKGROUND On April 20, 1994, the California Public Utilities Commission (CPUC) issued a proposal to restructure the electric utility industry to provide for greater competition in the electricity generation business, thereby reducing the overall rates for California industries, businesses and residents. In March 1995, the Federal Energy Regulatory Commission (FERC) initiated discussions to promote greater competition nationwide, by making access on the nation’s transmission network readily available to all electricity suppliers. FERC’s action was a clear indication of the Administration’s support to the CPUC in particular and to the deregulation of the electric industry in general. Since the CPUC initiated the deregulation process, state legislators have closely monitored the restructuring process with the intent to enact legislation at the appropriate time. In the spring of 1996, the California legislators formed a 6 member bipartisan committee (3 Assembly Members, 3 Senators, 3 Democrats, 3 Republicans) to draft a comprehensive bill to deal with all aspects of the California electric industry deregulation. On August 5, 1996, the Committee began its hearing on the issues related to the restructuring. Members worked tirelessly with all interested parties (including municipal utilities) and allowed the parties to negotiate principles that formed the basis for the comprehensive bill. On August 30, 1996, the California Assembly and Senate unanimously voted to approve AB 1890. The bill became effective on September 24, 1996 after it was signed by Governor Wilson. DISCUSSION Summary of AB 1890 Currently, electric energy is sold to regulated utilities with exclusive service monopolies. This bill will help to end utility monopoly on generation and open the market to competition, so that retail customers can select the supplier of their choice. The transmission and distribution of electricity will continue to be regulated monopoly services. The attached exhibit provides details on actions required by Investor Owned Utllmes (IOU’s) and Municipal Utilities. To ease the transition to a more competitive environment, the bill deals with four key issues. These four issues are: The recovery of transition costs,. Organization of the new market structure, Ensuring system reliability, Funding of public purpose programs, Transition costs. Transition costs are the continuing obligations for past utility power plant investments and power purchase contracts that will not be recovered in a competitive generation market (such as the debt service obligations for the Calaveras project.) The bill provides for full recovery of these costs through a charge, called the Competition Transition Charge (CTC). CTC will be levied on all consumers in proportion to their consumption. Market Structure. The establishment of a competitive market structure with transparent market prices is critical to the success of the industry restructuring. The bill establishes two nonprofit market institutions, an Independent System Operator (ISO) and a Power Exchange (PX). The ISO will control and provide for the efficient use of the state-wide transmission grid. The PX will provide for a competitive electric energy auction. A five member oversight committee, made up of three gubernatorial appointees and two non-voting members appointed by the Senate and the Assembly, will oversee the activities of the ISO and the PX and appoint governing boards broadly representing California electricity users and providers. The bill requires that the IOUs and POUs commit control of their transmission to the ISO and to jointly advocate transmission pricing methodology before FERC. The bill authorizes direct transactions between the IOUs retail customers and energy providers by January 1, 1998. The bill provides the POUs with the options of allowing choice in their service territory. If the POUs elect not to embrace customer choice, then all provisions dealing with recovery of CTC would not be applicable to them. o System Reliability. The bill directs both the ISO and the CPUC to adopt inspection, maintenance and replacement standards for all transmission and IOU distribution systems to reduce the potential for system-wide outages, such as those that occurred on July 2, 1996 and August 10, 1996. In the event of an outage that affects more than 10 percent of a service territory, the ISO is required to conduct an investigation of the utility’s practices and levy appropriate sanctions on non-performing participants. The bill also requires that the ISO, in consultation with other Western regulatory bodies, conduct an exhaustive reliability study of the Western electric system within six months of receiving FERC authorization. Finally, AB 1890 promotes entering into agreements with neighboring states requiring utilities, that sell power to California, to adhere to protocols and standards to protect system reliability. Public Programs. The bill confirms California’s commitment to renewable resources, energy efficiency, public goods and research and development programs. These programs would be significantly curtailed in a competitive environment. The CPUC and the CEC will determine the details of how to fund these programs for the IOUs. POUs will retain their authority to collect and direct the expenditure of these funds. These charges will be shown as a line item on the utility bills. What AB 1890 Means for Municipal Utilities There are several differences as to how AB 1890 treats the IOUs and the POU, as outlined in the attached exhibit. The most important difference is that AB 1890 does not compel the POUs to allow open access (customer choice) to their customers. However, a POU must join the ISO and allow customer choice to receive the State sanction CTC recovery. If a POU elects to provide for customer choice, it must begin the process by January 1, 2000 and conclude it by 2010 ( 8 years later than the IOU’s). The bill confirms the POUs’ existing rate making authority, allows the POUs to direct the expenditure of the "Public Benefit Charge", and compels the IOUs to jointly work with the POUs to advocate to FERC a pricing methodology for the Independent System Operation that results in an equitable return on capital investment in transmission facilities. What AB 1890 Means for Palo Alto Like most of the other municipal utilities, Palo Alto’s electric utility (PAEU) needs to establish broad policies to deal with the deregulation of the electric utility industry. These policies will need to address these questions: [] [] [] Should Palo Alto allow its customers to choose their electricity supplier? If customer choice is allowed, what is Palo Alto’s CTC and how will it be collected? Should Palo Alto market its resources and services outside of its service territory? Addressing these policy issues early will put Palo Alto in a favorable competitive position and improve PAEU’s ability to provide the superior services that its customers have come to expect over the years. NEXT STEPS Staff has already begun to examine PAEU’s options, and will work through the Utilities Advisory Commission and solicit Council’s guidance to these important policy decisions. Following the UAC and Council input and direction, staff will prepare a detailed implementation work plan outlining the work products and delineating a schedule to complete that work. ATTACHMENTS Attachment A:Detail Summary of AB 1890 Prepared by:Tom Habashi, Assistant Director,of Utilities Department Head Approval: EDW~I~d) J. MP~EI~ Direct’or of Utilities City Manager Approval: Detailed Summary of AB 1890 ATTACHMENT "A" Topic CTC Recovery Direct Access Phase-In Non- Bypassable CTC Reciprocity Rate Rednction Rate Reduction Bonds IOU’s Munis IOU’s collect CTC from Indust & Lrg Comm from 1/1/98 - 12/31/01. Residential and small commercials pay CTC until rate reduction bonds are paid off. Start Phase-in by 1/1/98 Phase-in completed by 12/31/01 CPUC will review phase-in plans and set phase-in schedule (p 42) Within the Direct Access Phase-in period no person, corporation or munis can provide electric service to an IOU (or Muni) customer unless a severance fee (nonbypassable CTC) is paid to the original electric supplier. (p 90) There are several exceptions to the CTC rule for irrigation districts, BART and for self generation. "No local publicly owned electric utility or electric corporation shall sell electric power to the retail customers of another local publicly owned utility or electric corporation unless the first utility has agreed to let the second utility make sales of electric power to the retail customers of the first utility." (p 90). ~ 10% rate reduction (from 1/1/96 rates) for resid, and small comm. From 1/1/98 through the end of 2001. (p 32) Cumulative 20% rate reduction by 4/1/02 (costs are net of the competitively procured electricity and the costs of rate reduction bonds) i.e. does not insulate against market price increases. (p 28) IOU’s shall apply to the California Infrastructure and Economic Development Bank (CIEDB) by 6/1/97 and secure the means to finance the CTC portion for res and small comm. secured by the income from these IOU customers. (p 33) These customer groups will continue to pay for these bonds until the bonds are paid off (p 78). Does not set a timeframe for CTC recovery. Defines rough categories of costs and requires a public hearing 6 months after costs are prepared. Start Phase-in the latter of 1/1/2000 or 2 years after IOU’s begin phase-in. Phase-in completed by the latter of 12/31 2010 or 2 years after IOU’s end. Same as applies to IOU’s - no swiping an IOU’s or muni’s customer unless CTC is paid to former provider. (p 90) IOU’s and munis are treated the same. No rate reductions required for munis. Does not apply to Munis. Public Purpose Programs Local Control Sets out specific dollar amounts to be spent by the IOU’s in each of the four areas of: a) energy efficiency & DSM b) RD&D c) in-state operation and development of new & existing renewables, and d) low income programs. The money will be collected through a non- bypassable charge on local distribution service. The CEC will administer the moneys for the IOU’s. Funding to begin 1/1/98 and run through end of 2001. Specific dollar amounts are stated for each utility & each program based on 1994 expenditure levels. Details of a market-based allocation of the renewables funds will be developed by the CEC. (p 61-66) Creates a large number of conditions that the IOU’s must meet in order to collect stranded costs. Same four categories as IOU’s, except that renewables are focused exclusively on new renewables. * Overall dollar amount to be "not less than the lowest expenditure of the three largest electrical corporations on a percent of revenue basis". (The expenditure level appears to be approx. 2.5% of the 1994 revenues. CMUA is completing some analysis to determine the exact percentage as it applies to munis.) * No date is specified for beginning or ending the programs. * Munis get to choose amount to be placed in any/all of the categories. * Funds and programs are to be locally administered. (p 67) States that "nothing in this division ..... shall affect preexisting ratemaking authority of a regulatory body of a local publicly owned electric utility." (p 92) - But has two hooks that tie collecting CTC to direct access and joining the ISO. IS____QO - Requires that Munis join ISO in order to collect stranded costs as allowed in the bill - "...no California electric corporation or local publicly-owned electric utility shall be authorized to collect any competitive transition charge authorized pursuant to this division ... unless it commits control of its transmission facilities to the Independent System Operator." (p 89) Direct Access - "If the regulatory body does not authorize direct access as authorized in this section, then the public owned electric utility shall not.be eligible to recover the nonbypassable charge as provided in section 9603."(p 91) Cost Shifting Establishes ’fire-walls’ between customer Does not specifically address cost shifting classes so that there is no cost shifting. (several between customer classes for munis. locations) N/AGeneral Fund Transfers "All city-owned electric utilities shall report on the periodic bill the amount expected to be transferred to the general fund of the city on a no less than annual basis". (p 93) 2 ISO Governance ISO & Transmission Pricing Establishes a five member IS~ Oversight Board to oversee the functions of the ISO and PX. Three members will be appointed by the Govenor from a list jointly provided by the CEC and CPUC. The other two members will be non-voting mebers appointed by the Assembly and Senate. TheOversight Board will determine the composition and term of the Governing Boards of the ISO and PX. A simple majority of the the Governing Board will consist of persons unaffiliated with G, T or D companies. (p 35) Requires IOU’s to place their transmission assets under the control of the ISO. There are many requirements and conditions relating to the ISO operation and structure. Same as for the IOU’s. Munis are required to turn over control of their transmission facilities to the ISO (if they want CTC collection as described in bill) IOUs and munis should jointly advocate to FERC a transmission pricing methodology that includes the following principles: (1) Utility specific access fees, as finally approved by FERC, reflecting that utility’s costs shall go into effect on the first day of ISO operation. (2) Within 2 years from the start of the ISO, the ISO shall recommend to FERC a rate methodology determined by the ISO Governing Board (IGB). (a) If there is no IGB decision, the alternative dispute resolution method shall be used to determine rates. (b) If the alternative dispute resolution fails then the default rate is a uniform regional access charge (> 230KV and an appropriate percentage of facilities below 230 KV) and a utility specific local access charge (all facilities not in regional charge). This shall be recommended upon termination of stranded cost recovery plan or no more than two years after initial operation of the ISO, whichever is later. (3) If the rate determined after two years is different than the rate in effect for the first 2 years then the difference wilt be trued-up within 3 years for IOUs and 5 years for munis.