fw : california ' s desperate attempts to avoid a rate increase - cera alert
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from : webmaster @ cera . com @ enron
sent : monday , february 05 , 2001 4 : 38 pm
to : insights @ cera . com
subject : california ' s desperate attempts to avoid a rate increase - cera alert
title : california ' s desperate attempts to avoid a rate increase
url : http : / / www 20 . cera . com / eprofile ? u = 35 & m = 2241
california  , 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 .
the
legislature has been meeting since early january in a  & special extraordinary
session  8 to address the power market crisis in the state , and the new law
represents their first significant piece of legislation . the bill , ab 1 ,
establishes a new mechanism for purchasing power for the state  , s businesses
and
consumers . whether the mechanism works will depend chiefly on whether the
limited revenue source used to pay for the power  * collected by the state  , s
investor - owned utilities ( ious ) under current retail rates  * will cover
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  , s market structure .
ab 1 ushers in several important changes to the california market structure .
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 power
for the customers of california  , s ious has been transferred to the california
department of water resources ( cdwr ) . the california utilities will continue
to
operate and schedule their remaining generating facilities and contracts . the
difference between the utilities  , total load and the sum of their resources
( referred to as the utilities  ,  & net short  8 amount ) will be supplied by cdwr ,
an
amount of energy that varies between 5 , 000 and 25 , 000 megawatts ( mw ) ,
depending
on the time of year , time of day , and utility plant availability . the
utilities
most recently performed this function themselves , buying energy from the
california power exchange ( px ) . however , cdwr has been buying electricity on
behalf of the ious since mid - january , when the near - bankruptcy of southern
california edison ( sce ) and pacific gas & electric ( pg & e ) threatened to
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  , s reservoirs generate power . the cdwr is thus well integrated
in
the state  , s electric grid but in the past has not executed large , complicated
energy purchase arrangements to supply the customers of california  , s
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 monthly ,
annual , two - year , three - year , and longer . cdwr may also enter into options .
thus , although cdwr  , s role is intended to be temporary , the contracts that it
executes could extend many years .
* power for munis . cdwr may purchase power on behalf of some california
municipal utilities at the municipal utilities  , election .
* new payment scheme . cdwr will be entitled to a portion of existing utility
rates to pay for the cost of purchased power , interest on bonds , and
administrative expenses . this payment stream will be equal to the difference
between the generation component currently embedded in utility retail rates
( averaging about $ 0 . 07 per kilowatt - hour kwh ) and the utilities  ,
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 rates
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 be
abandoned .
* new bonds . bonds will be issued to secure power . the total amount of bonds
issued may not exceed four times the cpa . the state will transfer $ 500 million
from the general fund to jump - start the program , which begins immediately .
this
seed money and all bond proceeds must be recovered by cdwr from the california
utilities  , 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 has
completed paying all outstanding obligations . this locks in the recent 9
percent residential rate increase indefinitely . governor gray davis thus keeps
his pledge not to increase rates further .
* retail competition . to help secure a stable payment stream for the new
bonds ,
ab 1 enables the cpuc to prohibit the utilities  , retail customers from
choosing
an alternative electricity provider until cdwr  , s obligations are paid .
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 program .
* taxpayer protection . ab 1 directs that the new bonds clearly state  &
neither
the faith and credit nor the taxing power of the state of california is
pledged
to the payment of the principal of or interest on this bond .  8 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 ,
california
has sidestepped the issue by simply transferring the electricity purchasing
function . sce and pg & e are still left to contend with uncollected costs from
past energy purchases , although they will no longer incur costs associated
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  , s prohibition on rate increases for
residential
customers can be achieved . the law is silent on rate increases for commercial
and industrial customers , providing a potential path for recovering
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  , s retail rates for a long period of time .
ab 1 is just one of the steps that state officials hope will restore the power
system in california to a more stable footing . key tasks remain .
* california  , s wholesale market structure , which helped cause the supply
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 will
provide a mechanism for mainly existing generators to lay off risk but will
not
be sufficient to encourage the build of sufficient new facilities . in
addition ,
california  , 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 energy
costs of california  , s utilities . the state has been negotiating a deal with
the
utilities that may involve the transfer of generation or transmission assets
to
the state . however , the utilities have achieved recent court victories that
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 , which
should have triggered an end to their respective rate freezes . a legal
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 ceraweek 2001 , " shooting the rapids :
strategies and risks for the energy future " in houston , february 12 - 16 , 2001 !
for more information and to register , please visit
http : / / www 20 . cera . com / ceraweek /
e - mail category : alert
cera knowledge area ( s ) : western energy ,
to make changes to your cera . com account go to :
forgot your username and password ? go to :
http : / / www 20 . 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 : / / www 20 . cera . com / tos
questions / comments : webmaster @ cera . com
copyright 2001 . cambridge energy research associates
fw : california ' s desperate attempts to avoid a rate increase - cera
alert
fyi
- - - - - original message - - - - -
from : webmaster @ cera . com @ enron
sent : monday , february 05 , 2001 4 : 38 pm
to : insights @ cera . com
subject : california ' s desperate attempts to avoid a rate increase - cera alert
title : california ' s desperate attempts to avoid a rate increase
url : http : / / www 20 . cera . com / eprofile ? u = 35 & m = 2241
california  , 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 .
the
legislature has been meeting since early january in a  & special extraordinary
session  8 to address the power market crisis in the state , and the new law
represents their first significant piece of legislation . the bill , ab 1 ,
establishes a new mechanism for purchasing power for the state  , s businesses
and
consumers . whether the mechanism works will depend chiefly on whether the
limited revenue source used to pay for the power  * collected by the state  , s
investor - owned utilities ( ious ) under current retail rates  * will cover
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  , s market structure .
ab 1 ushers in several important changes to the california market structure .
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 power
for the customers of california  , s ious has been transferred to the california
department of water resources ( cdwr ) . the california utilities will continue
to
operate and schedule their remaining generating facilities and contracts . the
difference between the utilities  , total load and the sum of their resources
( referred to as the utilities  ,  & net short  8 amount ) will be supplied by cdwr ,
an
amount of energy that varies between 5 , 000 and 25 , 000 megawatts ( mw ) ,
depending
on the time of year , time of day , and utility plant availability . the
utilities
most recently performed this function themselves , buying energy from the
california power exchange ( px ) . however , cdwr has been buying electricity on
behalf of the ious since mid - january , when the near - bankruptcy of southern
california edison ( sce ) and pacific gas & electric ( pg & e ) threatened to
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  , s reservoirs generate power . the cdwr is thus well integrated
in
the state  , s electric grid but in the past has not executed large , complicated
energy purchase arrangements to supply the customers of california  , s
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 monthly ,
annual , two - year , three - year , and longer . cdwr may also enter into options .
thus , although cdwr  , s role is intended to be temporary , the contracts that it
executes could extend many years .
* power for munis . cdwr may purchase power on behalf of some california
municipal utilities at the municipal utilities  , election .
* new payment scheme . cdwr will be entitled to a portion of existing utility
rates to pay for the cost of purchased power , interest on bonds , and
administrative expenses . this payment stream will be equal to the difference
between the generation component currently embedded in utility retail rates
( averaging about $ 0 . 07 per kilowatt - hour kwh ) and the utilities  ,
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 rates
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 be
abandoned .
* new bonds . bonds will be issued to secure power . the total amount of bonds
issued may not exceed four times the cpa . the state will transfer $ 500 million
from the general fund to jump - start the program , which begins immediately .
this
seed money and all bond proceeds must be recovered by cdwr from the california
utilities  , 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 has
completed paying all outstanding obligations . this locks in the recent 9
percent residential rate increase indefinitely . governor gray davis thus keeps
his pledge not to increase rates further .
* retail competition . to help secure a stable payment stream for the new
bonds ,
ab 1 enables the cpuc to prohibit the utilities  , retail customers from
choosing
an alternative electricity provider until cdwr  , s obligations are paid .
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 program .
* taxpayer protection . ab 1 directs that the new bonds clearly state  &
neither
the faith and credit nor the taxing power of the state of california is
pledged
to the payment of the principal of or interest on this bond .  8 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 ,
california
has sidestepped the issue by simply transferring the electricity purchasing
function . sce and pg & e are still left to contend with uncollected costs from
past energy purchases , although they will no longer incur costs associated
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  , s prohibition on rate increases for
residential
customers can be achieved . the law is silent on rate increases for commercial
and industrial customers , providing a potential path for recovering
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  , s retail rates for a long period of time .
ab 1 is just one of the steps that state officials hope will restore the power
system in california to a more stable footing . key tasks remain .
* california  , s wholesale market structure , which helped cause the supply
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 will
provide a mechanism for mainly existing generators to lay off risk but will
not
be sufficient to encourage the build of sufficient new facilities . in
addition ,
california  , 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 energy
costs of california  , s utilities . the state has been negotiating a deal with
the
utilities that may involve the transfer of generation or transmission assets
to
the state . however , the utilities have achieved recent court victories that
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 , which
should have triggered an end to their respective rate freezes . a legal
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 ceraweek 2001 , " shooting the rapids :
strategies and risks for the energy future " in houston , february 12 - 16 , 2001 !
for more information and to register , please visit
http : / / www 20 . cera . com / ceraweek /
e - mail category : alert
cera knowledge area ( s ) : western energy ,
to make changes to your cera . com account go to :
forgot your username and password ? go to :
http : / / www 20 . 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 : / / www 20 . cera . com / tos
questions / comments : webmaster @ cera . com
copyright 2001 . cambridge energy research associates