Thursday, July 10, 2003

ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE

Sarah Reyes, Chair; Keith Richman, Vice Chair

Committee Members LaMalfa, Campbell, Maddox, LaSuer, Canciamilla, Ridley-Thomas, Wolk, Calderon, Diaz, Horton, Levine, and Nuñez:

Comments IN OPPOSITION to

SB 888 (Dunn), “Repeal of Electricity Deregulation Act”

(Amended July 7, 2003)

Comments of Paul Fenn

Local Power

4281 Piedmont Avenue

Oakland, California 94611

510 451 1727

paulfenn@local.org

local.org

July 10, 2003

California Assembly

Committee on Utilities and Commerce Hearing

To Committee Chair Reyes, Vice Chair Richman, and Committee Members LaMalfa, Campbell, Maddox, LaSuer, Canciamilla, Ridley-Thomas, Wolk, Calderon, Diaz, Horton, Levine, and Nuñez:

Local Power hereby registers its strong OPPOSITION to Senate Bill 888, sponsored by Senator Dunn. We oppose this legislation not as an industry group or representative of large customers, but as advocate for the dozens of California communities that successfully fought for the 2002 Community Choice of Energy Law, AB117 (Migden) from 2000 to 2002.

We oppose SB 888, also, as original authors of both AB117 and San Francisco’s H Bond Authority (Prop H of 2001), and a plan to use Community Choice and H Bonds to develop an unprecedented renewable energy, energy efficiency and conservation facilities in San Francisco. Local Power has worked with California cities since 1996 and is preparing similar plans in other jurisdictions.

Finally, we oppose SB 888 as organizers of perhaps the most vocal opposition to AB1890 in the Summer of 1996, a coalition including CalPIRG, Public Citizen, Citizen Action: not the proponents of SB 888, many of whom supported or were neutral on AB1890. We opposed AB1890 because it prohibited Community Choice Aggregation and would thus lead to market segregation, discrimination, and market abuse exactly what came to pass between 1998 and 2001.

SB 888 will not bring about re-regulation of the electric industry, but it would seriously undermine ongoing efforts to reverse the errors of AB1890 through Community Choice Aggregation and should be rejected outright by the Committee. SB 888 would impose, instead, re-monopolization with second- or third-rate regulation, and would permanently damage the ability of communities now seeking to switch to alternative electricity suppliers and develop renewable energy, conservation and energy efficiency development in their communities:

a. SB 888 would allow monopolies to buy power plants and put their ratepayers on the hook for their bad investment decisions, giving them an unfair competitive advantage over alternative suppliers and inevitably diluting the pool of alternative suppliers available to serve Community Choice Aggregators;

b. prohibiting (opt-out) Community Choice Aggregators from employing real-time metering, which is essential for developing cost-effective renewable resources such as the 50 MW solar facility planned for in San Francisco;

c. providing monopolies with carte blanche to develop distributed generation and put customers on the hook for DG facilities, putting them in position to block competitive suppliers serving Community Choice Aggregators.

I. ANALYSIS

A. Summary

1.--Senate 888 would establish a re-monopolization of the electric industry by putting California residents and businesses on the hook for monopoly contracts and monopoly power plant investments.

“330.6 (c) The commission, on behalf of end-use customers, shall ensure that the electrical corporation is afforded the means to carry out this obligation to serve, specifically including a reasonable opportunity to fully recover from all customers, in a manner determined by the commission pursuant to this code, reasonable costs
to operate and maintain those resources, reasonable compensation for employees, a return of and a reasonable return on  prudent reasonable  investments in utility owned generation, transmission, and distribution resources necessary to meet the obligations pursuant to subdivision (b), and reasonable costs for procured generation resources in accordance with Section 454.5.” (Section 4)

This would put Californians on the hook, yet again, for their monopolies’ power plant investments, and portends more future bailouts and scandals. It is the key decision that SB 88 would make: restate the obligation to serve, and put Californians on the hook for their mistakes again. SB 888 calls this “re-regulation.”

The key failure of AB1890 was that the legislature and governor failed to anticipate the market impacts of what they did, and were guided by political rhetoric. Specifically, they sang the song of “consumer choice” but did not examine what would be necessary to actually deliver choice to consumers, assuming it would come automatically through the market. Specifically, in AB1890 the legislature prohibited the kinds of municipal and regional aggregations of customers that AB117 made possible, and in so doing prevented consumer choice while so fervently promising it would come. By assuming that allowing retail choice to take place would automatically cause a retail market to form, AB1890 in fact resulted in the segregation of 95% of consumers into an electric ghetto receiving its power from two day-ahead spot markets designed for a poor minority: only the largest of the largest corporations and groups of corporations ever had a chance of finding competitive suppliers because they were simply too small to serve profitably. Community Choice would have solved this problem and given California’s market a foundation on which to build, but the utilities did not like it so it was rejected.

SB 888 would repeat this error by assuming that a saying monopolies have an “obligation to serve” and saying ratepayers have an obligation to pay for their bad decisions will automatically reconstitute “re-regulation.” It will not have this result. It is a naive assumption, as naive as the market worship that guided the drafting of AB1890 in the Summer of 1996. It is a dangerous assumption that seriously threatens San Francisco and more than sixty (60) other municipalities and counties now seeking to pursue the new, better, and more sustainable alternative.

What is worse, SB 888 specifically waters down the terminology of regulation in order to win the support of the state’s bailed out and/or bankrupt monopolies. Observe that the July 7 draft of section 330.6(c), which was amended to obtain their support or neutrality, would put consumers on the hook for monopoly investments without even requiring that such investments be “prudent” – prudence being the standard criterion (“prudence review”) that regulation has historically employed in California and all other states – but instead downgrades that criterion to “reasonable,” under which virtually any monopoly investment decision would pass muster under the new “regulation,” thus exposing consumers to liability for imprudent monopoly investments and contracts. This latest amendment is but one example of what we mean when we say that “re-regulation” from SB 888 will only mean re-monopolization with second- or third-rate regulation.

Moreover, the Committee should anticipate the market impacts of allowing monopolies to purchase power plants and enter into power purchase contracts with impunity. Deregulating without Community Choice Aggregation led to choice for the few but Byzantine and volatile captivity for the many. Similarly, section 330.6(c) as proposed in SB 888 would inevitably lead to monopoly re-domination of the power generation business in California. Merchant power plant owners would be pressured to leave the state and sell their plants back to the monopolies, or negotiate agreements with the monopolies. As a result, the many municipalities seeking to find alternative suppliers and develop renewable energy, conservation and energy efficiency development would discover that there was no one to answer their competitive solicitations. With the ability to buy and contract with impunity, the monopolies would quickly re-establish their monopolies – but the regulatory power of the state would remain permanently impaired. Californians would, in fact, enjoy neither choice nor protection, but simply a monopoly of unaccountable energy giants whose holding companies would remain unregulated, and whose unregulated affiliates would continue to operate in neighboring states. Under SB 888 California will give up the promise of Community Choice Aggregation and gain nothing.

2. SB 888 Would Permanently Restrict Community Choice Aggregators From Developing Cost-Effective Renewable Resources by Prohibiting Real Time Rates

SB 888 would prohibit Community Choice Aggregators from developing renewable resources by prohibiting residential and small commercial customers being required to take service under a time-differentiated rate without prior consent. Specifically, SB 888 would require an opt-in for small consumers to “take service” from real-time rates:

“Section 393.2.(b) No residential or small commercial customer with average usage of less than 1,000 kilowatt hours per month may be required to take service under a time-differentiated rate.”(Section 38, SB 888)

Section 393.2(b) as proposed in Section 38 of SB 888 directly contradicts Chapter 838, of which Section 366.2 which allows a Community Choice Aggregator to establish its own rate-setting mechanism in an Implementation Plan, then to switch suppliers on an opt-out basis:

“366.2. (a) (1) Customers shall be entitled to aggregate their electric loads as members of their local community with community choice aggregators.
 (2) Customers may aggregate their loads through a public process with community choice aggregators, if each customer is given an opportunity to opt out of their community's aggregation program” (emphasis added, Chapter 838, Section 4).

“366.2(c)(3) A community choice aggregator establishing electrical load aggregation pursuant to this section shall develop an implementation plan detailing the process and consequences of aggregation. The implementation plan, and any subsequent changes to it, shall be considered and adopted at a duly noticed public hearing. The
implementation plan shall contain all of the following:
 (A) An organizational structure of the program, its operations, and its funding.
 (B) Ratesetting and other costs to participants.
 (C) Provisions for disclosure and due process in setting rates and allocating costs among participants.” (emphasis added, Chapter 838, Section 4).

Given that the basic mechanism of Community Choice Aggregation as approved by the legislature in Chapter 838 is its “opt-out” structure in which consumers may choose to opt-out of a community contract – the very structure which makes competitive electric markets so much more successful - Section 38 of SB 888 would prohibit California communities’ Implementation Plans from including real-time rates in their ratesetting process. Clearly, this prohibition would have the effect of making it difficult, and prohibitively expensive, for communities implementing Community Choice to develop renewable resources, for which real time rates were, after all, invented, because renewable energy systems like solar depend on real time rates in order to be cost-effective.

While we can understand why utility monopolies would want to prevent California communities from developing renewable resources from a strictly selfish motive, we fail to understand why Senator Dunn or his co-sponsors would want to stop them: and we believe, in any case, that this Committee, and the legislature would not want to stop them.

3. SB 888 Allows Monopolies to Develop and Rate-Base Distributed Generation

SB 888, Section 43 allows monopolies to develop distributed generation, a power they have been unable to achieve at the California Public Utilities Commission for the obvious reason that they have blocked distributed generation for decades and have the same conflict of interest in developing distributed generation that they have in developing energy efficiency and other technologies that would reduce their revenues. SB 888 would hand over this exciting new market to the monopolies by fiat:

“454.10(a)…the commission may require an electrical corporation that provides distribution service to make direct investments in, or contract with any entity, public or private, for, electric generation plants that are dedicated to serve the customers connected to the electrical corporation’s distribution system or grid, consistent with the plan approved by the commission…” (SB 888, Section 43)

As with their generation plant and contracts, monopolies would be free to put their customers on the hook for those investments, imposing new exit fees on any customers that might dare to seek an alternative providers through Community Aggregation – so distributed generation would figure as a new form of “stranded asset” requiring customer bailouts:

“454.10 (b) After a hearing, the commission shall approve rates that provide the electrical corporation a reasonable opportunity to recover its reasonable costs of operating, its reasonable investment in, and a reasonable return on its investment in the electric generation plants, in accordance with Sections 330.6, 451, and 1005.5.” (SB 888, Section 43)

Section 454.10 as proposed by SB 888 would put the monopolies at a distinctly unfair competitive advantage to any suppliers that might remain to serve Community Choice Aggregators. In answer to this, SB 888 answers by allowing monopolies to “partner” with municipalities, a figure of speech as rhetorical as a Cuban election. Specifically, SB 888 would allow the monopolies to form partnerships with any party, private or public, “without limitation,” meaning they could either try to “cooperate” with municipalities seeking to develop distributed generation, or threaten to cherry pick large customers in Community Choice Aggregators jurisdictions:

“(c) An electrical corporation may meet the obligations of this section by contracting with or entering into projects for construction of electric generation plants jointly with any entity, including, without limitation, the California Consumer Power and Conservation Financing Authority, California municipalities, cooperatives, and joint powers authorities.” (SB 888, Section 43)

There has been good reason for the California Public Utilities Commission not to allow wires monopolies into the Distributed Generation market. As wires utilities they are in a conflict of interest and should not be allowed. As the Commission makes policy in this regard in coming years, it is critical that such decisions not be made by fiat in the legislature. Clearly, this is a power grab not in the public interest.

II. SUMMARY

Senate 888 repeats the mistakes of AB1890 by its ignorance of structure, legislating without anticipating the downstream impacts of such legislation.

Senate 888 purports to “repudiate the failed policies of electrical industry regulation” (Section 3) when in fact it would undermine a new law, Chapter 838 (AB117) passed only last September. AB117 would correct the failed policies of Assembly Bill 1890 of 1996 if the legislature will give it time to develop. Community Choice is a dramatically successful law in several other states that and has already allowed millions of ratepayers to find cleaner, better, non-monopoly electricity services at lower rates and under local control. Californians have asked for energy independence: do not deny them the chance with legislation like this.

This legislation is premature at best, considering that the legislature near-unanimously signed Community Choice into law (Chapter 838 of 2002) just nine months ago, under which more than sixty (60) California municipalities, counties and joint powers agencies are now mobilizing to find non-monopoly suppliers, and to whose implementation both the California Public Utilities Commission and the California Energy Commission are now devoting very significant time and resources. SB888 is a politically motivated bill which, like AB1890 of 1996, will cause only chaos and undermine the good progress made by the legislature last year with enactment Community Choice.

The exclusion of Community Choice from AB1890 was more responsible for the Energy Crisis than any other provision. AB1890 made competition depend on individual customer choice: because residents and businesses were prohibited by AB1890 from aggregating regionally to find competitive suppliers, they proved too small for competitive suppliers to bother serving. Just months after California’s market opened in 1998, Enron and virtually every Electric Service Provider in the state withdrew from marketing to all but the largest industrial and commercial customers; seeing no market, they sought to make their profits in the state’s two day-ahead spot markets. This withdrawal, caused by AB1890’s unreasonable aggregation rules, set the stage for the Energy Crisis that followed. Between 1998 and 2000, less than 5% of California customers ever found a competitive supplier, and both the legislature and state agencies refused to act. It was insane and irresponsible to allow 95% of the world’s fifth largest economy to be served in inherently speculative spot markets for two years, and inevitable that it would lead to collusion, market abuse, and manipulation: a fact for which the government must accept responsibility. Moreover, it is critical that the legislature learn the mistake of ignoring the issue of market structure and legislating in an ideological vacuum.

Compare this to Ohio, whose 1999 Community Choice law accounts for 92% of all customers participating in the market, and is considered the jewel of that state’s electric industry restructuring law. AB1890 was the result of an inside deal brokered by the state’s monopoly utilities under which “choice” was the rhetoric but not the reality of the market it created. Choice would go to large corporations only: a kind of core/noncore system in itself. It was, in short, a “failure by design” that led to 95% of Californians receiving their electricity from two day-ahead spot markets meant as a backup system for elderly and low-income ratepayers. This was the ultimate cause of the gaming and market manipulation for which Enron has become infamous. It was the failure of the legislature, governor and regulators to attend to the basic structure of energy markets in their deliberations. Instead, they pretended that deregulation would automatically create choice. We are writing to ask that the legislature not repeat this mistake in Senate 888: re-monopolization will not lead to re-regulation any more than deregulation led to choice.

With passage of Chapter 838, California now looks forward to the kind of progress made in other states with Community Choice laws, such as Ohio, where green power records have been broken both in scale and price: where renewable and clean energy is being sold to hundreds of thousands of consumers at lower prices than coal and nuclear power. With the California Public Utilities Commission now creating procedures for independent administration of the public benefits charge funds for energy efficiency under Chapter 838, Californians will enjoy the same benefits now being reaped in Massachusetts, under whose Community Choice law (Section 247 of Chapter 164 of 1997) local community control of energy efficiency funds has resulted in dramatically better energy efficiency programs, greater customer satisfaction and support, and better monitoring of local energy efficiency funds investments.

AB117 has repaired the basic flaw of AB1890. In contrast, by putting monopoly utilities back in the generation game, SB 888 will drive what remains of competitive suppliers out of the state and result in monopolization of power plant ownership. As a result, the pool of competitive suppliers available to Community Choice Aggregators will inevitably be narrowed, and competitive solicitations suffer from a shortage of competitors to answer them. Without a competitive supply market, the Community Choice law would die in its infancy. With many states such as New Jersey (Chapter 24 of 2003) and Rhode Island (2002) following Ohio, Massachusetts and California by passing Community Choice laws in recognition of its importance in promoting orderly and competitive energy markets, passage of Senate 888 would be no less than a repeat of the follies of 1996, and should be firmly rejected by the Committee.

This is not a time to turn back. In fact, turning back is impossible, and will only result in re-monopolization with third-rate regulation. This is, rather, a time to move forward with a new wisdom about the role of public institutions, an attendance to structure rather than rhetoric, and a time to turn away from policies based on political agendas in favor of policies from proven solutions to deliver lower rates, rate stability, and competition to California’s energy markets.

Respectfully Submitted,

Paul Fenn

Local Power

4281 Piedmont Avenue

Oakland, CA 94611

510 451 1727

July 10, 2003