The deregulation of electric utilities in California and its effect on Navy Installations

Transcription

1 Calhun: The NPS Institutinal Archive Theses and Dissertatins Thesis and Dissertatin Cllectin 1997 The deregulatin f electric utilities in Califrnia and its effect n Navy Installatins O'Shea, Patrick J Mnterey, Califrnia. Naval Pstgraduate Schl

2 NPS ARCHIVE 1997 O'SHEA, P. NAVAL POSTGRADUATE SCHOOL Mnterey, Califrnia THESIS THE DEREGULATION OF ELECTRIC UTILITIES IN CALIFORNIA AND ITS EFFECT ON NAVY INSTALLATIONS by Patrick J. O'Shea June 1997 Principal Advisr: William R. Gates Apprved fr public release; distributin is unlimited. Thesis

3 OX LIBRARY ^GRADUATE SCHOOL ' CA ^

4 REPORT DOCUMENTATION PAGE Frm Apprved OMB N Public reprting burden fr this cllectin f infrmatin is estimated t average 1 hur per respnse, including the time fr reviewing instructins, searching existing data surces, gathering and maintaining the data needed, and cmpleting and reviewing the cllectin f infrmatin Send cmments regarding this burden estimate r any ther aspect f this cllectin f infrmatin, including suggestins fr reducing this burden, t Washingtn Headquarters Services, Directrate fr Infrmatin Operatins and Reprts, 1215 Jeffersn Davis Highway. Suite 1204, Arlingtn, VA 22202^*302. and t the Office f Management and Budget, Paperwrk Reductin Prject ( ), Washingtn, DC AGENCY USE ONLY (Leave Blank) REPORT DATE June TITLE AND SUBTITLE: THE DEREGULATION OF ELECTRIC UTILITIES IN CALIFORNIA AND ITS EFFECT ON NAVY INSTALLATIONS REPORT TYPE AND DATES VERED Master's Thesis 5. FUNDING NUMBERS 6. AUTHOR(S) O'Shea, Patrick J. 7. PERFORMING ORGANIZATION NAMES(S) AND ADDRESS(ES) Naval Pstgraduate Schl Mnterey, CA PERFORMING ORGANIZATION REPORT NUMBER 9. SPONSORING/MONITORING AGENCY NAME(S) AND ADDRESS(ES) 10. SPONSORING/MONITORING AGENCY REPORT NUMBER 11. SUPPLEMENTARY NOTES The views expressed in this thesis are thse f the authr and d nt reflect the fficial plicy r psitin f the Department f Defense r the United States Gvernment. 12a. DISTRIBUTION/AVAILABILITY STATEMENT 12b. DISTRIBUTION DE Apprved fr public release; distributin is unlimited. 13. ABSTRACT ( Maximum 200 wrds ) On January 1, 1998, Califrnia will be the first state t deregulate its electricity industry. Deregulatin is expected t reduce the high rates paid thrughut the state by allwing cmpetitin, nt regulatrs, t determine rates. Deregulatin will disslve the mnply f the electricity industry by allwing custmers t chse wh will supply their electricity. Cmpetitin will emerge in the generatin market, where transactins between cnsumers and suppliers will be free and pen. Under regulatin, mst custmers d nt have a chice in their electricity supplier. Their supplier is usually determined by their gegraphic lcatin. This thesis researches the differences between the regulated and deregulated rate structures and prvides a cst cmparisn fr a Navy rganizatin classified as a large cmmercial/industrial user f electricity. There are many aspects f deregulatin that are nt yet determined, but the initial cmparisn indicates deregulatin may save Navy installatins mney. If deregulatin prgresses as planned, additinal future saving may ccur. 14. SUBJECT TERMS Electric Utilities, Deregulatin f Electricity, Califrnia Assembly Bill SECURITY CLASSIFICA- TION OF REPORT Unclassified 18. SECURITY CLASSIFI- CATION OF THIS PAGE Unclassified 19. SECURITY CLASSIFICA- TION OF ABSTRACT Unclassified 15. NUMBER OF PAGES PRICE DE 20. LIMITATION OF ABSTRACT UL NSN Standard Frm 298 (Rev. 2-89) Prescribed by ANSI Std

5 11

6 Apprved fr public release; distributin is unlimited. THE DEREGULATION OF ELECTRIC UTILITIES IN CALIFORNIA AND ITS EFFECT ON NAVY INSTALLATIONS Patrick J. O'Shea Lieutenant Cmmander, United States Navy B.S., New Hampshire Cllege, 1985 Submitted in partial fulfillment f the requirements fr the degree f MASTER OF SCIENCE IN MANAGEMENT frm the NAVAL POSTGRADUATE SCHOOL June 1997

7

8 ABSTRACT OX LIBRARY TGRADUATE SCHOOL CA 0304*5101 On January 1, 1998, Califrnia will be the first state t deregulate its electricity industry. Deregulatin is expected t reduce the high rates paid thrughut the state by allwing cmpetitin, nt regulatrs, t determine rates. Deregulatin will disslve the mnply f the electricity industry by allwing custmers t chse wh will supply their electricity. Cmpetitin will emerge in the generatin market, where transactins between cnsumers and suppliers will be free and pen. Under regulatin, mst custmers d nt have a chice in their electricity supplier. Their supplier is usually determined by their gegraphic lcatin. This thesis researches the differences between the regulated and deregulated rate structures and prvides a cst cmparisn fr a Navy rganizatin classified as a large cmmercial/industrial user f electricity. There are many aspects f deregulatin that are nt yet determined, but the initial cmparisn indicates deregulatin may save Navy installatins mney. If deregulatin prgresses as planned, additinal future saving may ccur.

9 VI

10 TABLE OF NTENTS I. INTRODUCTION 1 A. BACKGROUND 1 B. RESEARCH QUESTIONS 2 C. METHODOLOGY 3 D. THESIS STRUCTURE 3 II. CALIFORNIA'S REGULATED ELECTRICITY INDUSTRY 5 A. INTRODUCTION 5 B. UTILITY REGULATION 6 1. Federal Regulatin 6 2. State Regulatin 6 C. RATEMAKING 7 1. Establish the Revenue Requirement 8 2. Allcate the Revenue Requirement 10 D. NCLUSION 17 III. CALIFORNIA'S DEREGULATION OF THE ELECTRICITY INDUSTRY A. INTRODUCTION 19 B. DEREGULATION 20 C. ASSEMBLY BILL Independent System Operatr Pwer Exchange 22 vii

11 D. ELECTRICITY RATES UNDER DEREGULATION Generatin Transmissin Distributin Custmer Related Charges (Revenue Cycle Services) Cmpetitive Transitin Charge 29 E. NCLUSION 30 IV. ST ANALYSIS 33 A. INTRODUCTION 33 B. ELECTRICITY FORECAST Energy Cnsumptin Frecast Demand Frecast 38 C. PACIFIC GAS AND ELECTRIC RATE SCHEDULE E Cst f Demand Cst f Energy Custmer Charge Ttal Electricity Cst 43 D. UNBUNDLED ST OF ELECTRICITY 43 E. ST OF ELECTRICITY MPARISON 46 V. NCLUSIONS AND REMMENDATIONS 49 A. NCLUSIONS 49 B. REMMENDATIONS 49 viii

12 C. REMMENDED AREAS FOR FUTURE STUDY 50 APPENDIX A - NPS ELECTRIC BILLS 51 APPENDIX B - CLASSICAL DEMPOSITION FORECAST 53 APPENDIX C ENERGY FORECAST - 55 APPENDIX D - DEMAND FORECAST 57 APPENDIX E PG&E ST OF - ELECTRICITY 59 APPENDIX F - UNBUNDLED ST OF ELECTRICITY 61 LIST OF REFERENCES 63 INITIAL DISTRIBUTION LIST 65 IX

13

14 I. INTRODUCTION A. BACKGROUND Navy installatins spend a significant amunt f their Operatins and Maintenance, Navy (0&M,N) budgets n utilities and, in particular, electricity. Fr example, the Naval Pstgraduate Schl (NPS) may spend less than seven percent f its nn-labr 0&M,N budget n electricity, but that percentage actually equates t ver $1 millin a year. Therefre, any reductin in electricity cnsumptin may prduce significant cst savings. As a result, cmmands adpt energy cnscius prgrams t reduce electricity cnsumptin and, ultimately, the csts. Unfrtunately, these prgrams can nly reduce wasteful electricity cnsumptin. Additinally, n matter hw energy cnscius a cmmand may be, there are still envirnmental factrs that affect cnsumptin and ver which the cmmand has n cntrl. Therefre, cmmands can nly reduce their cnsumptin and csts by a certain amunt. Anther cmpnent which affects the amunt installatins pay fr electricity is the rate schedule. In Califrnia, apprximately 80 percent f all electricity service is prvided by three investr wned utilities (IOUs), Pacific Gas and Electric, Suthern Califrnia Edisn, and San Dieg Gas and Electric [Ref. 1 :p. 2]. These cmpanies are given exclusive rights t prvide electricity t specific gegraphic areas. Since these rights create mnplistic markets, the state invkes regulatin as a surrgate fr cmpetitin. Regulatin cntrls all aspects f the IOUs' peratins, which includes setting the rate schedules. Therefre, the rates custmers pay fr electricity depend n 1

15 their gegraphic lcatin, which dictates their electricity supplier and ultimately their rate schedule. Califrnia legislatrs believe that the electricity rates paid in Califrnia are t high and have respnded with Assembly Bill This bill, which was signed int law n September 23, 1996, will deregulate the electricity industry by breaking up the three IOUs and allw ther electricity suppliers t cmpete fr retail custmers. It is believed that deregulatin will decrease electricity rates because cmpetitin will determine the price, nt regulatin. If Navy installatins culd reduce their electricity rates, the savings wuld be genuine. This thesis researched hw electricity rates are determined under regulatin, hw deregulatin will affect thse rates, and whether Navy installatins in Califrnia will realize lwer electricity csts under deregulatin. B. RESEARCH QUESTIONS The primary research questin is: Will Navy installatins, which receive electricity frm ne f Califrnia's three IOUs, save mney as a result f deregulatin? Secndary research questin are: 1 What laws and regulatins gvern Califrnia's electricity industry? 2. Hw des Califrnia plan t deregulate its electricity industry? 3. Hw will the electricity rate structure fr Navy installatins change under deregulatin?

16 C. METHODOLOGY This research was cnducted in three parts. First, a review was made f the regulated rate setting prcedures fr the IOUs. This was accmplished thrugh a rate case fr Suthern Califrnia Edisn decided by the Califrnia Public Utilities Cmmissin (CPUC). Secnd, infrmatin n hw Califrnia plans t deregulate the electricity industry was reviewed. Deregulatin infrmatin was btained thrugh varius surces, such as Assembly Bill 1890, the 1994 Electricity Reprt prepared by the Califrnia Energy Cmmissin, and an Internet' site managed by the CPUC. The CPUC site cntains a wealth f infrmatin abut the peratins and prceedings f the CPUC, as well as a dedicated sectin fr deregulatin. Third, a cst cmparisn between a regulated rate schedule and deregulatin was cnducted fr a Navy rganizatin in rder t determine what type f cst savings, if any, may be realized. D. THESIS STRUCTURE This thesis is divided int five chapters. Chapter I is the thesis backgrund, methdlgy, and structure. Chapter II cncentrates n the regulated electricity industry. It prvides the reader a brief backgrund n why the industry is regulated and hw rates are determined by the regulatrs. Chapter III cntains the thery and methd by which Califrnia will deregulate the industry. It discusses what aspects f the industry will change and hw the rates will be determined. Chapter IV cmpares the cst f electricity fr the Naval Pstgraduate - Schl's Main Statin, which is classified as a large cmmercial/industrial user f electricity. This chapter applies a baseline frecast t the applicable rate schedule and t 3

17 the prjected cst f electricity after deregulatin. Chapter V cntains the cnclusins and recmmendatins frm the study.

18 II. CALIFORNIA'S REGULATED ELECTRICITY INDUSTRY A. INTRODUCTION At the turn f the century, vast applicatins fr electricity were just starting t be realized. Peple then believed that, because f its natural characteristics, the emerging industry culd best serve the public as a mnply. Fr example, multiple transmissin lines thrughut neighbrhds, each prvided by different cmpanies cmpeting fr the same business, were thught t be inefficient. Additinally, multiple transmissin lines running thrughut every neighbrhd wuld have been unsightly. [Ref. 2:p. 1] The characteristics f the electric industry that naturally lend themselves t mnplistic behavir als prvide ecnmic benefits. Single transmissin lines are ecnmically mre efficient fr tw reasns. First, single transmissin lines reduce the amunt f electricity lst during transmissin. Secnd, resurces are nt wasted n duplicate lines. [Ref. 3] Hwever, the absence f cmpetitin, r existence f a mnply, can als have detrimental effects n a free market ecnmy. Sciety is essentially a captured market because the gd r service can nt be received by any ther means. A mnply is free t set any price and is ften nt respnsive t custmer needs. This may lead t a breakdwn in areas such as safety, quality f service, and, mst imprtantly, inefficient use f valuable resurces.

19 B. UTILITY REGULATION In an attempt t prtect the captured market frm the mnplists' rule, the gvernment impses regulatin. Regulatin is designed t simulate the characteristics f a cmpetitive market by regulating all aspects f the industry, frm rates t the quality f service prvided. Tday, the electric industry is regulated natinally by the Federal Energy Regulatry Cmmissin (FERC), and in Califrnia by the Califrnia Public Utilities Cmmissin (CPUC). 1. Federal Regulatin The Federal Energy Regulatry Cmmissin is a divisin within the Department f Energy. The cmmissin was established in by the Department f Energy Organizatin Act. Its charter is t regulate the transmissin f natural gas and il and the transmissin and whlesale market fr electricity in interstate cmmerce; t inspect and license private, municipal and state hydrelectric prjects; and t versee related envirnmental matters. The Cmmissin ensures that whlesale electric rates, service standards, and electricity transmissin thrugh interstate cmmerce are cnducted in accrdance with federal laws. In summary, FERC regulates interstate utility transactins and claims n jurisdictin ver electric rate setting within the states. [Ref. 4:p. 1 ] 2. State Regulatin The Califrnia Public Utilities Cmmissin was riginally established as the Railrad Cmmissin in In 1946, its name was changed t the CPUC and it was empwered t regulate the utilities and transprtatin services within the state. The CPUC's decisin-making bdy is its Bard f Directrs. The bard includes five 6

20 members, each appinted by the gvernr and apprved by the senate. Each member serves a six year term. [Ref. 5:p. 1] The CPUC's jb is t prtect cnsumers frm electric and transprtatin mnplies by regulating safety, standards f service, and rates. The Cmmissin must als cnsider the financial status f the investr-wned utilities. It must allw utility cmpanies t recver their perating csts and capital csts and still prvide a reasnable rate f return fr their sharehlders. Therefre, the Cmmissin must balance the public interest and the utilities' interests when setting electric rates. [Ref. 5:p. 1] C. RATEMAKING The Califrnia Public Utilities Cmmissin spends a great deal f time and resurces reviewing utilities' applicatins fr rate increases. These applicatins presumably are nt attempts by the utilities t increase prfits, but substantiated requests t adjust rates t meet their revenue requirement. During the review prcess, several cntrasting ratemaking plicies may be emplyed, depending n ne's utlk. The methd CPUC uses is a marginal cst-based ratemaking plicy. [Ref. 6:p. 3] This plicy is designed t "achieve rates which reflect the csts that the custmer impses n the system." [Ref. 6:p. 20] The thery behind marginal cst is that ecnmic efficiency will ccur if gds are priced at the pint where the cst t prduce ne additinal unit is equal t the benefit received frm cnsuming that unit. Therefre, the CPUC's bjective is t set the price f electricity at an ptimal pint where the quantity f electricity cnsumed is equal t the amunt prduced and the marginal cst f the last unit prduced equals the marginal 7

21 value f that unit t cnsumers. If this bjective is met, then the prper amunt f resurces will be allcated t the electric industry. [Ref. 6: Attach. 3,pp. 1-3] The marginal cst ratemaking plicy has been used by the CPUC since This plicy distributes electric csts in the mst equitable manner, while prviding custmers with infrmatin abut their electricity cnsumptin. The marginal-cst ratemaking prcess is divided int tw parts. They are: 1 Establish the revenue requirement. 2. Allcate the established revenue requirement. [Ref. 6:p. 13] The fllwing subsectins will discuss each part f this prcess, as illustrated in Figure Establish the Revenue Requirement The revenue requirement is the ttal f all current csts t the utility, which include: peratin and maintenance, fuel, taxes, depreciatin, interest payments, and an allwance fr return n equity. These csts, r expenses, are referred t as embedded csts and equal the amunt authrized by the CPUC t be recvered thrugh electricity rates. It shuld be nted that embedded csts include capital investment csts. [Ref. 6:pp. 16]

22 Operatins and Maintenance Fuel Establish Revenue Requirement Taxes Depreciatin Interest Payments Return n Equity Allcate Energy Generatin Revenue Requirement Demand Custmer N Transmissin Distributin Determine Marginal Cst f Service Respnsibility Related Charges I Allcate Revenue Requirements Between Rate Grups Set Rates Within Rate Grups MnknunV Custmer Charge Energy Charge Demand Charge Baseline Simple Blck Declining Blck Time-f-Use Figure 1. Marginal Cst f Service Ratemaking.

23 2. Allcate the Revenue Requirement The allcatin prcess is a fur step prcedure which determines hw the authrized revenue requirement will be spread between rate grups. The fur steps are: a. Determine marginal cst f service. b. Determine marginal cst f service respnsibility. c. Allcate the revenue requirement between rate grups. d. Set rates within rate grups. [Ref. 6:p. 16] The fllwing explains each step in mre detail: a. Determine Marginal Cst fservice. The marginal cst f service is determined by the marginal csts f its three principal cmpnents, energy, demand, and custmer-related csts. (1) Energy. The marginal cst f energy is defined as the additinal cst incurred t prduce ne additinal unit f electricity, measured as a kilwatt hur (kwh). The cst f energy is variable, depending n the time f day and seasn. Marginal energy csts include the cst f fuel plus variable peratin and maintenance expenses. [Ref. 6:p. 24] (2) Demand. Demand is the level f capacity needed t meet the wrklad. Because electricity is difficult and expensive t stre, electricity must be instantaneusly generated in rder t meet the current demand n the system. If demand were t exceed system capacity, blackuts and/r greyuts culd ensue. The marginal cst f demand is the additinal cst incurred t prduce ne additinal unit f demand measured as a kilwatt (kw). The marginal cst 10

24 f demand is determined by the marginal csts f generatin, transmissin, and distributin. (a) Generatin. Generatin is the prcess that prvides electricity t the system. The prcess is accmplished by varius methds such as hydrelectric, nuclear, and fssil-fired. The CPUC defines the marginal cst f generatin as "... the change in ttal csts f prviding dependable capability t deliver energy frm the generating system." [Ref. 6:pp ] (b) Transmissin. Transmissin is the prcess f transprting high-vltage electricity frm the generatin facility t the distributin pint. Califrnia's transmissin lines are cmplex netwrks intercnnected thrughut the western United States. These netwrks allw intercnnectin between generating plants and prvide backup electricity in times f emergencies. [Ref. 2:p. 11] The marginal cst f transmissin was nt riginally calculated as part f the system marginal csts. In 1982, hwever, the Califrnia Public Utilities Cmmissin decided that transmissin csts shuld be added t system marginal csts. As kw demand increases, transmissin lines reach their capacity, increasing the prbability f a system shrtage. Therefre, custmers shuld bear the csts they impse n the limits f the transmissin lines by the relatinship between new plant investment and transmissin lad grwth. [Ref. 6:p. 56] 11

25 (c ) Distributin. Frm the transmissin lines, electricity is transferred t the distributin system via substatins. Substatins are used t reduce the high-vltage electricity frm the transmissin lines t lwer vltages used by the distributin system. A distributin system cnsists f primary and secndary lines which distribute electricity t distributin transfrmers. The distributin transfrmers reduce the vltages t usable levels fr end users. Marginal distributin csts are determined in the same manner as transmissin marginal csts. (3) Custmer-Related Csts. The final marginal cst is custmer-related csts. These csts measure the change in ttal csts required t prvide access t the system fr new custmers and the csts t maintain current custmers. Examples f custmer csts include custmer equipment, custmer service, and accunting expense. [Ref. 6:p. 24] Custmer-related csts are estimated by a "new custmer nly" (N) methd. This methd assigns the lump sum cst fr new hkups t each grup based n the number f new custmers and estimated replacements. Current csts are estimated based n the ttal number f custmers in the rate grup. The marginal custmer related csts are the sum f the N cst and current csts fr each grup. [Ref. 6:pp ] b. Determine Marginal Cst f Service Respnsibility The marginal cst f service respnsibility assigns each rate grup respnsibility fr the marginal csts incurred by the utility. This is referred t as the 12

26 Marginal Cst Revenue Respnsibility (MCRR). The MCRR is a percent which represents a rate grup's cntributin twards ttal marginal csts. [Ref. 6:pp ] c. Allcate Revenue Requirement Between Rate Grups The allcatin f revenue requirement distributes the revenue requirement between the rate grups. This is accmplished by a methd called equal percent marginal cst (EPMC). The EPMC allcates the revenue requirement based n each rate grup's MCRR. Fr example, if a rate grup's MCRR is 35 percent then the revenue requirement fr that grup will be calculated based n 35 percent. [Ref. 6:p. 6] d. Set Rates Within Rate Grups Utility custmers are divided int service categries called rate grups. Rate grups cnsist f custmers wh receive similar service based n their energy needs and usage. Each rate grup is further divided int specific rate schedules. These schedules will define, at a minimum, the applicability, territry, rates, and special cnditins that may apply t the type f service. The rate schedules are the vehicle used t distribute the rate grup's assigned revenue requirement. Each IOU has unique rate schedules which apply t its custmers. This is because each utility's custmer base and authrized revenue requirements are different. Regardless f the differences between the rate schedules, the type f charges are the same. The primary charges that cmprise a custmer's bill are: (1) Minimum r basic charge. (2) Custmer Charge. 13

27 (3) Demand Charge. (4) Energy Charge. These charges are nt inclusive fr all schedules but are applied as the CPUC distributes the revenue requirement within the rate grup. Each charge is discussed in further detail in the fllwing subsectins: (1) Minimum r Basic Charge. The minimum r basic charge recvers a minimum amunt f revenue fr custmer related csts, such as metering and billing. This charge nrmally applies t dmestic service. (2) Custmer Charge. The custmer charge applies t all custmers except dmestic and is als used t recver custmer related charges. This charge is nrmally a fixed cst. (3) Demand Charge. The demand charge, which recvers the cmpnent csts f demand as discussed abve, is based upn cincidental and nncincidental custmer demand. Cincidental demand is the custmer's demand which cntributes t generatin peak demand. The cincidental demand charge is usually "time f use" (TOU) related and increases frm ff-peak, t partial-peak, and peak, respectively. [Ref. 6: p. 57] Nn-cincidental demand is the custmer's maximum demand placed n the lcal distributin system. The nn-cincidental demand, r facilitiesrelated charge, is TOU independent and is a flat fee dependent n the maximum demand during the perid. The custmer's demand charge will be the ttal f the cincidental and facilities-related charges. [Ref. 6:p. 57] 14

28 (4) Energy Charge. Energy charges apply t all custmers and are designed t recver the cst f fuel, peratins and maintenance, and the remainder f the revenue requirement nt yet recvered by custmer charges and demand charges. The charges are structured t recver the energy csts within each rate grup in a manner that best represents the energy usage characteristics f the grup's custmers. The CPUC emplys different allcatin methds t meet its gals. Fur methds are predminant in the rate schedules. They are: (a) baseline, (b) flat rate, (c) declining blck, and (d) timef-use. (a) Baseline Rates. The baseline methd applies t dmestic users and prvides a minimum quantity f electricity at a lw rate. The schedule is structured int tw tiers. The first tier prvides the minimum quantity f energy at the lw rate, while the secnd tier sets a higher rate fr all energy usage abve the minimum. The mnthly energy charge fr this schedule is the ttal f tier ne and tier tw csts. The baseline rate and quantity will vary accrding t utility, climate, and seasn and is emplyed thrughut Califrnia. (b) Simple Blck. The simple blck r flat rate methd charges ne rate fr all energy use. This methd has restricted applicatins based n custmer demand and mnthly energy use. Fr example, San Dieg Gas and Electric (SDGE) flat rate schedule applies nly t custmers whse mnthly demand is less than 20 kw and mnthly cnsumptin 15

29 less than 12,000 kwh. Energy cst under this schedule is the single set rate times the cnsumptin. [Ref. 7] ( c) Declining Blck. The declining blck methd is a cnsumptin based rate structure. This methd divides energy cnsumptin int blcks and charges a crrespnding rate fr cnsumptin within that blck. Because the cst t prduce energy decreases with increased vlume, the blck rates decline as cnsumptin increases. This methd usually applies t custmers with mnthly demand greater than 20 kw but less than 500 kw. (d) Time-f-Use. The last methd f rate allcatin is the time-f-use (TOU) schedule. TOU schedules charge energy cnsumptin based n the time f day in which it is used. The mst cmmn TOU schedules divide the day int peak, partial peak, and ff peak perids. These perids will vary depending n time f day, regin, climate, and seasn. The peak perid is when energy use is the highest; therefre it equates t the highest rate. The ff peak perid is when energy use is the lwest and crrespnds t the lwest rate. The primary applicants fr TOU schedules are large pwer users with mnthly demand greater than 500 kw. Table 1 is an example f the TOU time perids used by San Dieg Gas and Electric. 16

30 Perid Summer May 1 - Sept. 30 Winter All ther Peak 1 1 a.m. - 6 p.m. Weekdays 5 p.m. - 8 p.m. Weekdays Partial Peak 6. a.m. - 11a.m. Weekdays 6 p.m p.m. Weekdays Off Peak 10 p.m. - 6 a.m. Weekdays Plus Weekends & Hlidays 6 a.m. - 5 p.m. Weekdays 8 p.m p.m. Weekdays 10 p.m. - 6 a.m. Weekdays Plus Weekends & Hlidays Table 1. San Dieg Gas and Electric Time Perids. (SDGE Schedule A6-TOU) D. NCLUSION In cnclusin, the ratemaking prcess determines the amunt f revenue the utility is allwed t generate based n its current csts plus an amunt t ensure a reasnable return n equity. The prcess then determines the marginal csts and assigns the marginal cst revenue respnsibility t each rate grup. The revenue requirement is then allcated t the rate grups based n the equal percent marginal cst methd, as previusly discussed. 17

31 18

32 III. CALIFORNIA'S DEREGULATION OF THE ELECTRICITY INDUSTRY A. INTRODUCTION On September 23, 1996, the gvernr f Califrnia signed Assembly Bill 1890 (AB 1890). This legislatin will deregulate nearly 80 percent f electricity service prvided by Califrnia's three investr-wned utilities (IOUs), specifically Pacific Gas and Electric (PG&E), Suthern Califrnia Edisn (SCE), and San Dieg Gas and Electric (SDG&E). [Ref. l:p. 1] This bill was created in respnse t the high electricity rates paid in Califrnia and the changing cmpsitin f the electricity industry. Califrnia lawmakers and custmers were frustrated with the electricity rates paid in Califrnia cmpared t the rest f the cuntry. The average Califrnia electric bill is lwer than the natinal average. Hwever, Califrnia electricity rates are 40 percent higher. [Ref. 8:pp. 1-4] This is due in part t the stringent energy cnservatin measures and energy efficiency prgrams adpted by Califrnia. These prgrams reduce energy cnsumptin but result in higher rates because the fixed csts f the IOUs must be spread ver the lwer energy cnsumptin. [Ref. 2:p. 2] Legislatin, such as the Energy Plicy Act f (EPAct), has shifted the paradigm f the electric industry. The EPAct prvided whlesale electricity generatrs nndiscriminatry access t the transmissin grid at reasnable rates. This effrt increased cmpetitin and lwered rates within the whlesale generatin market created by nnutility generatrs. [Ref. 2:p. 2] 19

33 The Califrnia Energy Cmmissin (CEC) believes lwer electricity rates are essential t the well being f the state. The CEC states, Energy is essential t Califrnia's ecnmy. The state's lng-term ecnmic grwth relies n, amng ther factrs, an adequate and stable supply f energy in all majr frms: transprtatin fuels, electricity and natural gas. It is time fr refrm. Califrnia needs stable energy prices, as lw as can be achieved cnsistent with cncern fr the envirnmental impacts f energy use, as part f the fundatin fr a sund ecnmy, new industries, jbs and exprt pprtunities fr Califrnia's businesses. [Ref. 9:p. 6] Tday, regulatin cntrls every aspect f the electricity industry. The issues regarding wh will prvide service t whm, hw much custmers will pay fr electricity, and even where and hw many pwer plants will be built are all decided by regulatin. The thery behind the deregulatin f electricity is t allw the natural frces f supply and demand t cntrl the electric industry. State authrities are ptimistic that these frces will increase ecnmic efficiency and ultimately reduce rates. [Ref. 2:p. 1] B. DEREGULATION The deregulatin f electricity will permit electricity suppliers t cmpete fr retail custmers. Under regulatin, the investr-wned utilities (IOUs) prvide electricity t custmers accrding t the custmers' gegraphic lcatin. Each IOU receives exclusive rights t serve specific lcatins. Hwever, in return fr these rights each IOU must prvide service t all custmers within that area. Under this situatin, if the custmer chses t receive electricity, it must be frm the utility with the rights t serve that lcatin. Deregulatin will disslve these exclusive rights and allw virtually all utilities access t all regins. The custmers will be able t chse their electricity supplier. 20

34 It is essential t the success f deregulatin that cmpetitive markets exist where transactins are free and pen between suppliers and cnsumers. This will likely prve t be the biggest challenge fr deregulatin. Califrnia's IOUs have evlved, with the help f regulatin, int vertically-integrated crpratins. This means generatin, transmissin, distributin, and custmer services are all prvided by a single utility cmpany. [Ref. 2:pp. 1-9] The vertical-integratin f the utilities prvides substantial market pwer, which makes it difficult fr smaller cmpanies t cmpete. Fr a truly cmpetitive market t exist, the vertical-integratin f these utilities must be disslved. This will be accmplished by "unbundling" each cmpnent f electricity service. [Ref. 2:p. 1] C. ASSEMBLY BILL 1890 Assembly Bill (AB 1 890) states that three situatins must ccur in rder fr a cmpetitive generatin market t exist. They are: 1 Separate mnply utility transmissin functins frm cmpetitive generatin functins, by develping independent, third-party cntrl f transmissin access and pricing. 2. Permit all custmers t chse amng cmpeting electric pwer suppliers. 3. Prvide custmers and suppliers with pen, nndiscriminatry, and cmparable access t transmissin and distributin services. [Ref. 10: Sectin 330.k] These situatins depend n separating generatin, transmissin, and distributin frm the vertically-integrated IOUs. The legislatin accmplishes this separatin by establishing tw gvernment agencies, an Independent System Operatr (ISO) and Pwer Exchange (PX). 21

35 1. Independent System Operatr The Independent System Operatr (ISO) will functin as the central crdinatr fr electricity transmissin. It will crdinate the peratins f the electricity netwrk t ensure that safety and reliability standards are maintained. This will be accmplished by the IOUs transferring cntrl f their transmissin facilities t the ISO. The ISO will perate as an independent entity cntrlled by regulatin. [Ref. 10:Sectin 330. m] In additin t netwrk crdinatin, the ISO will act as a dispatch service fr electricity. This service will maintain system reliability by purchasing electricity t meet any differences between the system's supply and demand. The dispatch service will decide where t purchase electricity, based n the lwest bid frm the generatin market. [Ref. 6:p. 15] The establishment f the ISO is designed t break the vertical-integratin f the IOUs by separating generatin frm transmissin. This will allw all generatin suppliers pen access t the netwrk, thereby prviding the necessary cnnectin between generatin and retail custmers withut IOU interventin. 2. Pwer Exchange Assembly Bill establishes a cmpetitive auctin service t dispatch electricity generatin, called the Pwer Exchange (PX). The PX will serve as a mediatr fr generatrs with excess capacity and retail suppliers. The PX will accmplish this thrugh an pen bid auctin where generatrs bid excess capacity thrugh the PX. Retail suppliers will als bid thrugh the PX, but they will d s with demand requirements. 22

36 The PX will match the demand f the retail suppliers with the lwest generatin bids. [Ref. llrsectin III.B.2] Intrducing the ISO will separate the vertically-integrated IOUs, but the Califrnia Public Utility Cmmissin (CPUC) is als cncerned abut the hrizntal market pwer the IOUs will have in the generatin market. The CPUC states, There is a need t ensure that n participant in these new market institutins has the ability t exercise significant market pwer s that peratin f the new market institutins wuld be distrted. [Ref. 12:Sectin II. D] The CPUC will implement tw plicies t prevent the IOUs frm exercising generatin market pwer. First, the IOUs will be required t divest themselves f 50 percent f their fssil-fired generating facilities. Secnd, a mandatry buy-sell plicy will require the IOUs t bid all their generatin thrugh the PX. In return, the IOUs will buy electricity back frm the PX t meet their custmers' demand. [Ref. 12:Sectin II. -II.D.l] D. ELECTRICITY RATES UNDER DEREGULATION Deregulatin will prmte cmpetitin within the electricity industry by unbundling the cmpnents f electricity service. Cmpetitin will emerge primarily in the generatin market, which is where custmers will chse wh will supply their electricity. Transmissin anil distributin are critical t system reliability, and therefre will remain regulated. Because each cmpnent f electricity service may be prvided by different cmpanies, electric bills may reflect the separate csts f generatin, transmissin, distributin, and custmer-related csts. Additinally, AB has

37 authrized a Cmpetitive Transitin Charge (CTC) t be added t all custmers' bills during a specified transitin perid. 1. Generatin Custmers may chse between varius electricity suppliers such as the lcal utility, the PX, and retail suppliers. Once an electricity supplier is chsen, the custmers will enter int a bilateral cntract with that supplier. Three cntract ptins the custmer may chse are: a. Retain lcal utility service. b. Stabilize price thrugh financial hedging. c. Direct access. [Ref. ll:sectin I.B.I] The thery behind each cntract ptin will be discussed in further detail belw: a. Retain Lcal Utility Service Under this cntract, custmers will retain all services frm their lcal utility cmpany. The lcal utility will be respnsible fr prviding all services frm generatin t distributin and will charge the custmer fr the bundle f services. Residential and small cmmercial custmers will have an additinal chice between blck rates r time-f-use (TOU) billing. TOU rates were nt available fr these custmers under regulatin. The cst f electricity will be determined by the market rate. If a custmer is nt satisfied with the lcal utility rate, the custmer may chse a new supplier. [Ref. ll:sectin I.B.I] 24

38 b. Stabilize Price Thrugh Financial Hedging. Custmers wh are cncerned abut price stability within the cmpetitive electricity market may enter int a hedging cntract with a third party. Custmers wh enter int this type f cntract will cntinue t receive bills frm their lcal utility cmpany. Hwever, peridically bills will be ttaled and cmpared t the hedged cntract price. The third party will pay the custmer fr any amunt greater than the hedged price. Cnversely, the custmer will pay the third party fr any amunt less than the cntract price. Under this cntract, the custmer will be able t predict electricity csts independent f market fluctuatins. [Ref. 1 1 :Sectin I.B.2] c. Direct Access Direct access will prvide retail custmers the pprtunity t negtiate the price f electricity directly frm suppliers. The retail custmer and the supplier will decide n the terms and cnditins f a direct access cntract withut gvernment interventin. Direct access will pen the generatin market t cmpetitin. Utilities will cmpete fr retail business against ther utilities and nnutility generatrs. As such, the generatin market will be pen t anyne willing t cmpete and nt just electricity prducers. [Ref. 1 1 :Sectin LB. 3] Direct access cntracts must als include the lcal utility, which must deliver the electricity frm the supplier t the custmer. The CPUC believes that, as lng as mutually satisfactry cntract arrangements are made amng the custmer, supplier, and lcal utility, there is n need fr gvernment invlvement. [Ref. 1 1 :Sectin LB. 3] 25

39 2. Transmissin As stated abve, the Independent System Operatr (ISO) will cntrl the transmissin facilities t allw nn-discriminatry access t the transmissin grid. The ISO will determine the cst fr using the transmissin netwrk based n the marginal cst f generatin at different lcatins. The fllwing is an example f hw the marginal csts f different lcatins will perate. This example is taken frm the Califrnia Energy Cmmissin, 1994 Energy Reprt: Suppse the price f generatin at lcatin A is 3 cents per kilwatt hur and the price at lcatin B is 5 cents per kilwatt hur. If there are n transmissin cnstraints and enugh generatin at A, a custmer at either A r B shuld pay nly 3 cents fr generatin. But suppse there was insufficient transmissin between A and B, s that nt all the 3 -cent generatin cnsumers wanted frm A culd get t B. In that case, the price f generatin fr cnsumer at A wuld still be 3 cents; but the price fr a custmer lcated at B wuld be 5 cents. If a cnsumer at B sught t purchase pwer frm a 3-cent generatr at A, it culd sign a cntract t pay 3 cents fr the generatin, but it wuld nt be able t receive all f that pwer; that is, sme prtin f the generatr's 3-cent pwer culd nt be physically transmitted t B because f netwrk cnstraints. T enable the cnsumer at B t get its remaining pwer, generatin at B wuld have t be used and its price wuld be 5 cents, raising the spt price fr pwer delivered at B t 5 cents. Cntinuing the example, if pwer had been ffered t the ISO's dispatch service at these different prices, the ISO wuld have been ffered pwer at A at 3 cents and pwer at B at 5 cents. Given the netwrk cnstraint, sme f the 3 cent pwer wuld nt have been taken;, instead, the ISO wuld have dispatched the remaining pwer at B, paying 5 cents. The cnsumer at B wuld have paid 5 cents fr all its pwer, even thugh part f the pwer wuld have cme frm A at 3 cents. [Ref. 2:pp. 17] 26

40 The difference, at lcatin B, between the 5-cent price paid and 3-cent price will equal the price fr transmissin, i.e., 2-cents. The ISO will set the price f transmissin between lcatins based n the price f electricity sld thrugh the exchange at thse different lcatins. The transmissin prices will apply t all users f the transmissin system. [Ref. ll:sectin I.C.3] The ISO will create cngestin cntracts fr custmers entering lng-term generatin agreements which require using the transmissin system. These cntracts will give the custmer the right t transprt all their cntracted electricity ver the transmissin lines. Under this circumstance, the custmer will nt be subject t the market cngestin f the transmissin netwrk. [Ref. ll:sectin I.C.3] 3. Distributin The investr-wned utilities will retain the wnership and cntrl f their distributin facilities, which will remain regulated in rder t maintain system reliability. This will ensure that nn-discriminatry service is prvided t all custmers. The cst f distributin services will n lnger be determined by the marginal cst f service but by a methd called Perfrmance Based Ratemaking (PBR). Regulatrs believe that the marginal cst f service has becme t difficult and cmplex t maintain in the new cmpetitive electricity market. [Ref. 1 1 :Sectin III.E] PBR is an incentive type f ratemaking which establishes benchmarks t measure the utility's perfrmance. Perfrmance, abve the benchmark wuld receive financial rewards, perfrmance belw the benchmark wuld result in a financial penalties. Similar t cst f service, each 27

41 utility will be measured against benchmarks unique t its distributin area. [Ref. ll:sectiniii.e.l] T date, the benchmarks and the perfrmance measurements fr PBR have nt yet been established. Until then, custmers will pay the distributin rate established in the applicable June 10, 1996 rate schedule. 4. Custmer Related Charges (Revenue Cycle Services) The Califrnia Public Utility Cmmissin has decided t unbundle revenue cycle services frm the distributin services t help prmte cmpetitin in the new electricity market. This decisin will prvide energy suppliers with three billing ptins: a. Cnslidated energy supplier bill. b. Cnslidated distributin cmpany billing c. Dual billing. Each ptin is discussed belw: a. Cnslidated Energy Supplier Billing. Revenue cycle services are prvided by the energy supplier under this ptin. Distributin services prvided by the lcal distributin utility t the custmer will be billed t the energy supplier. The energy supplier will present the custmer with a cnslidated bill fr all electricity service. b. Cnslidated Distributin Cmpany Billing. Under this billing ptin, the lcal distributin cmpany will prvide revenue cycle services. The energy supplier will bill the distributin cmpany fr the 28

42 custmer's energy use; the distributin cmpany will then present the custmer with a cnslidated bill. c. Dual Billing. This billing ptin separates energy service frm distributin services. Therefre, bth the energy supplier and distributin cmpany will prvide revenue cycle services and bill the custmer separately. [Ref. 13:The PG&E Mdel] The unbundling f revenue cycle services is nly applicable t custmers wh receive electricity frm suppliers ther than their lcal utility cmpany. 5. Cmpetitive Transitin Charge Assembly Bill 1890 authrizes the cllectin f a Cmpetitive Transitin Charge (CTC) t recver the lss frm the unecnmical assets f the IOUs. Legislatrs feel the IOUs shuld nt be cmpletely respnsible fr the cst f unecnmical assets acquired under regulatin. An unecnmical asset is an asset whse bk value exceeds its market value. The CTC cvers regulatry assets, existing pwer purchase bligatins, and unecnmical utility generating assets. (Ref. 1 1 : Sectin I.A] All custmer grups will be allcated a prtin f the CTC based n the equal percent f marginal cst (EPMC) methd. Once allcated, the transitin cst will be cllected as a surcharge based n a percentage f the custmer's bill. [Ref. 1 1 : Sectin V] The CTC will be cllected during a transitin perid that will begin January 1, 1998 and nt extend beynd December 31, 2001, with a few exceptins. [Ref. 10:Sectin 367.a e] It shuld be nted that custmers wh cntract electricity frm suppliers ther than their lcal IOU, must still pay the CTC. [Ref. 10:Sectin370] 29

43 E. NCLUSION In cnclusin, electricity suppliers will cmpete fr retail business, which shuld drive electricity rates belw thse set by regulatin. Retail custmers will have t decide wh will prvide their electricity. The decisin may be as simple as staying with the lcal utility cmpany r as cmplex as mnitring the market t find the best rate amng cmpeting suppliers. The transmissin f electricity will maintain the structure f a mnply, run by an Independent System Operatr, t ensure system safety and reliability. The cst f transmissin will depend n where electricity is prcured and the amunt f netwrk cngestin between the supplier and custmer. The lcal utility will maintain cntrl f distributin facilities and remain regulated t maintain system reliability and access. The cst f distributin will eventually be determined using an incentive ratemaking methd, called Perfrmance Based Ratemaking. Revenue cycle services will be prvided by either the supplier, the distributin utility, r bth. The custmer will be indifferent t wh prvides the revenue cycle services because the cst is usually negligible in relatin t the rest f the bill. The prvider will likely be determined by the electricity supplier based n the ecnmic cnsequences f the service. Finally, during a fur year transitin perid, custmers will be charged a cmpetitive transitin fee t recver the unecnmical assets acquired by the IOUs as a result f regulatin. The CTC will appear as a surcharge t all custmers' bills. 30

44 Hwever, legislatrs are cmmitted t ensuring that custmers will nt experience a rate increase as a result f the CTC if they purchase electricity at a rate equal t r less than that prvided by the PX. 31

45 32

46 IV. ST ANALYSIS A. INTRODUCTION This chapter cmpares the cst f electricity fr a Navy rganizatin befre and after deregulatin. The cmparisn was cnducted in fur parts. First, electricity cnsumptin and demand fr the rganizatin was frecast. Secnd, the frecast was applied t the rganizatin's regulated rate schedule. Third, the frecast was als applied t the prjected cst f the deregulated services. Finally, the csts were cmpared. This analysis was cnducted n the Naval Pstgraduate Schl's Main Statin, which is categrized as a large cmmercial/industrial electricity user with demand equal t r greater than 1000 kilwatts (kw). The main statin receives electrical pwer frm Pacific Gas and Electric (PG&E) and is charged accrding t PG&E's E-20 Rate Schedule. B. ELECTRICITY FORECAST The electricity frecast was cnducted t prvide an electricity cnsumptin base with which t cmpare csts. The electricity frecast fr the main statin cnsists f a frecast fr cnsumptin and a frecast fr demand. Data pints were cllected directly frm PG&E electric bills fr 24 mnths starting September ana ending September (See Appendix A fr data) The billing cycles nrmally begin the last week f the previus billing mnth and end the third week f the current billing mnth. The cycles d nt pse a prblem except when the seasns change. This creates bills which include charges frm bth seasns. 33

47 Because the seasns' charges are distinguishable, they are separated and paired with similar seasns. Fr example, Nvember's bill starts the winter seasn but includes summer charges fr the last week f Octber. The charges fr Octber are separated frm the Nvember bill and paired with the summer bills. February 1995's data included ttal energy cnsumptin nly and did nt prvide the perid's demand. Therefre, the demand was assumed t be the average f January 1995's and March 1995's demand. 1. Energy Cnsumptin Frecast The energy cnsumptin frecast is cnducted by frecasting the mnthly energy cnsumptin and then allcating the cnsumptin between the PG&E time perids. a. Mnthly Energy Frecast As Figure 2 indicates, the Main Statin's mnthly energy cnsumptin des nt indicate any significant difference between the summer and winter seasns but des indicate a slight decrease in trend. Hwever, a clser lk at the electric bills reveals the number f days per billing cycle varies frm mnth t mnth. Therefre, an average daily cnsumptin was calculated based n the mnthly ttal divided by the number f days in the billing cycle. Figure 3 is the result f the calculatin. 34

48 1,500,000 </> 3 1,400,000 O i X a 1,300, ,200,000-1,100,000- O Q in m a> m m a> m CD Q. < c 3 < ts O 0) Q 1 0) LL O) Q. < CD c 3-5 CD O) 3 < Figure 2. NPS Main Statin Mnthly Electricity Cnsumptin. Figure 3 cnfirms the decreasing trend indicated by Figure 2 but als indicates seasnality. The seasnality ccurs every six mnths which crrelates t the schl's academic breaks. These breaks ccur between June/July and December/January. The frecast was perfrmed using the average daily cnsumptin. 48,000 w 46,000 3 I 44,000 42,000 40,000 38,000 O Q in m m in m in CD CD CD CD > > O) O) a> O) CD a> > a> ja il c O) T5 XI *1 c ai U- < > < O Q LL < i < <D. 3 3 CD 0) 3 3 Figure 3. Average Daily Electricity Cnsumptin. Based n the trend and seasnality f the energy cnsumptin data, the Classical Decmpsitin methd f times series analysis is used. The Classical Decmpsitin methd, in general, creates a seasnal index fr each perid by remving 35

49 Daily the seasnality frm the data. It then calculates a regressin equatin based n the deseasnalized data, which is the trend. The frecast is then the prduct f the regressin equatin and the seasnal index. [Ref. 14] This discussin will be limited t the results f the analysis and will nt discuss the actual calculatins. The calculatins are cntained in Appendix B. Figure 4 validates the decmpsitin frecast by cmparing it t the average daily cnsumptin. This frecast is then used t calculate the mnthly cnsumptin by simply multiplying the frecast times the number f days per mnth. The calculatins fr the mnthly frecast are cntained in Appendix B. 48,000 42,000 * 40,000 38,000 ft 6.a c i it ii c u en O ^- "^ "^ Oqu.< ><Oqu.<-5< - Frecast «Daily Average Figure 4. Daily Frecast vs. Average Daily Electricity Cnsumptin. b. Mnthly Cnsumptin Allcatin T accurately predict electricity csts, the mnthly cnsumptin is further divided between summer and winter, and further int time-f-use (TOU). Pacific Gas and Electric TOU rate schedules charge csts based n the seasn and als accrding t st peak, partial peak, and ff peak. Summer is defined as May 1 thrugh Octber 31 s and 36