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FACTSHEET

Fact Sheet: Legislation to Let State Buy Electricity for Utility Companies Impact on Ratepayers

The passage of AB1X on Thursday, February 1, is an unprecedented event in our state's history. Governor Davis and the California Legislature have placed the state, and its taxpayers, in the electricity supply business on behalf of private utility companies, who claim they can't, and clearly won't, perform that function any longer.

Some have argued that under the circumstances, the state had little choice but to step in to keep the lights on. This is debatable. FTCR and other consumer groups offered detailed proposals that would have protected residential and small business ratepayers from the deregulation debacle and lowered electricity rates for those consumers. The Legislature did not accept the proposals.

In any case, FTCR did not support AB1X because it contains numerous loopholes and provided no constraints against abusive terms:

o Wholesale prices are likely to drop precipitously within several years, as new supply and other events make it difficult for wholesale suppliers to charge the current windfall prices. At that point, the long-term contract price may far exceed the market price, and what seemed like a good deal by today's standards will become a white elephant.

o The massive amount of state money made available by AB1X -- $10 billion -- was said to be requested by the Governor in order to negotiate contracts long enough in duration to allow the Governor to make good on his promise of no rate increases prior to his re-election campaign in 2002. Shorter term contracts might have cost more up front but would have cost less overall.

o Providing $10 billion, without any restrictions or counter-leverage, signals the wholesale energy companies that have manipulated supplies to create shortages that the doors of the state Treasury are wide open. Nothing in the bill gives these profiteering companies an incentive to come to the table with the lowest possible prices. For example, the threat of seizure and condemnation, or a windfall profits tax, might have encouraged the energy suppliers to offer a better deal.

o There is no requirement that the utilities compensate the state for extending its credit. AB1X is an interest-free charge card, and a significant bailout of the utilities.

o The legislation empowers the utility companies to charge ratepayers for billing and delivery services related to electricity purchased by the state. The bill requires the PUC to set the charges. Such charges could become a vehicle for paying off the utilities' losses.

o While Senate lawmakers were able to freeze rates for 130% of residential baseline consumption, most families exceed this level of consumption. They will experience far higher rates on the second tier of service. There is no protection for any businesses.

o The legislation does not repeal the deregulation law that caused this crisis. Thus, once state contracting authority expires in 2003, there is no statutory protection against another market failure and we could find ourselves back in the midst of another crisis.

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