Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Something for Everyone: The Politics of California's New Law on Electric Restructuring

Fortnightly Magazine - November 15 1996

off the "securitized assets," replacing them on the balance sheet with the cash proceeds from the "sale," their annual revenue requirement associated with the recovery of capital and return for those assets is reduced. The large customers agreed that the revenue requirement savings could be targeted to small customers, resulting in an immediate 10-percent decrease for that class. The legislature further mandated an additional 10-percent decrease beginning in 2002; this insurance should not pose a problem for the utilities if they have truly recovered their stranded costs by that time.

State Senator Peace claimed that the Infrastructure Bank would be able to issue debt at a lower cost of money than the utilities would charge for carrying the asset on their books. It turns out, however, that nearly all the benefit of the securitization approach will come from extending the repayment term; the cost of money differential is slight since the CPUC had already reduced the rate of return on utility stranded assets to a debt-based return.2

The securitization program became very important since TURN (Toward Utility Rate Normalization) was most unhappy about the willingness of the conferees to accept a freeze on allocating stranded costs among customer classes. TURN had fought hard to limit small ratepayer liability to 35 percent of the stranded costs. The current CPUC-approved rate design, with an allocation of stranded costs based on an equal percentage marginal cost (EPMC), mandates a higher cost responsibility level on small customers. (Small customers would pay for stranded costs based on their EPMC share of overall systems costs, rather than their smaller share of generation costs.) Large customers threatened to walk from the process if the legislature were to adopt TURN's proposed EPMC based only on generation. In the end, the conferees argued that the rate relief for small customers promised by securitization would provide an offsetting benefit to the cost allocation freeze. TURN ultimately agreed that the securitization program would provide an actual 10-percent reduction.

How Will Utilities Recover 100 Percent of Stranded Costs?

In return for some type of rate freeze, the utilities received strong assurances for recovering their $20 to $30 billion in stranded costs over the transition period (January 1, 1998 to December 31, 2001). AB 1890 also expands upon the CPUC's definition of stranded costs to include worker retraining and displacement compensation, initial support for renewable energy technologies, and reliability-related capital additions made prior to December 31, 2001.

Ostensibly, all going-forward costs, such as operation and maintenance costs, fuel and fuel transport, and administrative and general costs, will be recovered via the Power Exchange or from contracts with the ISO for units run for system reliability.3

With stranded costs estimated at between $20 and $30 billion, the resulting competition transition charge (CTC) could range from 2 to 4 cents per kilowatt-hour (¢/Kwh). Naturally, some parties sought exemptions from the "non-bypassable" CTC obligations.

Parties who believed that they enjoyed historical rights to bypass the utility system argued that it was unfair to include a CTC on those transactions. This group included cogeneration projects by the major oil