HIGHLIGHTS HIGHLIGHTS HIGHLIGHTS OF THE WORKING GROUP REPORT OF THE WORKING GROUP REPORT OF THE WORKING GROUP REPORT The Working Group submitted its report to the Commission and the Legislature on February 22, 1995.1 The Working Group Report develops several options in the area of demand-side management (DSM) and energy efficiency, environmental protection, fuel diversity and renewable resource technologies. As described in the report, Working Group participants took as a given, from the Commission's December 7, 1994 decision, that current policies would continue under a restructured industry. Therefore, the Working Group Report does not discuss whether the policies should continue or be changed in any way. Instead, options for implementing each current policy under the four potential restructuring models are identified and briefly discussed. These models are 1) bi-lateral contracts, 2) Poolco, 3) wholesale reform, and 4) community access. As described below, some of the options would place responsibility for the programs with the Commission-regulated monopoly utility, considered to be a local distribution company (or "LDC") that would remain under each model of restructuring.2 Other options include expanding the responsibility for programs to entities not regulated by the Commission, incentives to enhance market forces for sustaining these public policy areas, new mandates, and, in some cases, relying on market forces without any state intervention. Although the report's discussion of options does not distinguish these differences, the Working Group Report points out that there may be potential conflicts between the business objectives of the LDC and its pursuit of policy goals that need to be carefully considered. Other issues discussed include: the jurisdictional concerns over expanding program responsibility to non-regulated corporations, questions regarding the authority and accountability of the statewide "consortium" established in several options, and the affects of performance-based ratemaking Working Group Report "Options for Commission Consideration," in Response to Decision 94-12-027 of the California Public Utilities Commission OIR 94-04-031/OII 94-04-032, February 22, 1995. The term "LDC" is used throughout the Working Group Report with the understanding that it refers to the remaining Commission-regulated monopoly utility, whatever that may be under the adopted restructuring model. alternatives on the pursuit of policy objectives.3 The following sections summarize the Working Group's recommendations for treatment of the public purpose and resource investment goals we identified in our interim opinion. (D.94-12- 027.) We also present the Working Group's major points on possible implications and implementation issues associated with each option. I. Economic Development I. Economic Development I. Economic Development The Working Group presents four different options for achieving economic development goals. All four options would be feasible under all restructuring models (except that wholesale reform with a mandatory pool does not require reform of economic development programs since current utility activities would continue with no change). 1. Local Distribution Company (LDC): The LDC would administer economic development programs with ratepayer funding and, if the utility determines it to be consistent with corporate strategies, with shareholder funding as well. This option is virtually identical to the way economic development programs are implemented today in vertically-integrated utilities. The sustainability of the programs would be based on identified ratepayer benefits according to Section 740.4. 2. Consortium: A consortium would be established that includes various public and private participants involved in business assistance and business climate enhancement. The consortium would develop a bidding process to deliver economic development services and set rates. This option would require coordination of the consortium with the California Trade and Commerce Agency and its TeamCalifornia economic development activities. The consortium would continue to exist as long as the participants felt it beneficial to the state or regional economy in question and as long as it was perceived to have value that supplemented, rather than duplicated, TeamCalifornia. The consortium option assumes that such a cooperative inter-agency structure would work better than single-agency efforts. 3. Taxpayers Funding: Instead of ratepayer funding, See Working Group Report, pp. 12-15. this option suggests that economic development programs be defined and implemented at the discretion of the utility and funded by utility shareholders. Taxpayers would fund economic development activities in legislatively-determined zones. The Working Group states that, under this option, utility shareholder-funded activities and services would exist only as long as the utility found them to be in shareholders interests. Other economic development services would be provided by other entities. This options success in sustaining current levels of benefits is dependent on the extent to which utilities and other parties find these activities to be in their best interests. 4. No Intervention: Under this option, implementation and definition of economic development programs would be at the discretion of the utility and funded by utility shareholders or by any other entity interested in conducting these types of activities using its own funding. This option differs from option 3 above in that taxpayers would not fund economic development activities. According to the Working Group Report, the success of this option depends on the ability of utilities and other entities to achieve and sustain economic development. There is a wide range of views concerning the extent to which these entities would find it beneficial to pursue these activities. Funding for Economic Development Options: Option 1 would rely on specific cost recovery from the LDCs customers through a non-bypassable charge. Option 2 could be funded through a similar charge, with funding then provided to the consortium, or through a state tax or surcharge. Option 3 would require taxpayer funding for economic development activities promoted by the Legislature. No specific funding mechanism would be needed for Option 4, since entities undertaking economic development activities would recover their costs through various market mechanisms. II. Low-Income Ratepayer Programs II. Low-Income Ratepayer Programs II. Low-Income Ratepayer Programs The Working Group Report offers three options for implementation of low-income policies. Under wholesale reform with a mandatory pool, no option would be necessary, since current utility activities would continue. 1. LDC and Others: This option would expand responsibility for low-income programs to include municipal utilities and non-utility energy service providers in addition to the LDC. The LDC and municipal utilities would manage the CARE and Direct Assistance programs. Non-utility energy service providers would implement these programs for customers with whom they have contracts to supply electricity. Service and funding levels would be determined by the Commission and Legislature. While there would not be mandatory competitive bidding of these programs, program providers would be responsible for ensuring that their programs were being implemented (either by themselves or third parties, including Community Based Organizations) in the least-cost manner. Since this option would expand requirements for low- income programs to all energy service providers and would provide opportunities for additional entities to offer these services to low-income customers, oversight issues must be addressed to ensure consistency and accountability for all program providers. The Working Group Report notes that the Commission should also consider jurisdictional issues associated with expanding the programs to entities it does not regulate. The Working Group Report suggests that policymakers consider appropriate incentives to promote the states policy goals and to give service providers an incentive to minimize costs and ensure program quality. Utilities require a decoupling mechanism to avoid any disincentives to participate in direct assistance programs that might exist due to lost sales. In addition, the Working Group Report recommends continuation of consumer protection policies and their application to other service providers. 2. LDC and Non-Commission Regulated Utilities: LDC and non-Commission regulated utilities would have the same requirements to implement the CARE and Direct Assistance programs. While competitive bidding of these programs would not be mandatory, all utilities would be responsible for least cost program delivery, either by themselves or third parties, such as community-based organizations. Performance incentives would be in place for program results. This option differs from Option 1 in that it limits provision of services to utilities providing distribution services to customers, including non-CPUC regulated utilities. The Working Group Report notes that this option is consistent with the manner in which low-income programs are currently conducted, but would differ in that it consolidates regulation of these programs under one authority. The Legislature would need to consider the jurisdictional implications of this option. Consideration of a decoupling mechanism, program oversight, application of the CARE discount, consumer protection policies, and policies regarding program scope and funding also applies to this option. 3. Statewide Agency/Consortium: Under this option all low-income programs would be consolidated under an existing statewide agency or a consortium that might also include other programs such as energy efficiency or renewable energy. The new statewide agency or consortium would be responsible for managing the implementation of the CARE and Direct Assistance programs for all California utility customers. Alternatively, an existing agency could be responsible for the CARE program, while the new consortium would be responsible for Direct Assistance. Under this option, the Direct Assistance program would be competitively bid. The Working Group Report notes that this option would require the establishment of a new state consortium and/or assignment of low-income programs to an existing agency. Transfer of existing program authorities and elements such as program evaluation and monitoring, establishment of activity and funding levels, oversight and accountability for the agency, reporting requirements, procedures for competitive bidding, application of the CARE discount, and consumer protection policies would need to occur. Funding the Options: Options 1 and 2 would rely on funding from customers of the entities implementing the programs. For Option 3, utility customers are the funding source. Funds are then transferred to the consortium. Funding could also occur through a state tax or surcharge. All three options would be feasible under the proposed restructuring models. III. Women, Minority, and Disabled Veteran-Owned Business III. Women, Minority, and Disabled Veteran-Owned Business III. Women, Minority, and Disabled Veteran-Owned Business Enterprise Enterprise Enterprise (WMDVBE) (WMDVBE) (WMDVBE) The Working Group Report identifies two options for implementing the WMDVBE program in a restructured industry. However, under the wholesale model with a mandatory pool, WMDVBE reform is not necessary, since current utility activities would continue. 1. LDC and Others: The WMDVBE program would be implemented by LDCs, utilities not regulated by the Commission, and all energy suppliers doing business in California. This option would expand WMDVBE requirements to all electricity service suppliers in California. With this expansion, oversight responsibilities including reporting requirements and program accountability need to be developed. In addition, the Working Group Report suggests that the Commission consider the jurisdictional issues associated with expanding program requirements to entities it does not regulate. 2. No Intervention: The WMDVBE program would not be regulated. Energy service providers would develop their own targets and implementation plans as a part of doing business. The state would provide to energy service providers information on the advantages of WMDVBE programs, how to implement a WMDVBE program, and relevant government procurement regulations. The Working Group Report notes that the success of this option hinges on the assumption that WMDVBE programs have been proven effective and that creativity and innovation is tapped by reliance on a broader base of suppliers. Implicit to this option is that mandates are not necessary, since businesses who use WMDVBE suppliers are more competitive because they increase the level of competition, creativity, diversity, and innovation from their suppliers. There is a wide range of views concerning the ability of this option to achieve and sustain public policy goals with respect to WMDVBE. Funding the Options: Option 1 requires specific to covery program administrative costs, which would come from customers of the various entities implementing the program. For Option 2, funding is provided by participating companies. Both options are feasible under all restructuring models. IV. Low Emission Vehicles (LEV) IV. Low Emission Vehicles (LEV) IV. Low Emission Vehicles (LEV) The Working Group identifies four options for LEV programs. 1. Comprehensive Programs for Integrated Utilities: The utilities' pending Commission applications request ratepayer funding from 1995 through 2000. Under the Comprehensive Program, the Commission would accept future utility applications and consider ratepayer funding for programs which meet criteria set forth in the Public Utilities Code and interpreted by the Commission in its upcoming decision on the pending applications. The programs would be carried out by integrated utilities. Various agency regulatory authority over air quality and transportation programs would remain unchanged. The Working Group Report notes that the new markets for LEV's may be created as a result of California Air Resources Board regulations. These markets may attract private sector investment including investment from unregulated utility subsidiaries. Utilities might choose to remove their LEV programs from regulatory protection through "spinning-off" the subsidiary or LEV programs or program components might be provided by private entrepreneurs. A utility spin-off may require ratepayer compensation or other financial mechanisms designed to make the ratepayers whole for past LEV-related investments. The operation of an unregulated subsidiary or of any private venture investing in LEV programs would be financed through the conventional capital investment of shareholders or private owners. 2. Comprehensive Programs for LDCs: This option would require that the LDC undertake some or all of the LEV activities that are authorized in the Commission's upcoming LEV decision. The Working Group Report notes that the Commission could decide that some or all of the activities shown in Table 1 of the Working Group Report are consistent with the responsibilities of an LDC and authorize the utilities to perform them, as in Option 1. Agency oversight of regulations governing air quality and transportation matters would remain unchanged. 3. Limited Programs for LDCs: LDCs would undertake only limited LEV programs consistent with their responsibility to distribute electricity to recharge LEVs, possibly including such activities as consumer information on LEV safety and off peak recharging. Customer support and coordination of advocacy with other agencies regarding LEVs would be cut back or eliminated. Agency oversight of regulations governing air quality and transportation matters would remain unchanged. 4. Limited Programs for LDCs/Supplemental Government Programs: This approach is similar except that CARB, local air quality management districts, or metropolitan planning organizations would develop new supplemental government programs to the extent they wished to support LEV development at higher levels than expected from limited LDC programs in conjunction with CARB regulations. The Working Group Report notes that one implication of this option is that supplemental government programs might cause additional amounts of LEVs in specific regions, a different set of transportation users purchasing them, and a somewhat different set of recharging facilities available for LEVs. Government programs promoting LEVs as an air quality mitigation measure might change consumer attitudes if sustained over a lengthy period of time. Funding the Options: These options would rely on several funding mechanisms. For Option 1, ratepayers would pay for approved LEV programs. For Options 2 and 3, LDC charges incurred by a Commission-regulated LDC would likely be recovered through rates, as part of a distribution charge or possibly a performance regulation mechanism. Municipal utilities would recover costs through rates. Other entities undertaking LEV activities would recover costs under various market mechanisms. For Option 4, LDCs would recover charges as for Options 2 and 3. New governmental programs could be funded through the LDC charge or a state tax or surcharge. V. Research, Development and Demonstration (RD&D) V. Research, Development and Demonstration (RD&D) V. Research, Development and Demonstration (RD&D) The Working Group identifies five options for RD&D programs.4 1. Consortium/Public Authority: This approach would require a consortium or public authority to conduct broad-based "public goods" RD&D not addressed by the competitive market. The consortium or public authority would be responsible for directing and administering Californias public goods research. In addition, the LDC would perform ratepayer-funded transmission and distribution RD&D, and shareholder-funded research focusing on private goods RD&D. Coordination of the consortium/public authoritys RD&D activities with those of other entities would be required to avoid duplication and inefficient expenditure of public funds. 2. LDC: Under this option, LDCs would have primary responsibility for both transmission and distribution RD&D and broad-based public goods research. The Working Group Report states that this option requires broad regulatory responsibilities for the LDC. In addition, public goods RD&D serves a broad-based constituency, thus raising the issue whether the general population should contribute to activities, rather than LDC customers only. Another issue would be to ensure the LDC truly undertakes a broad-based approach to public goods research. 3. National Research Organization: Under this approach, a national research organization similar in concept to the Gas Research Institute or EPRI would administer public goods RD&D programs. Collaboration among the federal government, state utility commissions, and electric utilities would be required to implement this option. One view of public goods RD&D is that it involves national and global issues rather than regional or state issues. Under this view, a national research organization would be effective in addressing public goods RD&D. Public goods research that is funded nationally may accurately distribute the cost for this research to the beneficiaries. At the same time, a key consideration would be whether a national group would reflect the concerns of the state. This option also entails implementation issues involving coordination with federal agencies and utility consumers nationally. 4. LDC and No Intervention: Under this option, the LDC would continue to perform ratepayer-funded transmission and distribution RD&D research. The competitive market would be relied upon to provide public goods RD&D, as a spillover from private-goods RD&D benefits. According to the Working Group Report, the success of this option hinges on critical assumptions about the ability of the competitive market, combined with ratepayer-funded transmission and distribution RD&D research, to achieve and sustain public purpose RD&D goals. A more competitive market may stimulate private-goods RD&D which subsequently may have public- goods benefits. At the same time, shareholder-funded RD&D may not explicitly value public goods RD&D. There is a wide range of views regarding how much public goods RD&D would be undertaken by private entities in a restructured electric industry. 5. Indirect RD&D Funding Approaches: This option would require state agencies such as the CEC, California Air Resources Board (CARB), regional Air Quality Management Districts, and the California Environmental Protection Agency to be given responsibility for developing public goods RD&D objectives and recommending legislative and administrative initiatives to encourage the objectives. Techniques these entities, along with legislative cooperation, could employ are tax credits, tax incentives, emission reduction credits, and CARB LEV-type mandates. According to the Working Group Report, this option gives the state some influence in ensuring that public goods RD&D continues and is used in combination with other options. The Working Group Report raised whether this option would distort market conditions by artificially influencing the economics of RD&D and noted that this option may also be difficult to implement both legislatively and administratively. Funding the Options: For Option 1, funding for the consortium could be provided from a charge to all customers of the LDC or through a state tax or surcharge. For Options 2 and 4, funding for LDC RD&D activities would be covered through a volume-based, non-bypassable charge to all customers of the LDC. The national research organization in Option 3 could be funded by a nationwide volume-based, non-bypassable charge on all electric supplies. Option 5 would rely on existing funding of the state agencies assuming responsibility for public goods RD&D, or additional funding could be provided as for the consortium in Option 1. These options are feasible under all restructuring models. VI. Fuel Diversity and Renewable Technologies VI. Fuel Diversity and Renewable Technologies VI. Fuel Diversity and Renewable Technologies The Working Group Report presents five broad categories of options for fuel diversity and renewable technologies. These options are feasible under all restructuring models, although implementation of Option 1 would be more difficult under a direct access or Poolco models. Options 2, 3, 4, and 5 would not be necessary under the wholesale model, since current utility activities could continue unchanged. Option 1: LDC Procurement Requirement Option 1: LDC Procurement Requirement Option 1: LDC Procurement Requirement The LDC would implement current state law and policy on fuel diversity and renewable resource development. Each LDCs annual renewable resource purchase requirements would be established by a state authority based on resource need and cost-effectiveness. Under such a proposal, this new state authority could require the LDC to require its utility service customers to buy a percentage of its energy needs from renewable resources. The same would hold true for direct access customers or brokers who would be required to meet a renewables direct purchase requirement. The authority could provide incentives to the LDC -- perhaps through performance rewards and penalties -- to purchase renewables or meet diversity targets. The LDC could fill grid support or distribution deferral needs through solicitations to purchase distributed power from renewable energy generators. In combination with any of the above, the LDC could offer "green pricing" options (tariffs) to its customers. Such tariffs would permit the customer to choose to pay a rate which would achieve a higher level of renewables to meet their individual power requirement. Such green pricing would offer individual customers a means of supplementing the LDC purchase requirement. Option 1 is feasible under all models, although its implementation would be more difficult for restructuing. An LDC procurement requirement assumes that the LDC would contract for or otherwise ensure delivery of a mix of generation provided to LDC consumers. The option might also involve some LDC-related resource planning functions, if the LDC purchase requirement for renewables is substantially larger than the generation mix being provided by the competitive market. Option 2: Supplier or Purchaser Requirements Option 2: Supplier or Purchaser Requirements Option 2: Supplier or Purchaser Requirements A state authority would require each direct access customer or distribution company to purchase, on an individual or aggregated basis, a percentage of its energy needs from renewable resources as a condition of becoming and remaining a direct access customer or providing electricity to remaining customers. Alternatively, a similar requirement could be placed on all electricity suppliers. The state authority would take into account cost, environmental benefits, and fuel diversity when establishing the requirement. The requirement could be traded. In this situation, a direct access customer could meet the requirement working with another customer who exceeded the requirement (the excess would be traded), as long as and to the extent the requirement is met in aggregate. The Working Group Report concludes that, since purchasing requirements would be uniform across customers or suppliers, potential concerns related to the effects of such a requirement on fair competition do not exist or are minimal. Option 3: Independent Purchasing Authority Option 3: Independent Purchasing Authority Option 3: Independent Purchasing Authority Under this option the Legislature would constitute an independent authority or consortium to purchase renewables. It would re-sell energy "on the market" to electricity purchasers: LDCs, direct access customers, or brokers/aggregators. The independent authority could be the same as the consortium suggested for DSM and low-income public policies. The authority would require operating rules as to how it procures renewable power, possibly under long-term contract, and as to how it resells this power to electricity purchasers. The Working Group Report notes that the Commission would need to consider the affect of this approach on the development of a customer-oriented competitive market for renewables and potential applicability of "green pricing." The sustainability of state policy under this option would depend on the level of funding available to the independent purchasing authority. Option 4: Renewables Incentives Option 4: Renewables Incentives Option 4: Renewables Incentives Purchasers and sellers in a competitive market would be provided incentives to diversify their generation mix to the extent that diversification is expected to reduce costs. The Working Group Report notes that a number of methods for providing additional financial incentives to renewables have been suggested. Some methods, such as tax credits and emissions fees, require new statutory authority. Methods suggested include: "Venture Capital Fund," where an entity, perhaps the LDC, would provide incremental capital to allow renewable developers to compete in the market. "Auctioned Renewables Credit," where an incentive would take the form of a production credit per kilowatt-hour. "LDC Grid Support Incentives," where the distribution entity would offer its customers T&D rate discounts or incentive payments for purchase of renewables. "Tax Credits to Reflect Value of Renewables," where the Legislature would provide tax credits and/or low interest loans to reflect the perceived value of renewables and fuel diversity to the extent these values are not reflected in the market. "Emission Taxes," where a tax would be imposed on residual emissions from fossil resources, reflecting the societal cost of those emissions to the extent these costs are not internalized. The Working Group Report points out that differences in the degree of administrative complexity exist among these methods. In addition, factors that affect whether these methods would be successful in sustaining current state policies require evaluation. The report notes that a combination of methods could be used to achieve state policy goals. Option 5: No Intervention Option 5: No Intervention Option 5: No Intervention Purchasers would acquire renewable energy as they would any other electrical energy product, with no state-imposed requirements. The Working Group Report notes that the success of the "No Intervention" option hinges on critical assumptions about the ability of the competitive market to achieve and sustain public policy goals with respect to renewables. There is a wide range of views concerning the extent to which energy suppliers and customers may find it beneficial voluntarily to acquire renewable resources and the extent to which price signals will reflect the value of renewables. One perspective held by some Working Group members is that the market, supplemented by existing investment, production, or emission credits, is sufficient to meet the state's goals and objectives. Other Working Group members note that renewables would be selling to their competitors (e.g., utilities owning generation) under some models and that, to be feasible, the "No Intervention" option requires that renewable generators be able to market directly to consumers. VII. DSM and Energy Efficiency Programs VII. DSM and Energy Efficiency Programs VII. DSM and Energy Efficiency Programs The Working Group Report identifies the following three options for DSM and energy efficiency programs. These options are be feasible under all restructuring models. Option #1: LDC Option #1: LDC Option #1: LDC Under this approach, the LDC acts as the focal point for Commission and legislative energy efficiency policies. The LDC is responsible for program funding, implementation oversight, measurement, verification and reporting. It assumes responsibility for the effectiveness of in-house and third-party-delivered energy efficiency programs and coordination of demand-side bidding programs. Performance incentives for the LDC are based on the achievements of those programs. This option is very close to current practice. LDCs would retain primary responsibility for energy efficiency programs, although actual implementation could be performed by the LDC or by other entities under contract. LDCs would be provided incentives to find the most efficient pathway to program implementation, making full use of energy service companies and other service providers.5 The Commission would continue to review budgets for LDC energy efficiency programs. Cost recovery would include a decoupling mechanism to protect against the conflicting incentives to sell and to save energy. The Commission would have to address implementation issues such as development of a pay- for-performance mechanism, criteria for determining program funding levels, program evaluation criteria, and the relationship between the LDCs and third-party service providers. Option #2: Consortium Option #2: Consortium Option #2: Consortium Under this option, public purpose objectives are pursued through a new public authority or consortium or by adding this function to an existing agency. The consortium would be created as soon as practicable, with current ratepayer-funded utility DSM programs eliminated as soon as the consortium starts operating. The centerpiece of the consortium's activities would be the periodic sponsorship of a competitive bid for the acquisition of demand-side alternatives to energy purchases. Energy service companies (ESCOs) would compete for the opportunity to use funds to establish performance-based contracts with customers or customer groups in overcoming market barriers that are limiting the widespread adoption of energy efficiency and decentralized energy production systems. This option requires the creation of a new state agency or adding this function to an existing jurisdiction. Implementation issues include: program evaluation, funding levels, decoupling mechanism, checks and balances on the consortium, reporting mechanism and bidding procedures. The consortium would need to define the entities eligible to bid as ESCOs, as well as define utility participation in the program. Depending on the scope and type of the consortium's activities and the details of the industry structure, there may or may not be a need to coordinate with any remaining utility programs. The Working Group Report states that the implications of energy efficiency objectives and the perceived need for a consortium, under alternative industry structures, are heavily influenced by such matters as: (1) the extent and nature of divestiture; (2) the existence or elimination of a decoupling mechanism; and (3) the type and nature of performance ratemaking mechanisms. Option #3: Two Track DSM Services: Customer Service Option #3: Two Track DSM Services: Customer Service Option #3: Two Track DSM Services: Customer Service and Market Transformation and Market Transformation and Market Transformation This option would pursue DSM public policy goals on two tracks: (1) a customer service track that envisions utilities using shareholder funds to pursue customer service DSM on a for-profit basis and (2) a market transformation track in which utilities would use ratepayer funds to lower energy services market barriers. Under the latter option, utilities would use shareholder funds to offer customers energy efficiency and other energy service options on a for-profit basis. A separate entity (such as the consortium in Option 2) would manage ratepayer funds to accomplish market transformation and would be responsible for implementation of a limited group of DSM programs. The range of energy services utilities provide to customers in the first track would be expanded by opening up the utility's billing and metering functions to private vendors. According to the Working Group Report, the success of this Option 3 would hinge on critical assumptions about the ability of the energy services industry and shareholder-funded utility programs to achieve and sustain energy efficiency public policy goals. Among the Working Group, there is a wide range of views regarding the extent to which this would occur. The Working Group Report recommends that the Commission also consider issues related to the confidentiality of customer records, legal issues related to opening up billing and metering functions to competitors, and coordination of these functions between the LDC and competitors. For example, some parties contend that billing and metering functions may be more efficiently provided by the LDC and that doing so would be consistent with customer privacy concerns. In addition, the Working Group identifies many issues related to the market transformation track of this proposal that require resolution. These include who would authorize market transformation program funding levels, how the effectiveness of these programs would be evaluated, and what groups or market participants should be included in the new institution. These three options are feasible under all restructuring models. Under wholesale reform, reform is necessary, since current utility activities would continue. Option 1 requires specific funding from all LDC customers through a mandatory usage-based charge. This same type of charge could provide funding for the consortium in Option 2, or funding for Option 2 could be generated through a state tax or surcharge. Option 3 involves no ratepayer funding since shareholders would fund any energy efficiency programs the LDC might pursue. Funding for the consortium in Option 3 could be the same as for Option 2. VIII. Environmental Protection VIII. Environmental Protection VIII. Environmental Protection In the area of environmental protection, the Working Group identifies four options. As is discussed, only options 3 and 4 would clearly be feasible under all restructuring models. Option 1: Existing Laws and Regulations Option Option 1: Existing Laws and Regulations Option Option 1: Existing Laws and Regulations Option Under this approach, existing environmental protection laws and regulations are maintained. The integrated utility would retain responsibility for managing of the generation portfolio in its franchise territory. The Commission, CEC, and other regulatory agencies would retain present environmental protection roles and responsibilities as well as their current duties in the area of resource planning and procurement and the consideration of environmental costs and benefits. The Commission and the CEC would implement their existing legislative directives through utilities subject to their jurisdiction. Option 1 is not feasible under either a bi-lateral contracts or Poolco model. Under both the bi-lateral contracts and Poolco models, resource decisions would be made not by government or through government-directed utility programs but by market participants. Neither model provides for a centralized resource planning process, and as a result, neither model allows for the valuation of externalities in resource planning as it is currently practiced today. Option 1 is feasible for both wholesale and community access models. Under community access, the energy supply function of the integrated utility is transferred to the consumer-owned utilities or cooperatives (COUs) through the mandatory features of the COU for a given geographic area. The COU is responsible for portfolio management since it has assumed all resource acquisition and power purchase responsibilities on behalf of the consumers within its jurisdiction. The utility regulators retain responsibility for resource planning and procurement. Option 2: Environmental Performance Standards for LDC Option 2: Environmental Performance Standards for LDC Option 2: Environmental Performance Standards for LDC Under this option, environmental performance standards would be established by the Commission for LDCs subject to its jurisdiction. These standards would substitute for current Commission directives to integrated utilities. The performance standards could cover a variety of environmental parameters - air, water, hazardous wastes, etc. Individual powerplants could have varying emission levels as air regulators choose a "bubble" or emission cap approach for all sources supplying the LDC's customers. The LDC would implement environmental standards as a consequence of managing their portfolio of resources. The LDC would be required to monitor power generation locations and specific powerplant performance, presumably based on information from the grid operator; the grid operator would constrain dispatch to allow the individual LDCs to meet their environmental performance standards. In effect, the LDC would impose an additional "dispatch" constraint and the grid operator would consider these LDC constraints in total dispatch operations. Option 2 requires establishment of new performance standards. The Working Group Report points out that environmental and energy regulators should have consistent, non duplicative requirements. Moreover, the development of non-air quality related performance standards covering such areas as land use or endangered species could be difficult. Another consideration may be that the LDC must be either financially independent of all power suppliers or subject to substantial regulatory oversight to ensure fair dispatch of plants to meet performance standards. Option 3 would be feasible under wholesale and community access models, but may not be feasible for direct access or Poolco. The performance standard option assumes that some aspects of the resource planning functions that utilities now perform are retained by the LDC, so that the utility could select which generation units to dispatch (or purchase power from) to meet the performance standards. Because the LDC does not retain such a function under direct access or the Poolco model, it is difficult to see how the option could be implemented. Option 3: Environmental Agency Regulation Option 3: Environmental Agency Regulation Option 3: Environmental Agency Regulation Under this option, environmental regulators would assume responsibility for environmental protection policies and programs currently done by energy agencies. Environmental regulators would determine whether additional regulations are required and what portions, if any, of the current regulatory apparatus employed by the Commission and CEC should continue. Option 3 is feasible under all restructuring models. The success of this option depends on whether or not environmental agencies are allocated sufficient resources to assume the environmental protection responsibilities of the Commission and CEC. The Working Group Report points out that local agencies may have difficulty addressing "systems" issues under this option: To coordinate regulation based on statewide interests, state agencies such as CalEPA would likely be required to play some larger role than is now the case. Option 4: Emissions Surcharge/Consortium Option 4: Emissions Surcharge/Consortium Option 4: Emissions Surcharge/Consortium Option 4 envisions that the state would establish to internalize the damages from environmental externalities. Under this option, a statewide consortium would be established to sustain environmental research, public information, and other activities not addressed through the emissions surcharge. Option 4 is feasible under all restructuring models. The emissions surcharge/tax would be levied to account for all or a major subset of the environmental externalities from individual facilities, regardless of ownership. Environmental protection measures that could not be localized to a specific facility would be accomplished in a similar scale by a new statewide consortium. The surcharge option requires development of a system for measuring and recording externalities by emissions source, assigning responsibility for these emissions, and pricing these emissions accordingly through a tax or surcharge. The Working Group Report identifies the following issues regarding the emissions surcharge/tax: administrative costs, the lack of an existing regulatory structure, the difficulty of establishing a new tax, the difficulty of accurately calculating damages, and potential inequities if the emissions surcharge/tax applies only to generators in California. Issues specific to the statewide consortium include duplication with existing utility efforts, organizational efficiency, and obtaining stable funding mechanisms. (END OF ATTACHMENT 6) (END OF ATTACHMENT 6) (END OF ATTACHMENT 6)