Discussion

A. Introduction

AB 117 amends § 394 by broadening the term ESP to include entities that provide electric service to all sizes of customers. That is, an ESP is no longer limited to an entity that provides electric service to residential and small commercial customers. As a result of AB 117, we need to expand our registration procedures to include all ESPs operating within California, except for those entities who are specifically excluded from registration under § 394(a).³ We presently have a registration framework that can be used to meet the expanded registration requirement. This existing registration framework was developed in D.97-05-040, D.98-03-072, and D.99-05-034. All of these preconditions to registration were in effect when the Legislature considered and passed AB 117. (See Stats. 2002, ch. 838, § 6.)

SB 477 also mandated that the Commission develop standards for proof of financial viability and proof of technical and operational ability. In D.98-03-072, we proposed such standards and solicited comments from the parties. In D.99-05-034, we adopted as the permanent standards, the proposed standards for proof of financial viability and proof of technical and operational ability which appeared at pages 32 to 34 of D.98-03-072. (D.99-05-034, p. 136, OP 7.) The permanent standards are based on and conform to the guidelines that were set forth in §§ 394(b)(9) and (10) as added by SB 477. As a result of the expanded ESP registration requirement made to § 394 by AB 117, one would assume that the permanent standards for proof of financial viability and proof of technical and operational ability should apply to all ESPs as well. However, AB 117 made slight changes to the language of § 394(b)(9), which, as discussed below, impact which ESPs are governed by the permanent standards for proof of financial viability that we adopted in D.99-05-034. In addition, D.99-05-034 was adopted when the only ESPs required to register were those who served residential and small commercial customers.

D.98-03-072 also discussed and implemented the other consumer protection safeguards that SB 477 mandated. These are found in §§ 394.1, 394.2, 394.25, 394.3, 394.4, 394.5, 394.7, and 396, among others. These consumer protection safeguards remain in place, and have not been revised as a result of the AB 117 expanded ESP registration requirement.

B. Expanded Registration and Related Proof

AB 117 revised § 394(a) to require the registration of all ESPs, unless excluded by § 394(a). As a result of that legislative change, we are now required to register all those other entities who were not previously required to register. This expanded registration requirement primarily affects those entities who provide electric service to agricultural customers, medium and large commercial customers and to industrial customers.

The registration procedures and ESP registration form that we adopted in D.97-05-040, as modified by D.98-03-072 and D.99-05-034, shall serve as the foundation for the registration of all ESPs in California who are required to register.⁴ Attached to this decision as Appendix A is the "9/03" revised version of the "Electric Service Provider Registration Application Form." This form shall serve as the ESP registration form starting today.

One of the requirements in the ESP registration form is that the ESP have an executed "Energy Service Provider Service Agreement" (Service Agreement) with each utility distribution company (UDC) in whose service territory the ESP plans to do business. The form of the Service Agreement was discussed and adopted in D.97-10-087. As part of the direct access tariff, all ESPs, regardless of the type of customers they serve, are required to execute a Service Agreement with the UDC. (D.97-10-087, App. A, § D.)

We have made some revisions to the registration form that was approved in D.99-05-034. These revisions reflect the fact that AB 117 broadened the registration of ESPs, that some code section requirements only apply to ESPs who serve residential and small commercial customers, and that permanent standards were adopted in D.99-05-034 for ESPs who serve agricultural customers, residential and small commercial customers, and in this decision for those ESPs who serve agricultural customers, medium to large commercial customers and/or industrial customers.⁵

The ESP registration form and procedures, and our discussion of the form and procedures in D.98-03-072 and in D.99-05-034, are integrally related to the permanent standards that we adopted for proof of financial viability and proof of technical and operational ability. The permanent standards that we adopted in D.99-05-034 are as follows:

(1) Before an ESP may apply for an ESP registration number, and for those ESPs who have already received an ESP registration number, the ESPs are required to provide the Energy Division with a signed copy of their UDC-ESP service agreements for each UDC in whose service territory the ESP plans to do business.

(2) Prior to signing up and initiating a DASR [direct access service] request on behalf of any residential or small commercial customer, an ESP will be required to post a minimum cash security deposit (cashier's check) or financial guarantee bond in the amount of $25,000 with the Commission. In the alternative, the registered ESP may open a customer trust account in that amount which is in a format approved by the Commission's General Counsel, and which ensures that residential and small commercial customers have adequate recourse in the event of the ESP's fraud or non-performance. The deposit, bond or trust account shall be established when the Section 394.5 notice is first tendered to the Energy Division.

As the ESP's number of customers increase, the ESP shall be required to increase its security deposit in accordance with the following schedule:

# of Customers Security Deposit Amount

1 - 250 $25,000

251 - 500 $50,000

501 - 1000 $75,000

1001 + $100,000

The ESP will be required to increase the amount of the deposit, bond or trust account in accordance with the schedule above if the number of customers reported in the standard service plan filing raises the ESP to a different security deposit amount level.

If a cash security deposit is posted with the Commission, any interest earned on the deposit would be returned to the ESP on an annual basis.

(3) The ESP registration application form shall contain a section which requests the applicant to name the key technical and operational personnel, their titles, and a description, including the time period, of each key person's experience in the sale, procurement, metering, and billing of energy services or similar products. If someone other than the ESP will be doing the metering or billing on behalf of the ESP, the names of the companies providing those services and their experience shall be disclosed as well. If the applicant has been authorized by the California ISO to act as an SC [scheduling coordinator], this requirement is waived. The ESP who has been authorized as an SC shall submit a copy of such authorization as part of the ESP registration application form.

(4) Each registered ESP is required to submit a copy of its Section 394.5 notice to the Energy Division when the ESP signs up its first customer or when the first standard service plan filing of the ESP is due, whichever is earliest.

(5) Each ESP is required to submit a copy of all of its SC agreements or a signed declaration from each SC with which it has an agreement and which states that the ESP has entered into a SC agreement with the ESP. The copy or declaration shall be submitted to the Energy Division on or before the date when the ESP signs up its first customer. If the ESP is an SC authorized by the California ISO, this requirement is waived. (D.99-05-034, p. 136, OP 7; D.98-03-072, pp. 32-34.)

The interpretation of the proof of financial viability subsection, found in § 394(b)(9), is affected by AB 117's broadening of which entities must now register with the Commission. This is apparent from a review of how the proof of financial viability subsection was developed.

As added by SB 477, § 394(b)(9) stated as follows:

"Proof of financial viability. The commission shall develop uniform standards for determining financial viability and shall publish those standards for public comment no later than March 31, 1998. In determining the financial viability of the entity, the commission shall take into account the number of customers the potential registrant expects to serve, the number of kilowatt hours of electricity it expects to provide, and any other appropriate criteria in order to ensure that residential and small commercial customers have adequate recourse in the event of fraud or nonperformance."

AB 1658 (Stats. 1999, ch. 1005, § 10) made three changes to § 394(b)(9), which are italicized below:

"Proof of financial viability. The commission shall develop uniform standards for determining financial viability and shall publish those standards for public comment no later than March 31, 1998. In determining the financial viability of the electric service provider, the commission shall take into account the number of customers the potential registrant expects to serve, the number of kilowatthours of electricity it expects to provide, and any other appropriate criteria to ensure that residential and small commercial customers have adequate recourse in the event of fraud or nonperformance."

As a result of the change to § 394(b)(9) by AB 1658, two issues arise as we implement the requirements of AB 117. The first issue is whether the permanent standards for proof of financial viability apply to all ESPs as expanded by AB 117, or do they only apply to ESPs who serve residential and small commercial customers.⁶ The second issue is if the permanent standards for proof of financial viability adopted in D.99-05-034 only apply to those ESPs who serve
agricultural customers, residential and small commercial customers, then what, if any, standards for proof of financial viability should apply to ESPs who serve agricultural customers, medium and large commercial customers, and industrial customers.

To answer these issues, we examine the legislative enactments that were in place when D.98-03-072 and D.99-05-034 were adopted. When D.98-03-072 and D.99-05-034 addressed the proof of financial viability issue, the code section in effect at the time was § 394(a)(9) as added by SB 477. The term "entity" was used in § 394, instead of "electric service provider," and referred to an "entity offering electrical service to residential and small commercial customers...." (§ 394(a) as added by Stats. 1997, ch. 275, § 13.) Since § 394 only addressed the registration of entities offering electrical service to residential and small commercial customers, the discussion in D.98-03-072 and D.99-05-034 pertaining to proof of financial viability was only in reference to those ESPs serving residential and small commercial customers. (See D.98-03-072, pp. 12, 19, 27-31; D.99-05-034, pp. 2, 16-19.)

AB 1658, which became effective on January 1, 2000, replaced the word "entity" with "electric service provider" in § 394, and added the definition of an ESP to § 218.3. However, AB 1658 did not affect which entities must register because registration was still limited to those entities which provide electric service to residential and small commercial customers. Since the entities who were required to register remained the same, AB 1658's revision of § 394 did not affect the permanent standards for proof of financial viability.

Due to AB 117's broadening of the definition of which entities must now register with the Commission, and because of the revision to § 394(b)(9) by AB 1658, the two issues regarding subsection 394(b)(9) must now be addressed. Reading § 394 as revised by AB 117, it is clear that subdivision (b) requires, as a precondition to registration, that the ESP, regardless of who it serves, provide proof of financial viability.⁷ Although D.98-03-072 and D.99-05-034 addressed the proof of financial viability standards, those standards were adopted in the context of ESPs who serve residential and small commercial customers. Thus, the answer to the first issue is that the permanent standards for proof of financial viability that were developed and implemented in D.98-03-072 and D.99-05-034 apply to those ESPs who serve residential and small commercial customers.

That raises the second issue about what standards for proof of financial viability should apply to ESPs who serve larger customers. Although AB 117 revised § 394(a), the preconditions to registration were not altered in § 394(b). Thus, the Legislature clearly intended that the proof of financial viability requirement, as well as the other preconditions found in § 394(b), also apply to those ESPs who serve agricultural customers, and the larger commercial customers and industrial customers.

Although D.98-03-072 and D.99-05-034 did not address the financial viability standards in the context of ESPs serving larger customers, the standards that we adopted provide a foundation for imposing financial viability standards on ESPs who serve larger customers. We note that when AB 117 was being considered by the Legislature, the Legislature was no doubt aware from the language contained in § 394(b)(9) and (10) that the Commission was required to develop financial viability standards and proof of technical and operational ability standards for comment by March 31, 1998.⁸ We have reviewed the development of the interim and permanent financial viability standards in D.98-03-072 and D.99-05-034. The standards that were adopted for ESPs who serve smaller customers are based on similar concerns for ESPs who serve larger customers. These concerns include: requiring an ESP to have a signed service agreement with the electric utility as a measure of the ESP's financial health and creditworthiness; that a mechanism be developed to ensure that customers have adequate recourse should an ESP defraud customers or go out of business, and that the mechanism be sized according to the number of customers; and that ESPs have sufficient capital to fund their operations. (See D.98-03-072, pp. 27-36; D.99-05-034, pp. 16-23.)

We have also considered subdivisions (d), (e) and (f) of § 391 in our deliberations of what financial viability standards should apply to ESPs who serve larger customers. Subdivision (d) notes that "Larger commercial and industrial customers are sophisticated energy consumers that have adequate civil remedies and are adequately protected by existing commercial law...." Subdivision (e) notes that the market structure should not "unduly burden new entrants into the competitive electric market...." Subdivision (f) states that the system of registration and consumer protection be "designed to ensure sufficient protection for residential and small commercial consumers while simplifying entry into the market for responsible entities serving larger, more sophisticated customers."

Based on similar concerns about the financial well-being of ESPs who serve the larger customer classes, and balancing the Legislature's intent of ensuring that these ESPs are subject to proof of financial viability standards which are not unduly burdensome, we will adopt the standards for proof of financial viability that we adopted in D.99-05-034 for ESPs who serve residential and small commercial customers as the permanent standards for proof of financial viability for ESPs who serve agricultural customers, medium to large commercial customers and industrial customers. Accordingly, the permanent standards labeled "(1)" and "(2)," as reworded below, shall be adopted as the permanent standard for proof of financial viability for those ESPs who serve agricultural customers, medium and large commercial customers and industrial customers. Due to the references in permanent standard "(2)" to "residential or small commercial customer," the § 394.5 notice and the "standard service plan filing," and because the ESPs that are currently serving agricultural and larger customers were never required to register before AB 117 was enacted, we shall reword permanent standard (2) as it applies to ESPs serving agricultural customers, medium and large commercial customers and industrial customers. The following standards for proof of financial viability shall be adopted as permanent, and shall apply to ESPs serving agricultural customers, medium and large commercial customers and industrial customers:

(1) Before an ESP may apply for an ESP registration number, and for those ESPs who have already received an ESP registration number, the ESPs are required to provide the Energy Division with a signed copy of their UDC-ESP service agreements for each UDC in whose service territory the ESP plans to do business.

(2) At the time of registration with the CPUC, an ESP serving agricultural customers, medium to large commercial customers and/or industrial customers shall be required to post a minimum cash security deposit (cashier's check) or financial guarantee bond in the amount of $25,000 with the Commission. In the alternative, the registered ESP may open a customer trust account in that amount which is in a format approved by the Commission's General Counsel, and which ensures that the customers have adequate recourse in the event of the ESP's fraud or non-performance, and to pay any applicable re-entry fee.

If the actual number of customers served by the ESP exceeds 250, the ESP shall be required to immediately increase its security deposit, financial guarantee bond, or trust account in accordance with the following schedule when its number of customers raises the ESP to the different security deposit amount level.

# of Customers Security Deposit Amount

1 - 250 $25,000

251 - 500 $50,000

501 - 1000 $75,000

100 + $100,000

If a cash security deposit is posted with the Commission, any interest earned on the deposit will be returned to the ESP on an annual basis.

We turn next to the permanent standards for proof of technical and operational ability that should apply to ESPs who serve larger customers. The proposed standards approved in D.98-03-072 and made permanent in D.99-05-034 were adopted in the context of ESPs who served residential and small commercial customers. Those permanent standards, like the standards for proof of financial viability, should also serve as the foundation for establishing permanent standards for proof of technical and operational ability for those ESPs who serve larger customers. The standards that were adopted for ESPs who serve smaller customers are based on similar concerns for ESPs who serve larger customers. These concerns include: requiring an ESP to have a signed service agreement with the electric utility will help measure the ESP's technical and operational experience in energy transactions; requiring a copy of the scheduling coordinator agreement or a signed declaration from each scheduling coordinator will assist in determining the ESP's technical and operational experience; requiring the ESPs to disclose the names and experience of key personnel will assist in screening out entities with little or no experience. (See D.98-03-072, pp. 26-29, 32-34; D.99-05-034, pp. 16-23.)

Based on similar concerns about the technical and operational ability of ESPs who serve the larger customers, and balancing the Legislature's intent in §§ 391 and 394(b) of ensuring that these ESPs are subject to proof of technical and operational ability standards which are not unduly burdensome, we will adopt three of the standards for proof of technical and operational ability that we adopted in D.99-05-034 for ESPs serving agricultural customers, medium to large commercial customers and/or industrial customers. Accordingly, the permanent standards labeled (1), (3),⁹ and (5) shall be adopted as the permanent standards for proof of technical and operational ability that apply to ESPs serving agricultural customers, medium to large commercial customers and/or industrial customers. The permanent standard labeled "(4)" in D.98-03-072 and D.99-05-034 will not be adopted because the § 394.5 notice only applies to an ESP offering electric service to residential and small commercial customers. Permanent standard (1) is listed above, and permanent standards (3), and (5), which has been renumbered as (4), are as follows:

(3) The ESP registration application form shall contain a section which requests the applicant to name the key technical and operational personnel, their titles, and a description, including the time period, of each key person's experience in the sale, procurement, metering, and billing of energy services or similar products. If someone other than the ESP will be doing the metering or billing on behalf of the ESP, the names of the companies providing those services and their experience shall be disclosed as well. If the applicant has been authorized by the California ISO to act as an SC [scheduling coordinator], this requirement is waived. The ESP who has been authorized as an SC shall submit a copy of such authorization as part of the ESP registration application form.

(4) Each ESP is required to submit a copy of all of its SC agreements or a signed declaration from each SC with which it has an agreement and which states that the ESP has entered into a SC agreement with the ESP. The copy or declaration shall be submitted to the Energy Division on or before the date when the ESP signs up its first customer. If the ESP is an SC authorized by the California ISO, this requirement is waived.

All entities offering electric service to customers within the service territory of an electrical corporation, except for the following: an electrical corporation as defined in § 218, an entity that offers electric service solely to serve customer load consistent with § 218(b), or a public agency that offers electric service to residential and small commercial customers within its jurisdiction or within the service territory of a local publicly owned electric utility, shall register with the Commission as an ESP. Those entities who are currently registered as ESPs with the Commission, and in good standing, do not need to re-register. All other ESPs, who were not required to register with the Commission prior to the effective date of AB 117, or who have failed to register, shall be required to register with the Commission within 90 days from today.

In order to accomplish the registration of ESPs who serve agricultural customers, medium to large commercial customers, and industrial customers, we shall direct all the electric utilities to supply the names and addresses of all ESPs who are operating in their service territories, or who have signed Service Agreements. This list of names and addresses shall be delivered to the Director of the Energy Division within 20 days of today's date. Within 30 days of today's date, the Energy Division shall notify all the ESPs on the list of their obligation to register pursuant to AB 117 and this decision, and that such registration must occur within 90 days of this decision.

The Energy Division shall ensure that all of the ESPs, appearing on the lists compiled by the utilities, have registered with the Commission within the 90 days. If an ESP fails to register within the time allotted, the Energy Division is directed to take all necessary action to prevent the unregistered ESP from engaging in the sale of electricity to California customers.

The Energy Division shall also update its registration records in accordance with the provisions of § 392.1, and make the necessary changes to appropriate documents and web pages to reflect the expanded registration requirements, and the permanent standards for proof of financial ability and proof of technical and operational ability for ESPs who serve agricultural customers, medium to large commercial customers and/or industrial customers.

C. Use of Electric Service Provider
in Other Code Sections

Due to AB 117's expanded registration requirement, clarification of the use of the term "ESP" in other code sections is needed. It is clear from the introductory phrase, "As used in this section," found in Section 394(a) as revised by AB 117, that the term ESP is being defined only for the purpose of § 394. Since the term "ESP" is referred to in other code sections besides § 394(a) as revised by AB 117, there is a need to clarify whether the other references to "ESP" have the same meaning as used in § 394(a,) or whether the references have some other meaning. This clarification is important because some of the other code sections generically refer to all ESPs, while other code sections only apply to those ESPs who serve residential and small commercial customers.

We have reviewed and compared the various legislative enactments which addressed the registration of ESPs and the related consumer protection safeguards. For the most part, these registration requirements and consumer protection safeguards, as implemented in D.98-03-072 and D.99-05-034, have remained unchanged, even though the registration of which ESPs must register with the Commission has been expanded.

Our research, discussed below, reveals that the term "ESP," as used in § 394, has the same meaning as used in other code sections, except when the other code sections specifically refer to an ESP that serves residential and small commercial customers.

When the direct access rules were first adopted, we relied on the language set forth in § 394(a), as added by AB 1890, as to which entities had to register with the Commission. We stated the following in D.97-05-040:

"AB 1890 requires that the Commission establish a registration system for `each entity offering electrical service to residential and small commercial customers within the service territory of an electrical corporation.'

"The Legislature appears to have intended that only those entities offering electrical service to residential and small commercial customers need to register with the Commission. There is no requirement in AB 1890 that those entities offering electrical service to large commercial customers and industrial customers need to register with the Commission." (D.97-05-040, p. 54 [72 CPUC2d 441, 477].)

In AB 1658, § 218.3 was added to the code, effective January 1, 2000. Section 218.3 set forth the following definition of an ESP:

" `Electric service provider' means an entity that offers electrical service to residential and small commercial customers, but does not include an electrical corporation, as defined in Section 218, or a public agency that offers electrical service to residential and small commercial customers within its jurisdiction, or within the service territory of a local publicly owned electric utility. `Electric service provider' includes the unregulated affiliates and subsidiaries of an electrical corporation, as defined in Section 218."

When AB 117 revised the definition of an ESP in § 394, that legislation also revised the definition of an ESP that appears in § 218.3 as follows:

" `Electric service provider' means an entity that offers electrical service to customers within the service territory of an electrical corporation, as defined in Section 218, but does not include an entity that offers electrical service solely to service customer load consistent with subdivision (b) of Section 218, and does not include an electrical corporation, as defined in Section 218, or a public agency that offers electrical service to residential and small commercial customers within its jurisdiction, or within the service territory of a local publicly owned electric utility. `Electric service provider' includes the unregulated affiliates and subsidiaries of an electrical corporation, as defined in Section 218."

In the Legislative Counsel's Digest to AB 117, the revisions to §§ 218.3 and 394 were noted as follows:

"Existing law defines `electric service provider' as an entity that offers electrical service to residential and small commercial customers, but not including an electrical corporation and requires these providers to register with the commission.

"This bill would instead define `electric service provider' as an entity that offers electrical service to customers within the service territory of an electrical corporation, but not including an electrical corporation or a person employing cogeneration technology or producing electricity from other than conventional power sources, for its own use or the use of its tenants or an adjacent property and not for sale of transmission to others."

A comparison of the revisions to § 218.3 and 394, in particular how an ESP is defined, reveals that the definitions in both code sections are the same. Thus, the references to an ESP in code sections other than § 394 has the same meaning as an ESP as defined in §§ 218.3 and 394, except when the code section references an ESP that serves residential and small commercial customers.

The distinction between the generic reference to an ESP, and to an ESP that serves residential and small commercial customers, is important for determining what code sections apply to an entity who provides electric service in California. The following is a list of the major code sections which apply to all entities offering electric service in California, except as noted in §§ 218.3 and 394(a).

Public Utilities Code §§ 218.3; 394; 394.1; 394.2(a), (c), (d); 394.25; 394.3; 396.

The above list of code sections is not exhaustive, and it is incumbent upon each ESP to determine whether other code section provisions that reference the term ESP apply to the electric services it is offering.

The following is a list of the major code sections which apply to those entities who offer electric service to residential and small commercial customers, except as noted in §§ 218.3 and 394(a):

Public Utilities Code §§ 366.5; 392.1; 394.2(b); 394.4; 394.5; 394.7; 395.

D. Reentry Fee

AB 117 amended § 394.25 by adding subdivision (e). Section 394.25(e) states:

"If a customer of an electric service provider or a community choice aggregator is involuntarily returned to service provided by an electrical corporation, any reentry fee imposed on that customer that the commission deems is necessary to avoid imposing costs on other customers of the electric corporation shall be the obligation of the electric service provider or a community choice aggregator, except in the case of a customer returned due to default in payment or other contractual obligations or because the customer's contract has expired. As a condition of its registration, an electric service provider or a community choice aggregator shall post a bond or demonstrate insurance sufficient to cover those reentry fees. In the event that an electric service provider becomes insolvent and is unable to discharge its obligation to pay reentry fees, the fees shall be allocated to the returning customers."

The addition of subdivision (e) to § 394.25 requires that if a customer of an ESP or a community choice aggregator is returned to utility electric service due to the fault of the ESP or community choice aggregator, any reentry fee imposed by the utility, as deemed necessary by the Commission to avoid imposing costs on other customers of the utility, must be paid for by the ESP or the community choice aggregator. Payment of the reentry fee is tied to the posting of a bond or demonstrating insurance sufficient to cover the reentry fee as a condition of registration.

As discussed above, we require an ESP to post a minimum cash security deposit or a financial guarantee bond in the minimum amount of $25,000 with the Commission, or to open a customer trust account.¹⁰ (D.99-05-034, pp. 16-24.) Since we already require the posting of a minimum of a $25,000 cash security deposit or a financial guarantee bond as part of the ESP registration requirement, the issue we need to address is whether the current schedule for deposits is sufficient to cover any reentry fee that might be imposed.

Interested persons are invited to file written comments on whether the current schedule of the deposit amounts is sufficient to cover the reentry fee required under § 394.25(e).¹¹ Opening comments on this issue shall be filed on or before December 1, 2003, and reply comments shall be filed on or before December 22, 2003. Depending on the comments, the schedule of the deposit amounts could be increased. Accordingly, interested parties are put on notice in accordance with § 1708 that the schedule of deposit amounts adopted in D.99-05-034 and in this decision may be revised.