Principal Authors:

Ruben Tavares and Ben Arikawa
Electricity Analysis Office
Energy Information and Analysis Division

California Energy Commission

Consumer Electricity Bills:
Explanation of the Ten Percent Retail Price Reduction and Rate Reduction Bonds

Beginning January 1998, residential and small commercial customers will find changes to their bills. These customers will receive a 10 percent retail price reduction from June 1996 levels. Other changes, however, will also be identified in the electricity bill. The following provides a simplified explanation of these changes.

Mandated Retail Price Reduction

On January 1, 1998, residential and small commercial customers of the three major California investor owned utilities, Pacific Gas and Electric (PG&E), Southern California Edison (Edison), and San Diego Gas and Electric (SDG&E), received a 10 percent reduction in retail prices in the form of bill credits. This 10 percent reduction was funded by the issuance in November and December 1997 of rate reduction bonds by a special purpose trust authorized by the California Infrastructure and Economic Development Bank. (Residential and small commercial customers of Sierra Pacific Power and Pacificorp in California also received a 10 percent rate reduction, but neither utility has applied to the CPUC for approval to issue bonds.)

Retail electricity prices of all investor-owned utility customers have been frozen since June 1996. The 10 percent reduction for residential and small commercial customers, and retail price freezes for large commercial, industrial and agricultural customers will remain in effect until March 31, 2002, or until the utilities' generation-related transition costs are fully recovered. This four year period between 1998 and 2002 is called the transition period.

Transition costs are costs that utilities have prudently incurred in the past, but which have now become uneconomic and thus not recoverable in a competitive market for electricity. Generation-related transition costs are the remaining capital cost of utility-owned power plants that have not yet been paid for through retail electricity prices. Transition costs are costs that we have been, are, or would be paying in retail prices in the absence of the restructuring of the electricity industry. The State Legislature has deemed the accelerated recovery of these investments as appropriate.

Electricity Bills

Beginning with the January 1998 bills, all customers now see greater detail in their monthly bills. The new bill format for residential and small commercial customers will show total charges before the 10 percent reduction, the 10 percent reduction, and the net total bill with the 10 percent reduction. It also shows the amount of the net charge used to repay the rate reduction bonds. This amount is called the "Trust Transfer Amount," (TTA) or the "Fixed Transition Amount" (FTA).

Many customers will, or have, noticed that the amount they are paying for the rate reduction bonds, the TTA, is numerically greater than the bill reduction they are receiving. This may lead some to the conclusion that the rate reduction bonds cost more than the savings they produce. This is an erroneous conclusion for the following reasons:

• Residential and small commercial customers do receive the 10 percent retail price reduction.

• Although the TTA charge is shown as a separate line item, it is not added to the reduced bill.

• The utility is required to give customers the 10 percent reduction and must repay the rate reduction bonds from the reduced revenue it receives during the transition period.

• After the transition period, the TTA is an additional charge to the retail prices that only the residential and small commercial customers pay.
  

In the figure below, we have reproduced a typical electricity bill from PG&E. This bill is for the period January 1 through January 31, 1998. (See A on the figure.) For this period, this customer used 739 kilowatt hours of electricity (B). The charge for this is $92.21 (C). The 10 percent rate reduction (D), $9.22, is shown on the bill below the total charges. The TTA charge (E) is $11.93.

On average, a typical PG&E or Edison residential customer has been paying approximately 12 cents per kWh for its electricity and a SDG&E customer about 11 cents per kWh. Without the rate reduction bonds, they would continue to pay 12 and 11 cents per kWh. With the rate reduction bonds, the typical residential customer now pays about 10 percent less, or about 11 cents per kWh for a PG&E and Edison residential customers and 10 cents per kWh for a SDG&E customer. As we stated previously, customers receive their 10 percent reduction.

The table below shows the potential monthly reductions for a typical residential customer using 500 kilowatt-hours of electricity. For residential customers of PG&E and Edison, the reductions are a little more than $6 per month. The reductions for SDG&E residential customers is a little less at $5.66 per month. (Of course, actual reductions may be larger or smaller depending on customer use.)

Average Monthly Bill Savings
For Typical Residential Customers
Using 500 Kilowatt Hours of Electricity

	PG&E	Edison	SDG&E
Average Bill for 500 kWh	$60.75	$62.95	$56.63
Bill Credit	6.08	6.30	5.66
Bill After Credit	$54.67	$56.65	$50.97
Notes: Bills are calculated using tariffs for non-all-electric residential customers in effect as of January 1, 1998. Bills are calculated for all baseline climate zones specified in tariffs assuming 500 kWh usage summer and winter. Bills then are averaged over both seasons and over all zones.

Purpose of Bonds

In essence, the proceeds from rate reduction bonds were used to fund a 10 percent rate reduction for residential and small commercial customers. Because these bonds are state income tax-exempt and come with a payment guarantee, they pay relatively low rates of interest, about 6.4 percent. Without the rate reduction bonds, ratepayers would have to pay a higher rate of return (about 10 percent) to the utility. Since the rate reduction bonds pay a lower return, refinancing those costs with cheaper debt gives the consumers benefits over the long run. Without the bonds, these customers could pay up to four cents per kWh in transition costs in their current rates during the transition period. With the bonds, the transition cost portion is reduced to about two cents per kWh.

Frequently Asked Questions

Why do customers pay the TTA charge over ten years when the retail price reduction is only for four years?

The bonds were issued to finance the revenue requirements associated with the 10 percent price reduction customers receive in the first four years. The term to repay the bonds is ten years. This term was chosen to give customers the most benefit without obligating them to a very long term repayment schedule. As the utilities no longer are able to recover their generation-related transition costs after December 31, 2001, retail prices are expected to fall further in 2002. In addition, there may be more reductions in retail price due to competition in the wholesale electricity market.

So, why are TTA charges larger now than the retail price reduction?

Unlike a home mortgage, the "payments" (i.e., the TTA charges) on the rate reduction bonds decline over time. Equal amounts of principal are paid over the ten years, but the interest portion decreases over time. The payments were structured this way to sell the bonds more easily and to recover as much of the costs in the early years as possible.

How much does this refinancing really save the average customer?

Regardless of whether or not the rate reduction bonds were issued, the utility would have collected that portion of the 10 percent rate reduction in the frozen retail rates of residential and small commercial customers. The real basis for the savings comparison is what customers would have had to pay without the bond financing, not the 10 percent rate reduction. The benefits to these customers derive from the method of financing the costs. Without bond financing the transition costs would have earned approximately a 10 percent rate of return for 4 and one quarter years, January 1, 1998 to March 31, 2002. With bond financing the same transition costs earn a lower rate of return, approximately 6.4 percent, for ten years.

In the table below, we compare what the costs associated with the 10 percent rate reduction would have cost residential customers without bond financing (called revenue requirements) and with the bond financing. The revenue requirements are as much as 1.4 cents per kWh higher than the TTA charges during the transition period.

Comparison of 4-1/4 Year vs. 10 Year Payment Schedules
Revenue Requirements and Trust Transfer Amounts
For Residential Customers
(In cents per kWh-year)

	PG&E		Edison		SDG&E
	Revenue Requirement Amount	Trust Transfer Amount	Revenue Requirement Amount	Trust Transfer Amount	Revenue Requirement Amount	Trust Transfer Amount
1998	2.9	1.6	2.8	1.7	2.4	1.6
1999	2.7	1.3	2.5	1.3	2.2	1.2
2000	2.5	1.3	2.4	1.3	2.1	1.2
2001	2.4	1.2	2.3	1.3	2.1	1.2
2002	0.6	1.1	0.6	1.2	0.5	1.1
2003	0.0	1.1	0.0	1.1	0.0	1.0
2004	0.0	1.0	0.0	1.0	0.0	0.9
2005	0.0	0.9	0.0	0.9	0.0	0.8
2006	0.0	0.9	0.0	0.8	0.0	0.8
2007	0.0	0.8	0.0	0.8	0.0	0.7
Notes: The revenue requirement amount shown is the estimated average for residential customers. There is a small portion of revenue requirement portion recovered in the first quarter of 2002. The TTA charges shown are estimates. The actual amounts will be adjusted at least on an annual basis.

When the low interest rate on the bonds is considered in combination with the longer term, the costs of bond financing is less than what ratepayers would have paid to the utility for revenue requirements of the 10 percent rate reduction. In the following table, we show the estimated net savings for residential and small commercial customers, using this method of financing transition costs. The net monthly savings for residential customers using 500 kWh are about $1.00 for PG&E and Edison and $0.90 for SDG&E. The monthly savings will vary with customer usage and climate zone.

Average Monthly Net Savings
For Residential Customers Using 500 kWh

	PG&E	Edison	SDG&E
Average Monthly Net Savings	$1.00	$1.00	$0.90
Net Savings as a Percentage of Monthly Bill	1.7 %	1.6 %	1.6 %
Notes: Net savings calculations are based on differences between revenue requirements and TTA charges present valued at 10 percent. Net savings calculations assume usage of 500 kWh per month. Actual savings will vary depending on customer usage and climate zone. The monthly bill before discount was used as the basis for savings as a percentage of monthly bill.

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