Fortnightly
California Rides the Tiger
January 01, 1995By W. Lynn Garner
Revolutions rarely succeed without a struggle. At the California Public Utilities Commission (CPUC), the move to restructure the state's electric utility industry is no exception. The stakes are enormous. For starters, annual revenues at the state's investor-owned electric utilities (IOUs) exceed $18 billion, making up
2 percent of California's gross state product. Competitively priced electricity is vital to California's $800-billion-a-year economy, one would think. And with its sweeping restructuring plan, the CPUC has found itself riding a tiger, hoping it won't get swallowed whole in the process.
But after five full-panel
hearings in the past six months \(em featuring over 100 witnesses, not to mention comments from the general public \(em virtually the only consensus to emerge is that very few people are satisfied with IOU regulation in California.
They want lower rates, which at the current level of 10 to 11 cents a kilowatt-hour approach twice the national average and rise higher than those of neighboring states; but they don't agree on how to achieve them.
The CPUC had promised to issue a final policy statement last August, following the April 20, 1994, release of its restructuring proposal, dubbed the "Blue Book." That deadline proved wildly optimistic.
Reflecting on the past year, CPUC president Daniel Fessler told PUBLIC UTILITIES FORTNIGHTLY that "tremendous progress has been made" and he feels a "high level of confidence" that all parties can reach a consensus on key issues. Fessler views the Blue Book as a "discussion vehicle," not an edict. And he has expressed skepticism that the January 1, 1996, implementation date will prove feasible for launching direct access to the largest customers. A frequently suggested alternative to the Blue Book schedule would be to permit a certain percentage of customer classes to go forward, which Fessler finds an idea worth considering.
Fessler is encouraged that the U.S. Department of Energy (DOE) and the Federal Energy Regulatory Commission (FERC) are willing to cooperate on jurisdictional issues, in what Fessler calls a "cooperative federalism . . . . California is not a market unto itself, but is physically connected to an international grid with 12 western states, 2 Canadian provinces, and 2 Mexican states, for a total of 16 jurisdictions." As part of that cooperative spirit, DOE is hosting an international conference in California later this month to begin a dialogue on regional and international issues, and Fessler intends to meet with commissioners of neighboring western states.
The California legislature is increasingly interested in the restructuring and has created a joint oversight committee to monitor the proceedings. The oversight committee is insisting on a preview before the CPUC issues any final policy statement. At the same time, the CPUC finds itself pressed by certain industry segments to act as soon as possible and stay on schedule. In particular, the CPUC is taking heat from a coalition of consumer advocacy groups who oppose the direct-access proposals and fear the impact on residential customers. The restructuring effort has renewed calls within the state for the CPUC to reform its due process rules, specifically ex parte meetings and disclosure requirements, in addition to resolving the overlapping jurisdictions between the CPUC and the California Energy Commission.
"This commission is phenomenally arrogant to think they could do this in such a short time," says Audrie Krause, executive director of TURN (Toward Utility Rate Normalization). Krause says the CPUC is "backpedaling in response to tremendous public outrage."
In response to California Assembly Concurrent Resolution (ACR) 143 and motions filed by TURN and other consumer groups, the CPUC scheduled a week-long evidentiary hearing in mid-December before an administrative law judge to examine stranded costs resulting from direct access as well as the impact of its performance-based rate-making (PBR) proposals. The consumer groups argue that the CPUC should resolve stranded cost issues first and create a "competition transition charge" to be allocated among the stakeholders before adopting any new policy. The California Assembly has asked to see a report on the hearing results by January 31, but the CPUC has requested more time to respond. The state legislature sets funding levels for the CPUC, and any restructuring plan will probably require enabling legislation.
The CPUC's Blue Book proposes a two-track strategy for restructuring the industry: Direct access, or retail wheeling, would be available to large customers (industrials at 50 kilovolts (Kv) or more) on January 1, 1996, and would be phased in to all consumers by January 1, 2002. Simultaneously, PBR would replace traditional cost-of-service regulation. Utilities will retain their traditional duty to serve consumers who still prefer bundled, tariffed utility service, including those customers who do not choose direct access. Understandably, the utilities have not embraced this safe harbor rule; they face growing competition from nonutility generators.
The Blue Book also calls for changes in the state's integrated resource planning (IRP) process, which many observers view as "government-sponsored central planning," inappropriate for a world in which vertically integrated utilities will no longer dominate the landscape. For low-income programs, the CPUC suggests that the state legislature consider alternative funding sources, such as an "end-user surcharge" on all customers or the state general fund. As a fundamental principle, the CPUC notes, costs will not be shifted from one customer class to another, no matter how the industry restructuring takes place.
As the hearings unfolded, a broad-based consumer alliance called upon the CPUC to order
a 25-percent reduction in rates over the next five years, charging that Californians were paying $6.4 billion over an idealized average of the nations' 30 best-performing utilities.
Consumer groups complained that the PBR proposals put forth by San Diego Gas & Electric Co. (SDG&E), Southern California Edison Co., and Pacific Gas & Electric Co. (PG&E) would not go far enough, and would yield reductions of only about 1.8 percent a year in base rates. PBR should be more than an opportunity to prune regulation while making only modest reductions to rates, they argued. They remain unconvinced that direct access will benefit small or residential customers, or that safeguards will prove adequate to avoid cross-subsidies.
The CPUC also must decide whether to call for a full-scale environmental review. Ralph Cavanagh, staff attorney for the Natural Resources Defense Council (NRDC), told commissioners that retail wheeling will necessitate an environmental impact statement to comply with the California Environmental Quality Act. Expanded demand-side management programs have saved Californians $2 billion in life-cycle net benefits since 1990, Cavanagh said, but the conservation momentum won't survive in a retail-wheeling environment. Approximately 11 percent of the state's electric generation comes from renewable energy sources, one of the highest levels in the nation, state officials assert.
DOE, while endorsing efforts to make wholesale markets more competitive and pledging cooperation on a regional basis, recommends delaying the CPUC's ambitious direct-access proposal. Direct access raises state/federal jurisdictional issues, especially if utilities try to recover stranded costs through something that resembles a transmission charge, said Susan Tierney, DOE assistant secretary for domestic and international energy policy. "[W]e expect that the Supreme Court will be deciding this case," Tierney said.
The CPUC also must allay the fears of California's municipal utilities. While the restructuring is aimed principally at the state's investor-owned electrics, municipal utilities believe they will be affected as well. The Los Angeles Department of Water & Power, the nation's largest municipal utility, wants the CPUC to scrap direct access and give wholesale competition more time to evolve. "We believe that it's quite possible that wholesale competition may be the primary answer to lowering California electricity prices," said Eldon Cotton, assistant general manager for the Los Angeles utility. Average residential customers receive a 25- to 35-percent subsidy in their bills, he says, expressing doubt that residential customers will benefit from direct access. Currently, the Los Angeles utility can sell only short-term, surplus electricity outside its service territory, Cotton said, but it would be forced to seek authorization to sell long-term outside the city, and state as well, in order to compete and retain its industrial/ commercial base.
As the hearings turned to the future structure of wholesale and retail markets, the battle shifted to complex jurisdictional issues and a debate between two distinct schools of thought \(em the United Kingdom style "PoolCo" concept versus a system of bilateral markets, typified by commodity futures trading. Professor William Hogan, member of the Harvard Electricity Policy Group, sought common ground, arguing that the PoolCo model proposed by SDG&E, a company he advises in the restructuring proceedings, is compatible with a "very efficient" bilateral market. The PoolCo \(em roughly defined as an independent system operator responsible for dispatching the transmission system on a nondiscriminatory basis and taking care of ancillary services such as spinning reserves and reactive power \(em could be designed to facilitate an open spot market that would facilitate trading, Hogan said. If parties don't want to rely on the hourly pool price, they can still bargain among themselves.
Under Southern California Edison's PoolCo proposal, the utilities would relinquish control, but retain ownership, of the transmission systems (see, PUBLIC UTILITIES FORTNIGHTLY, 10/15/94, p. 13). Robert Levin, senior vice president of the New York Mercantile Exchange (NYMEX), remains unconvinced: "We have opposed implementing a mandatory pool mechanism." NYMEX, which is developing an electricity futures contract for the western United States, opposes any concept if:
1) all physical delivery must take place through a pool, and 2) all physical deliveries occur in the spot market, as opposed to trading in a forward market. A PoolCo would restrict development of a cash market and the liquidity required for futures trading, Levin said. NYMEX sees numerous delivery mechanisms and pricing points developing in the West. They expect to apply for a futures contract later this year, but a launch date depends on the right timing, Levin observed. Jeffrey Skilling, managing director for Enron Capital & Trade Resources, strongly opposes Edison's pooling concept. A PoolCo "will inhibit or constrain the development of a deep liquid cash market," Skilling said.
The final hearings indicated a move toward some consensus, however. Skilling said he could support an alternative concept proposed by Hogan, called "OpCo," which is neither a PoolCo nor a pure bilateral market. As in the natural gas industry, where pipelines still serve as operators for nominations and scheduling, OpCo would create grid operators for dispatch and services. This would get the regulated utilities "out of the business of designing and operating a competitive commodity market," Skilling noted.
Another alternative would allow bilateral markets and PoolCo's to develop simultaneously in California. Dubbed the "Tehachapis compromise," after a small mountain range that bisects the state, Edison and SDG&E would be permitted to pursue their PoolCo concepts in southern California, but PG&E would be free to participate in bilateral markets in the north. PG&E proposes to implement direct access in 1996 for large customers, phasing in all other customers through 2008.
As the CPUC continues its re-structuring effort in the new year, it will welcome a new member. Commissioner Patricia Eckert, the senior member of the CPUC, completed her six-year term in December and chose not to seek reappointment. Gov. Pete Wilson (R) has promised to appoint a replacement as soon as possible. With this latest appointment, Wilson will have named each of the commission's five members. t
W. Lynn Garner is senior writer of PUBLIC UTILITIES FORTNIGHTLY.
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