Informational Hearing

How Recent Public Utilities Commission
Decisions Will Affect Electricity Rates

State Capitol, Room 112
January 21, 2003
Upon Adjournment Of Session

I. Opening Comments

• Senator Debra Bowen, Chairwoman
  Senate Energy, Utilities & Communications Committee

II. Witnesses

• Michael Peevey, President
  California Public Utilities Commission (PPT)
   
• Mike Florio, Senior Attorney
  The Utility Reform Network (TURN)
   
• Barbara Barkovich, Regulatory Consultant
  California Large Energy Consumers Association (CLECA)
   
• Karen Mills, Associate Counsel
  California Farm Bureau Federation
   
• Akbar Jazayeri, Director of Revenue and Tariffs
  Southern California Edison
   
• Lee Schavrien, Vice President of Regulatory Affairs
  San Diego Gas & Electric
   
• Representative
  Pacific Gas & Electric

How Recent Public Utilities Commission Decisions Will Affect Electricity Rates
 

January 21, 2003

Background

Since early 2001, the electricity rates set by the California Public Utilities Commission (CPUC) for the customers of the state’s major investor-owned utilities have exceeded the utilities’ ongoing cost of service, far exceeding the rates of in-state municipal utilities or any neighboring state, and ranking among the highest in the nation.

In January, and again in March, 2001, the CPUC increased rates for the customers of Southern California Edison (SCE) and Pacific Gas & Electric (PG&E). At the time, the Commission indicated that the increases, a combined average of 4 cents per kilowatt hour, were for "ongoing procurement costs" and "future power purchases" (CPUC Decisions D.01-01-018 and D.01-03-082).

However, between January 2001 and January 2003, much of the responsibility for "ongoing procurement costs" and "future power purchases" for SCE and PG&E, as well as for San Diego Gas & Electric, resided with the Department of Water Resources (DWR), pursuant to AB 1X (Chapter 4, Statutes of 2001).

While DWR has claimed a share of electricity rates for its ongoing operating costs and payments on bonds it issued to finance its high-cost power purchases in 2001, the utilities have also been collecting an extra measure of rates that would otherwise be dedicated to buying electricity. Under the CPUC rate increase decisions, these extra rates were subject to refund to utility customers.

However, the CPUC has maintained rates, which are not being refunded to customers or used for ongoing procurement, and expanded their purposes to include restoring the financial health of SCE and PG&E. For example, in October 2001, the CPUC entered a settlement of federal litigation with SCE permitting SCE to use excess rates to pay off about $3.6 billion of procurement debts incurred in 2000. Since then, SCE has been applying an average of about $200 million per month in rates to pay these debts. A challenge to the settlement by The Utility Reform Network (TURN) is now pending in the California Supreme Court.

While PG&E has also been collecting excess rates, the fate of these revenues has not been determined. The CPUC has proposed to allow PG&E to use these revenues to pay off procurement debts incurred in 2000 in the CPUC’s proposed plan of reorganization, which is competing with PG&E’s own plan in PG&E’s bankruptcy trial.

In November 2002, the CPUC issued a unanimous decision (D.02-11-026), applicable to both SCE and PG&E, lifting its prior restriction on the use of the 2001 rate increases and allowing those revenues to be used for "returning each utility to financial health."

Sometime in 2003, SCE’s and PG&E’s accumulation of excess rates should match their historic procurement debts, leaving little excuse for continuing today’s high rates. Once the debts are paid, rates could be reduced, or dedicated to some purpose other than payment of past utility debts. SCE has filed a petition to reduce its rates which, if approved by the CPUC, would take effect later this year. PG&E has not indicated its intentions, beyond its bankruptcy reorganization plan, which promises no rate increases.

The CPUC has proposed to dedicate a share of the excess rates to a loan program to defer direct access customers’ payment of DWR and utility procurement costs. In a decision issued in November 2002 (D.02-11-022), the CPUC capped the payment for these costs applicable to direct access customers at 2.7 cents per kilowatt hour. The CPUC majority (Commissioners Peevey, Brown and Duque) reasoned that such a cap was necessary to maintain the viability of existing direct access contracts.

Because 2.7 cents is not enough to pay what direct access customers owe for DWR power already delivered, or for DWR operating costs in the next few years, a revenue shortfall or "under-collection" is predicted. Over time (10-15 years), as DWR costs decline, direct access customers will catch up and pay off this under-collection.

Since payment of DWR’s costs (bond payment and ongoing revenue requirement) can’t be postponed, the obligation to pay any shortfall from direct access customers necessarily shifts to each utility’s bundled customers, be they residential, agricultural, commercial or industrial. Estimates of the magnitude of this under-collection, and the length of time it will take for direct access customers to pay it off, vary depending on projections of future operating costs of DWR power contracts. The Committee has requested analysis and testimony on this issue for this hearing.

Each ratepayer dollar dedicated to covering the shortfall for direct access customers is a dollar that can’t be used to reduce rates for bundled customers. As an example, SCE recently announced its intention to reduce its rates once its procurement debt is fully recovered, which it estimates will be in June or July of this year. According to SCE, its bundled customers will pay a higher rate as a result of the 2.7 cent cap to extend a "loan" to direct access customers. The average rate decrease for its customers will be 0.6 cents per kilowatt hour less than if direct access customers were paying in full. Based on these averages, a large commercial customer consuming 500,000 kilowatt hours per month would give up $36,000 in savings in the first year. The impact on rates of the CPUC’s decision, and the policy priorities it reflects, are important subjects for the Committee to investigate and understand.