This is the third Information Only Report To Council to be issued on the impact of electric deregulation on the City of Sunnyvale. This report is intended to give City Council a brief summary of developments in the electric deregulation area.

In September 1996, AB1890 (Brulte) was signed into law. AB1890 opened the state’s electric energy market to competition.

In 1998, the Association of Bay Area Governments (ABAG) began marketing an Electric Power Pool. Three independent energy providers were contracted to supply electricity to the Pool. Although members were originally promised electric savings of 4%, actual results from the first year of operation indicated no significant cost savings were achieved. In addition, several administrative issues were encountered during the year, prompting several members to leave the Pool. ABAG estimates cost savings for the second year of operation (June 2000) to range between 3-4%.

The City of Sunnyvale spends approximately $2 million each year on electricity. While 3% of this amount equals savings of $60,000, staff believes any short term savings gained by joining the ABAG pool would be offset by a number of factors. Additional staff time would be needed to administer the program. If the City wishes to switch back to PG&E or another energy service provider in the future, PG&E may charge significant conversion/standby costs. One-time costs to convert large meters would be incurred at a cost of $700-$1,500 per meter. A $160,000 refundable interest-earning deposit (estimated) is required in order for the City to participate in the pool. Lastly, the loss of goodwill with PG&E, with whom the City works closely on a variety of projects, could deteriorate the working relationship between the City and PG&E, making projects more difficult to complete.

Energy savings achieved by ABAG and other alternative energy providers have been very small because only a portion of the standard utility bill (25%) is eligible for reduction. The remaining portions of the electric bill are fixed until after March 2002, when full deregulation is expected to further reduce rates. At that time, it is expected that PG&E will need to drop its rates in order to stay competitive with the marketplace. As a result, the City should see substantial decreases in its electric bills, consistent with competitive market rates, even if the City does not change service providers.

Because the fully deregulated energy market is expected to offer major savings primarily to customers with large energy loads, some cities are attempting to aggregate residents and small businesses through creation of "Community Choice" pools. The problem with these types of aggregations is that most energy providers desire an even pattern of energy usage, and most households use electricity primarily during peak daytime and evening hours. By blending in commercial and industrial users, a community choice pool can level its energy profile in order to attract more service providers. There have been several attempts at this form of community aggregation, which have had mixed results thus far. Service providers have been hesitant to participate in these community choice pools because of the number of small residential consumers involved.

As a result, there are two pieces of federal legislation, HR2734 and HR2645, which are seeking to allow local government entities the right to serve as nonprofit aggregators of electrical services. In essence, a City would be allowed to procure favorable electric rates and terms on behalf of its residents and businesses. Both bills are currently in subcommittee and staff is continuing to monitor their status and will report any significant developments to Council.

City staff continues to recommend a "wait-and-see" approach towards alternative energy service providers, including ABAG. The existing energy market offers little savings and much uncertainty. Staff considers it prudent not to lock the City into a long-term contract without reviewing fully deregulated market data, which will not be available until after March 1, 2002. In the meantime, staff will continue to track developments in the electric market, including community choice options, and recommend changes as appropriate.

On September 23, 1996, Governor Pete Wilson signed AB1890 (Brulte) ¾ Electric Deregulation into law. This law opened the state’s electricity market to competition, beginning on January 1, 1998.

AB1890 was designed to:

1. Eliminate the monopoly on electricity;
2. Employ market mechanisms to reduce rates;
3. Give customers choice;
4. Allow competition to thrive; and
5. Allow for a fair rate of return for utilities.

The transition to a competitive marketplace is taking place between 1/1/98 and 3/1/02, during which time a Competitive Transition Charge (CTC) is included in consumers’ utility bills. The CTC is being levied to allow existing utilities to recover their non-economic or stranded assets. A Power Exchange (PX) acts as a spot commodities market for electricity. Purchased power is then delivered to the Independent System Operator (ISO), which manages the transmission grid. Distribution is handled through existing utility lines.

Alternative energy service providers began an intense campaign to attract new customers after January 1, 1998. Despite these efforts, less than 2% of eligible customers to date have switched to an alternative service provider statewide. This is due primarily to continuing uncertainties in the market and the small savings offered, particularly to residential customers. As a result, many alternative energy providers are now marketing the "green power" aspect of their service rather than cost savings. It should be noted that although residential conversions are relatively easy to complete, converting the City’s accounts to another service provider would require several additional steps, including security deposits, meter conversions, and possible standby charges from PG&E.

Many agencies that have switched electric service providers have been surprised at the small amount of actual savings. To date, these savings average between 2-3% of the total annual billing amount. Several experts have recommended a wait-and-see approach until the full impact of deregulation can be evaluated. It is expected that PG&E will reduce its electric rates downward in keeping with this deregulated market in order to stay competitive. Therefore, whatever savings can be offered by alternative energy service providers, once the Competitive Transition Charges are removed, should also be reflected in PG&E rates.

A member of the State Energy Commission recently suggested at an ABAG conference that it may be more productive, cost-savings wise, for a City to focus on energy saving practices rather than switching energy service providers. The City of Sunnyvale has been investigating these types of energy saving programs for a number of years, and has been able to decrease electric energy costs from $2.5 million in fiscal year 1993-94 to approximately $2.0 million at present.

In conclusion, a transformation of California’s electric power market is in progress. All of the key elements of this restructure have been put in place. However, opportunities for significant energy savings in the current market are very limited. It is expected that with a fully deregulated market for electric power, coupled with the removal of all competitive transition costs, electric energy rates will drop dramatically after March 1, 2002. Until that time, City staff considers it prudent to maintain a "wait-and-see" approach to this emerging marketplace.

Prepared by:

Michael Chan
Administrative Services Manager

Reviewed by:

Marvin Rose
Director, Public Works Department

Approved by:

Robert S. LaSala
City Manager