[BETA] Fortnightly

Early on in the debate, the legislature had signaled the commission that it would need the blessing of lawmakers to pursue its agenda.This past August, during the waning days of a two-year session, the California Legislature unanimously passed a landmark bill to deregulate the state's $23-billion electric utility industry.

The new law, known as "Assembly Bill (AB) 1890, largely reaffirms the broad outlines of the December 1995 Final Policy Decision issued by the California Public Utilities Commission (CPUC). It ratifies the CPUC's plan for a Power Exchange to create a wholesale electricity market, and an independent system operator (ISO) to manage operation of the transmission grid. It also calls for state-backed bonds to "securitize" stranded costs and secure a promise for a 10-percent rate reduction for residential and other small customers.

Overall, AB 1890 covers an enormous range of issues (em from market structure to direct access (em with special incentives for various players:

s Utilities (em receive strong assurances of their ability to recover $20 to $30 billion in stranded

costs over a four-year period

(municipals must play in the new market to get this authority).

s Large Customers (em get direct access in the near term, a shorter stranded-cost recovery period, and an exemption from paying stranded costs in certain areas.

s Labor unions (em are guaranteed that worker retraining and severance will be included in stranded costs, and benefit from a provision that requires buyers of divested plants to maintain labor agreements for two years.

s IPPs (em receive assurances that existing contracts will be respected, some certainty as to the method of calculating avoided cost, and utility financial support of both new and existing projects.

s Small customers (em are guaranteed a rate freeze and a mechanism that provides rate reductions by securitizing a portion of the stranded costs, as well as standards for system reliability and protections against consumer fraud by new suppliers.

All in all, the legislative committee remained remarkably diligent in attempting to comprehend the implications of each special provision inserted in AB 1890. But since the measure was crafted with the help of dozens of interest groups and their lobbyists, AB 1890 emerged ultimately as the bill with something for everyone.

Is the Small Customers' 10% Rate Reduction for Real?

The legislators had let it be known early in the game that a rate freeze would not be sufficient politically; instead, they had insisted that small customers must see a rate decrease (em in both nominal and real terms. So, rather than threaten utilities with reductions in stranded-cost recovery to achieve this rate relief, the rate reduction for small customers is paid for by securitizing a portion of each utility's stranded costs, using up to $10 billion in revenue bonds issued by the State Infrastructure Bank.1 The utilities will receive the proceeds of the sale of the bonds, write off that portion of stranded assets, and collect interest and principal payments from small customers over a 10-year period. The utilities' rights to these payments will be transferred to the Bank.

As the utilities write