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Provisions of AB 1890

The Electric Utility Industry Restructuring Act (Assembly Bill 1890) makes the generation of electricity competitive in California. The legislation became law on September 23, 1996.

Before restructuring, a single utility provided each customer with generation, transmission, distribution, and metering and billing of electricity. As of March 31, 1998, the new structure allows customers in most, but not all, existing electric utility service areas to choose their electric generation supplier.

Restructuring also brings changes to the transmission of electricity. Previously restricted transmission facilities will be opened to power generators on a fair and equitable basis, overseen by a new organization, the Independent System Operator (ISO). The ISO has been given the responsibility for assuring reliability of the high voltage transmission system. Local utilities will continue to distribute electricity.

The following section provides a summary of key concepts of the new restructuring legislation:


  • Direct Access -- After March 31, 1998, all customers located in the service territories of the investor-owned utilities (IOUs) --Pacific Gas & Electric, San Diego Gas &Electric, Southern California Edison, PacifiCorp, Sierra Pacific Power, or Bear Valley Electric -- will be allowed to shop for power in an open market. No longer will customers be restricted to buying power only from their local utility company.They can now compare deals and pick the one which best meets their needs. Although Kirkwood Electric Co. is also regulated by the CPUC, the CPUC did not require it to offer direct access at this time.
  • Independent System Operator (ISO) -- Currently, the IOUs own and operate a large portion of the state's transmission system. To increase reliability and provide new power producers equal opportunity and ability to deliver their supplies, AB 1890 creates an independent, statewide transmission system operator. The IOUs retain ownership of their transmission facilities, but are required to transfer operational control of the facilities to the Independent System Operator (ISO).

    Vesting operational control of the high voltage transmission system with the ISO is designed to ensure that owners of the transmission system cannot favor their own generation facilities over competing generators in providing transmission access. The ISO will control and operate the state's transmission system to schedule delivery of electric power supplies, and ensure all standards for transmission service are met. Since these transmission lines are the electrical "highways of commerce," the ISO will ensure that no particular buyer or seller of electricity can block access by others.

    Local distribution lines will continue to be operated by the existing electric utilities. The IOU utilities will be required to operate the distribution system in such a way that customers have to be provided direct access to any seller of electricity operating in their area. In addition, the ISO has the responsibility to maintain overall electricity system reliability. The ISO will maintain reserve generators which can provide additional electricity in the event that a generator owned by an energy service provider fails to operate or can not deliver the required amount of power.

    Electric service reliability will remain the same regardless of the choice of service provider an individual consumer makes; that is, to remain with the current utility or purchase power from a new energy service provider.

  • Power Exchange (PX) -- Another important element of the restructured market is the newly created Power Exchange (PX). The PX will operate like a commodities market where power producers will compete to sell their electricity generation in response to bids submitted by buyers.

    The PX creates a "pool" or "spot market"where price information is publicly available. The PX solicits bids from electricity buyers and generators and chooses the lowest generation bidders until the PX has enough electricity supply to meet requests for power. PX prices change on an hourly basis.

    Participation in the PX is voluntary for all buyers and sellers other than the IOUs. For the four-year transition period, the IOUs will be required to bid most of their generation into the PX and buy the power they need to meet their customer demands from the PX. In contrast, the new power generators will have the option to sell power directly to consumers.

    Many customers will pay for electrical power based on the PX price, either directly through their local utility or through a private power supply contract with terms that are pegged to the PX price. Thus consumers who choose to enter into private contracts for power where the terms,conditions and price are not public knowledge may use public information from the PX to gauge the attractiveness of supply or service offers they receive.

  • Load Aggregation -- Aggregation is a term applied to the action of new energy providers gathering customers together and providing electricity services to the combined load. A person or company can specialize in forming buying groups to enable customers to take advantage of larger volume power sales.


  • Stranded Investments -- IOUs have made investments in utility infrastructure, including major power generation stations, in order to meet the CPUC requirement that they provide sufficient electricity to meet California's demand. These investments were financed by the utilities, based on the assurance that repayment of the debt could be made through future electricity sales. In the restructured market, some of these power plant assets may become stranded; that is, they won't be able to operate competitively in the new market place. California's restructuring legislation decided that virtually all customers should pay a competition transition charge to all IOUs to meet past financial obligations made on the customer's behalf.
  • Competition Transition Charge (CTC) -- The new electricity restructuring legislation provides an accelerated recovery of the IOU investments through a Competition Transition Charge, or CTC. The CTC for investor-owned utilities varies by utility.

    Recovery of utility costs was already built into the existing regulatory structure and is included in rates charged to all customers. If there were no transition to a competitive market, customers would continue to repay these costs to utilities through their normal electricity bills. Consequently, the CTC does not result in an increase in electricity rates from current levels and should not be viewed as an additional cost. The CTC is determined by multiplying a CTC rate by electrical energy consumption. It appears as a dollar cost on some customer bills at this time, and all IOU customer bills by June 1, 1998.

    Several publicly owned utilities are now considering whether to offer Direct Access during the transition period and impose a CTC, if necessary. The CTC will also vary significantly among public utilities.


Up to 185 megawatts (MW) of irrigation district load is exempt from paying the CTC costs. Of these, 101 MW have been allocated by the California Energy Commission to qualifying districts as required by AB 1890. At least 50 percent of this exemption is to be used for agricultural pumping. In addition, water pumping loads served by members of the Southern San Joaquin Valley Power Authority and the Eastside Power Authority are exempt from the CTC. The legislation also specifies that the Merced Irrigation District will receive a 75 MW CTC exemption.

These benefits, however, are only available to customers within the selected irrigation district boundaries. Other farmers can reduce the amount paid by taking actions which lower electricity consumption. Since the CTC amount paid with each bill is the CTC rate multiplied by electricity consumption, reduced electricity use will lower the CTC paid. Modifications to production equipment or operations, changes in manufacturing processes, fuel switching, conservation efforts, or other activities which reduce electricity consumption will lower that customer's CTC payment.

Customers who completely terminate electricity service are not responsible for CTC (for example, individuals or firms that physically leave the utility service area). The CTC does not apply to emergency equipment, nor to any load served by non-mobile cogeneration or self-generation after June 30, 2000.


Regulated IOU rates for agricultural, residential, industrial, and large commercial customers were frozen at their June 1996, levels until utilities recover their generation related uneconomic costs through the competitive transition charge or until March 31, 2002, whichever is earlier. Starting January 1, 1998, rates for residential and small commercial customers (defined as 20 kilowatts or less peak demand) were reduced by 10 percent and will remain at that level until utilities recover their generation related uneconomic costs through the competitive transition charge, or until March 31, 2002, whichever is earlier.

  • Electric Rate Components -- Current rate structures often bundle fixed costs with variable energy rate components. In the new competitive energy market, rates are separated into functions and services: generation, transmission, distribution, retail services, CTC, and public interest programs (energy efficiency, research and development, renewable energy, and low-income programs).

    The appearance of bills will change and offer greater information about the components of service provided. This will be helpful information for some customers who are assessing whether or not to change providers; they will be able to see the portion of their bill that is for generation services and ancillary services. This is the only portion of electricity restructuring that is open to competition at this time.


The restructuring legislation also established funding for public interest programs to be allocated during the four-year transition period: $248 million for the Public Interest Energy Research Program (PIER); $540 million for the Renewable Technology Program; and about $912 million for the California Board for Energy Efficiency.

The Energy Commission will allocate $62 million a year from 1998 to 2001 to fund research, development and demonstration projects in the following areas: renewable energy technologies, environmentally preferred advanced generation, energy-related environmental research, end use energy efficiency and strategic energy research.

The Energy Commission will also provide $540 million to consumers and producers of renewable energy, such as wind, solar, geothermal, biomass, landfill gas and small hydroelectric power. The funding will be collected from ratepayers of investor-owned utilities over the next four years. This program will provide funds to renewable energy generators, as well as credits for consumers purchasing renewable electricity from a non-utility provider.

The California Public Utilities Commission created the California Board for Energy Efficiency to implement energy efficiency programs. The purpose of the Board is to oversee the independent administration of energy efficiency services designed to transform markets by: (a) providing cost-beneficial energy efficiency services to customers not normally served by markets; (b) offering customers meaningful information on the costs and benefits of energy efficiency measures; (c) reducing market barriers to investments in energy efficient products and services; and (d) creating a sustainable and competitive energy efficiency services market.

Adopted from:
California Energy Commission, "New Options For Agricultural Customers: California's Electric Industry Restructuring"
(Sacramento, June 1998), pp. 10-13.
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