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Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: Eric Benson X-To: Richard Shapiro, James D Steffes, Steven J Kean X-cc: X-bcc: X-Folder: \Steven_Kean_June2001_4\Notes Folders\Discussion threads X-Origin: KEAN-S X-FileName: skean.nsf attached is a notice from CERA re California bill AB 1 for your review and= =20 files; please advise if additional material is requested - Eric Benson =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D ----- Forwarded by Eric Benson/NA/Enron on 02/05/2001 05:07 PM ----- =09webmaster@cera.com =0902/05/2001 04:37 PM =09=09=20 =09=09 To: insights@cera.com =09=09 cc:=20 =09=09 Subject: California's Desperate Attempts to Avoid a Rate Increase - = CERA=20 Alert Title: California's Desperate Attempts to Avoid a Rate Increase URL: http://www20.cera.com/eprofile?u=3D35&;m=3D2241 California=01,s Desperate Attempts to Avoid a Rate Increase On February 1, 2001, the California Assembly approved and the California governor signed a new law intended to secure power supplies for California.= =20 The legislature has been meeting since early January in a =01&special extraordi= nary session=018 to address the power market crisis in the state, and the new la= w represents their first significant piece of legislation. The bill, AB 1, establishes a new mechanism for purchasing power for the state=01,s busines= ses=20 and consumers. Whether the mechanism works will depend chiefly on whether the limited revenue source used to pay for the power=01*collected by the state= =01,s investor-owned utilities (IOUs) under current retail rates=01*will cover=20 wholesale power market costs incurred by the state. The law reflects the obsession by California lawmakers with avoiding a rate increase rather than focusing on = the underlying flaws in California=01,s market structure. AB 1 ushers in several important changes to the California market structure= .=20 It also contains several key provisions that capture the political mood in the state. Highlights of the bill include * Power buying authority transferred. The responsibility for purchasing pow= er for the customers of California=01,s IOUs has been transferred to the Calif= ornia Department of Water Resources (CDWR). The California utilities will continu= e=20 to operate and schedule their remaining generating facilities and contracts. T= he difference between the utilities=01, total load and the sum of their resour= ces (referred to as the utilities=01, =01&net short=018 amount) will be supplie= d by CDWR,=20 an amount of energy that varies between 5,000 and 25,000 megawatts (MW),=20 depending on the time of year, time of day, and utility plant availability. The=20 utilities most recently performed this function themselves, buying energy from the California Power Exchange (PX). However, CDWR has been buying electricity o= n behalf of the IOUs since mid-January, when the near-bankruptcy of Southern California Edison (SCE) and Pacific Gas & Electric (PG&E) threatened to=20 disrupt supplies to their customers. CDWR is a state agency that manages water reservoirs and transportation systems in the state. CDWR uses an enormous amount of electricity to transport water across California and provides critical load-shedding capability to the independent system operator (ISO).= In addition, CDWR=01,s reservoirs generate power. The CDWR is thus well integr= ated=20 in the state=01,s electric grid but in the past has not executed large, compli= cated energy purchase arrangements to supply the customers of California=01,s=20 utilities. * Portfolio of transactions. The intent of AB 1 is to allow CDWR to execute= a portfolio of contracts to stabilize the cost of power for the utilities and their customers. CDWR has until January 2, 2003, to execute contracts. CDWR will take title to power and is thereby not just acting as a clearinghouse.= It has issued a request for bids and seeks a variety of terms, including month= ly, annual, two-year, three-year, and longer. CDWR may also enter into options. Thus, although CDWR=01,s role is intended to be temporary, the contracts th= at it executes could extend many years. * Power for munis. CDWR may purchase power on behalf of some California municipal utilities at the municipal utilities=01, election. * New payment scheme. CDWR will be entitled to a portion of existing utilit= y rates to pay for the cost of purchased power, interest on bonds, and administrative expenses. This payment stream will be equal to the differenc= e between the generation component currently embedded in utility retail rates (averaging about $0.07 per kilowatt-hour [kWh]) and the utilities= =01,=20 costs to run their own generation plants, costs of bilateral and qualifying facility contracts, and the costs of ancillary services. The CDWR share of retail ra= tes is referred to as the California Purchase Adjustment (CPA). It is not clear whether the CPA will cover wholesale power market costs. Current prices for multiyear power contracts may lie above the CPA. In addition, if investors believe that the CPA is inadequate to cover costs, the entire program may b= e abandoned. * New bonds. Bonds will be issued to secure power. The total amount of bond= s issued may not exceed four times the CPA. The state will transfer $500 mill= ion from the general fund to jump-start the program, which begins immediately.= =20 This seed money and all bond proceeds must be recovered by CDWR from the Califor= nia utilities=01, customers (and municipal utilities if they opt in). * New residential rate freeze. The California Public Utilities Commission (CPUC) is prohibited from increasing residential customer rates until it ha= s completed paying all outstanding obligations. This locks in the recent 9 percent residential rate increase indefinitely. Governor Gray Davis thus ke= eps his pledge not to increase rates further. * Retail competition. To help secure a stable payment stream for the new=20 bonds, AB 1 enables the CPUC to prohibit the utilities=01, retail customers from= =20 choosing an alternative electricity provider until CDWR=01,s obligations are paid.= =20 Although the CPUC has yet to act on this, the action would effectively halt the competitive retail markets in the state for the duration of the CDWR progra= m. * Taxpayer protection. AB 1 directs that the new bonds clearly state =01&&#= 91; n]either the faith and credit nor the taxing power of the State of California is=20 pledged to the payment of the principal of or interest on this bond.=018 Thus, the = bonds are secured only by the payment stream from utility rates. *No assets affected. The CDWR is granted neither ownership nor control of utility assets. Ironically, the authority now granted CDWR is what California utilities had essentially requested last summer when they sought to stabilize electricity prices by executing a portfolio of transactions. The utilities were never provided sufficient authority to execute term contracts. In addition, the utilities have more experience to perform this function than CDWR. Rather than aligning retail rates with wholesale electricity prices,=20 California has sidestepped the issue by simply transferring the electricity purchasing function. SCE and PG&E are still left to contend with uncollected costs fro= m past energy purchases, although they will no longer incur costs associated= =20 with buying power in the current wholesale market while charging frozen retail rates. The utility liquidity crisis has not been resolved. It is not clear whether the law=01,s prohibition on rate increases for=20 residential customers can be achieved. The law is silent on rate increases for commerci= al and industrial customers, providing a potential path for recovering=20 higher-than- expected costs. Alternatively, CDWR could conceivably find contracts of sufficient duration and low enough price that the rate pledge is met. These contracts would lock in today=01,s retail rates for a long period of time. AB 1 is just one of the steps that state officials hope will restore the po= wer system in California to a more stable footing. Key tasks remain. * California=01,s wholesale market structure, which helped cause the supply= =20 crisis by ensuring that it was not profitable or possible to build generation in California, remains unchanged. The term contracts CDWR is likely to sign wi= ll provide a mechanism for mainly existing generators to lay off risk but will= =20 not be sufficient to encourage the build of sufficient new facilities. In=20 addition, California=01,s siting and permitting process remains largely unchanged. * The state must still address the need to expedite the development of new power plants. * AB 1 does not provide for the recovery of uncollected past wholesale ener= gy costs of California=01,s utilities. The state has been negotiating a deal w= ith=20 the utilities that may involve the transfer of generation or transmission asset= s=20 to the state. However, the utilities have achieved recent court victories that= =20 may pave the way to a court-directed recovery of these costs. Recent audits indicate that SCE and PG&E recovered their stranded costs early in 2000, wh= ich should have triggered an end to their respective rate freezes. A legal=20 showdown between the utilities and the state on this issue may be inevitable. **end** Follow above URL for full report. ********************************************************* Come Shoot the Rapids with us at CERAWeek2001, "Shooting the Rapids: Strategies and Risks for the Energy Future" in Houston, February 12-16, 200= 1! For more information and to register, please visit http://www20.cera.com/ceraweek/ ********************************************************* E-mail Category: Alert CERA Knowledge Area(s): Western Energy, ********************************************************************** To make changes to your cera.com account go to: http://www20.cera.com/client/updateaccount Forgot your username and password? Go to: http://www20.cera.com/client/forgot This electronic message and attachments, if any, contain information from Cambridge Energy Research Associates, Inc. (CERA) which is confidential and may be privileged. Unauthorized disclosure, copying, distribution or use of the contents of this message or any attachments, in whole or in part, is strictly prohibited. Terms of Use: http://www20.cera.com/tos Questions/Comments: webmaster@cera.com Copyright 2001. Cambridge Energy Research Associates
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