Comments of the California Large Energy Consumers Association
Before the Committee on Energy, Utilities and Communications of the
California State Senate

January 21, 2003

Thank you for your invitation to speak. My name is Barbara R. Barkovich. I am here representing the California Large Energy Consumers Association (CLECA), whose members include companies in the cement, steel, air products, and plastics industries. All of these members are electricity-intensive, 24/7 manufacturing operations and they are distributed throughout the state. I have been actively involved in CPUC rate proceedings for more than 20 years, and directly involved in all of the proceedings leading to the current situation with DA fees.

I begin with several facts:

The State's purchases of power on the spot market during the first six months of 2001 and its long-term (10-year) contracts entered into during that period will hang over the economy for ten years. The State has already had to issue nearly $12 billion of bonds that will be paid back over the next 20 years by all ratepayers at roughly 1/2 cent per kWh. Its long-term contracts have an average cost of 10 cents/kWh, nearly twice the cost of the utilities' power portfolio, and roughly the system average cost of delivered power in 2000. These purchases have, and will continue to have, a negative impact on the State's economy.

Unfortunately, the Legislature and the CPUC have compounded the adverse affect of these power costs on the economy by the illogical and unfair manner in which they were passed on to customers. The distribution of responsibility for those increases, as a result of actions taken by the governor's office, legislature and the CPUC, fell very disproportionately on business, in particular commercial and industrial customers. In addition to the one center per kWh rate increase in January 2001 to cover utility cost increases (which exempted certain residential load), there was a large rate increase in June 2001 to cover DWR purchases, in which:

• 50% of residential customers saw no increase
• 65% of residential usage saw no increase, representing 25% of all usage of the three largest investor-owned utilities
• agricultural increases were held to 15% on average
• large commercial and industrial customers saw increases that averaged 40-70% and in, in the case of the largest, highest voltage interruptible industrial customers, exceeded 120%.

Under the circumstances, it is not surprising that customers, especially large customers, sought cheaper sources of energy. Many had been DA customers in 1998-2000 and had been forced back to utility service by suppliers who had not properly hedged their contracts against wholesale price increases. Whereas DA customers protected themselves by contract from wholesale price increases, the Commission allowed these suppliers to pass on that risk to the utilities who now demand that the DA customers cover it for them. Indeed, these customers are now required to pay for hundreds of millions of dollars of the utility undercollections resulting from utility payments to these suppliers, payments that were never passed on to the customers. These customers did not ask to go back to utility service and did not ask for DWR to buy them power, and yet they will now be asked to pay both for DWR historic undercollections and for a share of its ongoing purchase costs. There is something very unfair about this.

Nonetheless, in order to retain their DA service in the face of CPUC threat's to retroactively eliminate it, these DA customers have agreed to pay their share of the DWR costs. They are already paying for SCE's undercollections and expect to pay for PG&E's. They will pay for the DWR historical and ongoing procurement costs over time, despite the fact that they have received no power from the DWR since the late summer of 2001. But they cannot pay these costs all at once. Some of these DA customers are state agencies and entities that have trouble paying their power bills now. Some are electricity-intensive customers who are in intensely competitive markets, facing competition from abroad as well as domestically. The state's economy is already down and they are struggling to survive. If they are asked to pay these costs faster, even more will go out of business.

As they pay over time, they will incur some liability for costs over the cap for the combination of the undercollections, the bond charges, and the DWR excess costs. They will pay other customers back, with interest. If they go out of business or incur costs that they cannot pay, it will simply create a further burden on the economy and on the state budget.

The amount they will owe is not known and is currently unknowable. Current DWR revenue requirements are based on highly conservative assumptions about the price at which DWR can sell excess power in the market. They also assume generation that is unlikely to be built, and that gas prices will be well below current market prices. If DWR power moves closer to market prices, as all of these assumptions would suggest, the DWR excess costs will diminish. Ironically, this will not be good for the state or its economy either. But it will reduce any excess over the CRS that these customers, and bundled customers, will have to pay.

If the legislature and the CPUC want to reduce the negative impact on the economy of high power prices, there are some things that can and should be done. First of all, the grossly unfair rate increases to larger customers that occurred in 2001 should be rolled back proportionate to the increases themselves, so that the customers who took the largest hit should receive a concomitant benefit. The CPUC will have an opportunity to do this shortly in the Edison territory.

Second, a reasonable payback of DWR costs over time should be pursued so that further damage is not done to the economy. It has to take place over time, with a payback with interest to those customers who will help defray the up-front costs.

Third, alternatives that benefit the power system as a whole as well as customers, such as the continuation of interruptible rates under the current program, should be pursued. This program represents over 1000 MW of load shedding designed to protect other customers from loss of service. This program made a major contribution to protecting firm customers in 2000 and 2001 and the customers currently remaining on the program have shown their willingness to shut down in exchange for an up-front assurance of lower rates. Many of them have 24/7 operations and cannot respond to one hour price spikes under real-time or coincident pricing options. But they will shed load, and have done so, in response to system reliability problems. The state should not throw this option out with the bathwater.

Fourth, the legislature should seriously reconsider the distortions created by protecting 25% of all electricity usage from any rate increases. Expansions of the CARE program, while nobly intended, have only increased the amount of usage that is off limits for increases. But CARE at least is directed at the needy, whereas the provisions of AB1X shield every residential customers from any rate increases for a large percentage of its usage - in many cases for all its usage. Unfortunately, cost increases were incurred by the State and the utilities in order to serve these customers as well, and others are now paying for their burden. If the burden is not spread in a fair way, the state's economy will continue to suffer even more than it has done.