Labor Day found me trudging around in one of those "big box" discount stores, looking for a sale on a new refrigerator. Out West, California lawmakers spent the holiday putting together their own discount plan (em this one promising rate cuts for the state's residential electric consumers, funded by "rate reduction bonds" backed by a state-owned bank for economic development.
Either way you cut it, the holiday proved worthy of its name. I wore myself out looking and still don't have my refrigerator. And in California, organized labor largely got its way from the state legislature, winning several concessions in the new bill (Assembly Bill 1890) designed to save jobs: 1) stranded-cost status for lost jobs, 2) preservation of overly strict standards for reliability to keep marginal plants running, and 3) a clause to force buyers of divested fossil plants to retain the former utility for several years to operate the plant.
The nub of the deal lay in a questionable trade that allocates a larger-than-logical share of costs for stranded generation assets to small commercial and residential customers, in exchange for publicly funded rate discounts promised down the road. Utilities as hidden tax collectors? In California, at least, the government will serve as a hidden collector of utility bills, embedded in state tax rates.
Stranded Costs (Where the Deal Was Cut)
"The legislation gives clear direction. [It reduces] everybody's downside risk."
That opinion comes from Jan Smutny-Jones, executive director of the Independent Energy Producers Association, the voice of competitive generation in California. He praises the state legislature for its enormous investment in the bill.
He also believes the bill will prove advantageous for independent generators (IPPs) in California: "From the perspective of the IPPs, we're very pleased with the legislation. It gives us some very clear signals and market opportunities."
But it sends a very different signal to consumer groups, as I learned in talking with Nettie Hoge (executive director) and Lenny Goldberg (private lobbyist, Lenny Goldberg & Associates), representing TURN (Toward Utility Rate Normalization), and Michael Shames (executive director) and Eric Woychik (consultant, Strategic Integration), representing UCAN (Utility Consumers Action Network).
In many ways, the most important issue was stranded costs and the so-called "40-33" problem (that term alludes to the choice between using a 40-percent or a smaller 33-percent allocator to bill small customers for stranded investment).
Nettie Hoge at TURN notes that the state's investor-owned electric utilities had already "pow-wowed with their large customers." From what I understand, this industry coalition wanted to set any stranded-cost allocation to reflect the 40-percent share that residential customers pay for system costs, not the 33-percent share they pay for generation.
"Here's where the deal was cut," says Woychik.
According to Woychik, the law envisions that the California Public Utilities Commission (PUC) will spread stranded costs among ratepayers using the method known as "equal percentage of marginal cost" (EPMC). In other words, even though industrial and agricultural customers impose a larger drag on generation assets, a "full-EMPC" allocator for residentials would reflect demand on overall system costs, instead of a smaller allocation based upon the residentials' smaller share of generation.
"It's wrong to use the full-EPMC allocator to bill stranded generation to residentials," says Woychik. "Instead, you should use the EPMC allocation factor that applies to generation only."
Goldberg sees it differently. He notes that the bill's original language would have locked in a "full EPMC" allocation, but that lobbying efforts changed the wording to preserve the PUC's right to change the allocation. "The legislature made its views pretty well known on the unfairness of cost allocation to ratepayers," says Goldberg.
The deal still appears questionable to Woychik.
"The law promises a 10-percent rate cut," he notes, "with a 20-percent reduction in five years. I don't think that's a deal at all. It will be funded by a state-financed loan, to be paid back eventually by residential customers. On the other hand, natural gas prices are declining. IPP prices will fall at the 'QF cliff' (above-market, fixed-price contracts will expire soon). In 10 years, you've got a rate decrease anyway."
"From our point of view," says Hoge, "The deck was stacked. The large customers were not going to stand for something that was not at least as good [for them] as the PUC decision."
Reliability (Out of Touch)
The California bill contains some peculiar, perhaps contradictory, provisions. Foremost is reliability.
On one hand, AB 1890 directs the governing board for the independent system operator (ISO) to "assess the adequacy of current and prospective institutional provisions for the maintenance of reliability," and to conduct an "independent review and assessment" of reliability criteria followed by the Western Systems Coordinating Council (WSCC). At the same time, however, the ISO must employ planning and operating reserve criteria "no less stringent" than those set by the WSCC and North American Electric Reliability Council (NERC).
Woychik suggests that organized labor won the "no less stringent" language in an effort to preserve jobs by codifying strict reliability standards.
"We sort of won and lost on this," says Woychik. "I was happy to see the ISO review of WSCC, but
the other language bothered me. My view is that these [reliability] rules are old, out of touch, and expensive."
Woychik notes that even some in the industry would prefer a relaxation of reliability standards that would free up plant for open-market sales. Says Woychik: "Northern States Power is very unhappy about the standards imposed by the Mid-Continent Area Power Pool, which it feels requires too much spinning reserve that could be sold somewhere else."
Another plum for organized labor is a clause designed to preserve union jobs. The clause forces buyers of divested utility generating plants to contract with the selling utility or successor corporation to operate and maintain the facility for at least two years.
"When I talked with the utilities and IPPs they all rolled their eyes about this," says Goldberg. "It's a real problem, interfering with the market, and working as an impediment for capital to come in and to buy up these plants."
Goldberg also faults "anti-slamming" language added to the bill to protect consumers from abuses prevalent in the telephone industry. "We are very concerned that the language actually will work against residential customers and marketing efforts. We think it will hurt the market. We [TURN] told the legislators, 'Hey, don't do us any favors.'"
At press time Gov. Pete Wilson had not yet signed the bill. Goldberg told me that Wilson already had sent a letter to the Federal Energy Regulatory Commission saying that if the California legislature did anything to change the PUC's decision, he would veto the bill.
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