California is in a regulatory quagmire relative to energy and how it is generated, marketed and used. California water agencies, as an industry, uses more electricity than any other: five percent of the total, 7 percent of the peak usage. The price of electricity has major impact on the cost of getting water to users in homes, on farms and in industry. Reliability of electricity redsources is critical to assuring the people of California they are going to the water needed for all of life's endeavors.

Background:

The state's experiment with deregulation, the collapse of the deregulated market as wholesale electricity prices soared, the shortages that caused rolling blackouts and the spiraling costs for consumers-including water agencies-has frustrated water agencies throughout California as they work to maintain service with adequate quantities of good quality water. But the continuing struggle at the state and federal levels to repair the damage of the past few years has left consumers, including water agencies, in a state of uncertainty.

The production, management, marketing and regulation of electricity in California are in a state of flux. State and federal regulators, Congress, the State Legislature and even a federal court are working (maybe vying) to sort it out and put in place laws and regulations that will change California's energy future: California will have a new market design, investor-owned utilities may be significantly changed, new rate structures will affect most Californians and how (and whether) consumers can control their energy costs will be decided.

Following is an overview of some of the events, circumstance and proceedings that ACWA is following:

• Regulatory proceedings now underway-both before the Federal Energy Regulatory Commission (FERC) and the California Public Utilities Commission (CPUC)-are likely to completely restructure the electricity market in California. There remain, however numerous unanswered questions about what rules should be in place for the electricity market-who will be responsible for what, how power is purchased for or by the utilities, who will be building new power plants and making sure the state has adequate reserves.
• The direct access (deregulated) retail market has been suspended for an unknown period of time, frustrating ACWA-USA's work to help members reduce their electricity costs through the direct access market.
• The CPUC is struggling to determine the "exit" fees that should be paid by utility customers that pursue direct access (if it is restored) and/or on customers who try to meet their electricity needs through self-generation.
• Various proceedings may have other impacts for self-generation. In one CPUC proceeding the Commission is dealing various options, including interconnect and standby charges and responsibilities. At the same time, possible incentives to encourage self-generation are being explored. Conflicting signals from the state are the result.
• There is some uncertainty about who-the utilities, the Department of Water Resources, other state agency or other entity-should be the buyer of electricity for customers of the investor-owned utilities starting next January (when DWR's statutory authority to do so is set to expire). A CPUC, under the assumption that state law enacted during the height of the crisis requires it, has a proceeding to define how the utilities would handle the responsibility. In some cases customers themselves could be there own buyers if a viable direct access plan is developed.
• The CPUC is looking at the future structure of utility rates, including rate stabilization plans and ending the rate freeze on tariffs. There also are various general rates case and other related proceedings. The outcome of these proceedings will impact the cost of electricity throughout the state.
• DWR has spent a lot of state money purchasing electricity over the past year for the utilities, causing substantial state budget problems in the billions of dollars. A state revenue bond measure is being sold as a stopgap, but eventually the utilities and their customers and/or shareholders will have to pay the money back. Allocation of responsibility for repayment among utilities and among utility customers will impact consumer electricity costs for years to come.
• The Pacific Gas & Electric Co. (PG&E) bankruptcy proceedings may significantly impact the future cost of electricity in most of northern and central California. As part of its recovery plan, PG&E wants to transfer its hydroelectric facilities to new subsidiaries of its parent corporation. That would remove those facilities from CPUC regulation and allow the corporation to sell the power they produce to the utility at considerably higher prices than the current cost to the utility. That likely will mean higher retail pricing for PG&E electricity, though PG&E says it won't. The CPUC has filed an alternative plan with the bankruptcy court that would leave the facilities with the utility and under commission regulation. In the meantime, PG&E has already filed with FERC for the transfer of the hydro facilities called for in its reorganization plan.
• The CPUC still refuses to recognize water agencies as providers of essential services that should be exempt from blackouts unless there is an adequate energy alternative available to an agency.

ACWA Board of Directors' Policy Guidance:

Because of the enormous impact the regulatory and legislative decisions will have on water agencies, ACWA, through its Energy Committee and staff of the Regulatory Affairs, State Legislative and Federal Affairs Departments, is working to have positive impact at all levels of decision making. The Association Board of Directors adopted goals and specific objectives to guide that work:

Goals:

• Supply: The California electricity supply should be reliable, sufficient, competitive and diverse. Supply should be met with both generation and demand-side resources. The State should insure that there are adequate new resources being developed to meet demand.
• Rates: California electricity rates should be reasonable, nondiscriminatory and reflective of customer needs.
• Choice: California electricity customers should have a variety of choices-including self-generation, direct access, conservation and load management, and rate options-available to manage their electricity costs.
• Responsibility: California electricity customers should be responsible for their own electricity costs.
• Utility Assets: Utility assets that historically have been dedicated to public use-generation, transmission, and distribution-should remain under state or local regulation and be cost-of-service priced.

Objectives:

• Customer choice (i.e., direct access) for energy providers should be restored.
• Exit fees or other non by-passable charges should be avoided or be minimal so that consumers purchasing their electricity through a third party are not paying for energy they are not using.
• Who purchases electricity for the utilities is less important than how effective of a buyer the purchasing entity is. Bureaucracies should be avoided and overhead kept as low as possible. There should be appropriate reviews of purchasers' performance.
• Utilities should be required to own a base quantity of generation that is dedicated to service for their customers.
• Power purchases for the utilities (whether by the utilities, DWR, the ISO or other entity) should be based on a market mechanism that is fair to buyers, sellers and ratepayers, transparent, and that results in the lowest reasonable price. Marginal pricing should not be used and no seller should get paid more than the amount for which that seller offers its power.
• Utility rates (for both bundled and direct access customers) should be set at cost of service plus a fair rate of return for utility shareholders. Rates should not penalize large users just because they are large users.
• There should be a consistent state policy to encourage self generation, which means making it economically competitive with purchasing power from the utility or in a direct access market: (1) financial incentives through grant and low interest loan programs, (2) no exit fees, (3) reasonable interconnect requirements and (4) reasonable standby charges.
• Self-wheeling should be allowed. Self-generators should be able to provide power to multiple sites through reasonable wheeling arrangements with the distribution utilities. These off-site sites could be the generators' own facilities or those who purchase excess generation from them.
• The state should encourage and provide incentives for consumers to implement effective demand side management/conservation programs to improve the state's ability to handle energy shortages and avoid blackouts.
• Summer curtailment/load reduction programs need to be structured to provide appropriate compensation and contract terms for participants. Programs should be developed on a multi-year basis to make customer investments, where necessary or beneficial to these programs, financially sound for the participants.
• Water agencies should be recognized as providing essential services. They should be provided a black out exemption similar to that now provided to other providers of essential services.
• Appropriate market structure should be developed to allow the maximum number of suppliers to participate on an equitable basis. "Shallow" generation markets should be subject to regulatory intervention and control.
• California should join regional transmission organizations when it is demonstrated that there is an advantage for California ratepayers. Transmission organizations should not infringe upon the traditional rights of publicly owned utilities