I. INTRODUCTION The California Cogeneration Council ("CCC") appreciates this opportunity to submit comments on the issue the Commission has chosen for its third full panel hearing in this proceeding. That issue goes to the heart of restructuring. In essence, the Commission is asking how transactions should take place in the restructured electric services industry. The CCC submits that a free and open market is ideally suited for these transactions. The electric services industry already contains the essential ingredients for a vigorous competitive market. There are many consumers of such services, and many providers from whom an increasingly broad array of products and services are available. Information and transmission technology exist to enable ready access between consumers and providers. The Commission's key task in the restructured electric market is to safeguard competition and ensure consumer choice by insisting that (1) competition extend to the retail level, and (2) access services be provided on a fair and nondiscriminatory basis. Restricting competition by limiting it to the wholesale level or within a government- created pool is not a true market-based solution. In short, a fully competitive market in electric services will produce the greatest amount of consumer satisfaction with minimum consumption of society's scarce 1 resources. The market will produce many mechanisms for market-clearing and price dissemination. The market will prove superior to central planning, regardless of whether the planner is a public or private entity. II. THE COMMISSION SHOULD ALLOW CONSUMER CHOICE AND LET THE MARKET DEVELOP ACCORDINGLY The Commission should not attempt to determine the appropriate structure for a market in a newly competitive electric services industry and then to mandate the establishment of such a market structure by regulatory fiat. Such an attempt would be inconsistent with the nature of a true market and with the premise of this proceeding that the command-and-control era of regulation should end. Moreover, the attempt would almost certainly fail. The Commission's role in this undertaking should begin with adopting a policy favoring true consumer choice. The Commission can and should leave to the market the development of mechanisms for exercising such choices. III. THE COMMISSION SHOULD AIM FOR A REAL GENERATION MARKET, NOT AN APPROXIMATION OF A MARKET A. How Markets Maximize Value All parties agree that the Commission's task is to find ways to increase the value of the product(s) the electric services industry provides. Parties differ on the nature of the product(s), e.g., to what extent electricity is a commodity. They also differ on how to measure value, 2 e.g., the relative weight to be given to price and non-price factors associated with provision of electric services. The CCC believes that the differences among the parties correspond to different desires and capabilities among the many kinds of consumers and the many kinds of electric service providers. The Commission's problem would be simplified if a "typical" consumer and a "typical" provider existed. Reality is much more complex. Consumers have widely different demand patterns, reliability requirements, sensitivity to price volatility, and investment priorities. Providers operate under different terms and conditions, have varying ability to follow load, and must consider their relationship with fuel suppliers and (for cogenerators) their steam hosts. Like consumers, service providers vary in their sensitivity to price volatility and in their investment priorities. The result is that providers differ in the electric services they offer, and consumers differ in the electric services they want. The CCC submits that the virtue of market economies lies precisely in their ability to match many buyers and sellers, many needs and means. The process by which this matching occurs could be bilateral or multilateral. Indeed, some buyers, and some sellers, may have the desire and capability to form bilateral arrangements, while others may wish to participate in the 3 market jointly or through brokers or marketers. This multiplicity of arrangements is not chaos, it is what makes competitive markets efficient compared to rigid marketing schemes or central planning. B. To Pool or Not to Pool: Is That the Question? While the July 8 Assigned Commissioners' Ruling for this hearing assumes a dichotomy between bilateral contracts for electric services, on the one hand, and some sort of generation "pool," a pool does not necessarily preclude bilateral contracting. In fact, some pooling concepts may facilitate bilateral contracts and thus complement the competitive electric services market. Such pools should evolve rapidly, providing that government permits that evolution by opening the generation market. The CCC cautions that the pooling concepts urged by some parties amount to central planning with a free market veneer. The Commission should emphatically decline to mandate a "pool" that does nothing to expand consumer choices, and should leave to the market the development of mechanisms for exercising such choices. C. How POOLCO Would Abort Competition As described above, "pooling" of buyers, sellers, or both can constitute part of a competitive electric services market. Some parties advocate a single, regional generation "pool" in another sense altogether, specifically, as a substitute for a competitive electric services market. 4 The latter proposals, in which the CCC would include the POOLCO of Southern California Edison Company ("Edison"), do not permit consumer choice. They may actually reduce wholesale competition compared to what presently exists, and protect electric utilities at the expense of their competitors and customers. Edison has described POOLCO only sketchily.1 Edison has made clear, however, that POOLCO is intended to defer "direct access" indefinitely. Approval of POOLCO would thereby forego most of the market efficiencies the Commission hopes to capture, since the finely tuned matching of consumers and providers in a fully competitive market would not take place. POOLCO is a price-only system, neglecting the various non-price factors that are important for both consumers and providers. POOLCO also defines price competition restrictively, on the basis of a half-hour or hourly spot price. There are many products in the generation market besides spot power; the CCC considers such constrained competition would not reflect market prices in any meaningful way. Most damaging from the standpoint of the impact on development of a fully competitive market is Edison's 1 Most of the other proposals for restructuring the generation market are also sketchy. In consequence, it is hard to evaluate and respond to these proposals. The CCC suggests some remedies for this problem in Section III below. 5 apparent intent to collect, through some charge other than the variable energy charge, all of its costs not covered by the spot price described above. Under this system, Edison is unlikely to bid its true variable costs but instead is likely to bid "zero," since Edison would recover the full costs of each Edison plant that POOLCO dispatches. Consumers would see low or no savings, while Edison would always prevail in the bid against any competitor that had to bid its true costs, regardless of whether those costs were lower than Edison's actual costs. Such a system cannot fairly be characterized as competition. It has become apparent to the CCC that Edison fundamentally rejects the competitive, market-oriented premises of the Commission's restructuring proposal. POOLCO is a red herring, an attempt to disguise Edison's determination to continue as a traditional, outmoded vertically integrated utility. For reasons just described, POOLCO is a device to protect Edison's market power. The Commission could significantly advance this proceeding by rejecting POOLCO and firmly sending Edison's management back to the drawing board. IV. THE COMMISSION SHOULD CONSIDER ADDITIONAL MEANS TO FACILITATE UNDERSTANDING AND COMPARISON OF PARTIES' POSITIONS Most parties at this stage are limiting themselves to very broad positions, recognizing that fine-tuning can 6 and should occur after the Commission has finalized its policy judgments and proceeds to the implementation phase. The problem with broad positions, however, is that they are often unclear in material respects. For example, many parties, including some of the major California investor-owned electric utilities, favor a generation "pool," but as the CCC has explained earlier, there are major differences between parties about the proper role of pools and how pools would work. It would be very useful for the parties and the Commission to arrive at a shared understanding of the extent to which these utilities and other commenters on pooling hold the same views on this important issue, and exactly where and how the various pooling proposals differ. There does not seem to be any means at present to arrive at such a shared understanding, the lack of which can delay or prevent the narrowing of issues and complicate the task of decision makers. There are several good options to help parties to interact and to clarify the record. The Commission could direct the Commission Advisory and Compliance Division ("CACD") to hold informational workshops on targeted issues, of which generation pools would be one of the first choices. Similar to the workshops in the Commission's highly successful transmission access proceeding (Investigation 90- 09-050), proponents of particular pooling concepts could explain those concepts and answer questions in an informal, 7 non-confrontational setting. CACD could compile and publish workshop papers to ensure that non-attending parties can review the presentations. This process should help show where policy direction is needed from the Commission and what the key policy choices are. Short of workshops, or complementary to them, CACD could prepare, and circulate in draft form, a comparison exhibit on targeted issues. This exhibit could be detailed or general, and refined over time. The process of developing the exhibit will help clarify or amplify positions. Both workshops and comparison exhibit would also enable the parties to interact positively, without the rhetoric that inflames more adversarial settings. V. CONCLUSION One of the key issues for the Commission in electric industry restructuring is whether to allow a true generation market to develop, or instead to devise an approximation of such a market through some refinement to the limited wholesale competition that exists now. The CCC urges the Commission to aim for a true generation market. To that end, the touchstone the Commission should use in judging any restructuring proposal is to ask whether the proposal genuinely enhances the consumer's ability to shop for the kind, quality and combination of electric services that fit the needs of that consumer. 8 The Commission should also supplement the hearings and written comments with informational procedures to promote greater understanding of the alternative proposals and beneficial interaction among the parties. Respectfully submitted, Jerry R. Bloom Lynn M. Haug MORRISON & FOERSTER By: Jerry R. Bloom Attorneys for the California Cogeneration Council 9 A:\303183.doc [12856/86] TABLE OF CONTENTS PAGE I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . 1 II. THE COMMISSION SHOULD ALLOW CONSUMER CHOICE AND LET THE MARKET DEVELOP ACCORDINGLY . . . . . . . . . . . . 2 III. THE COMMISSION SHOULD AIM FOR A REAL GENERATION MARKET, NOT AN APPROXIMATION OF A MARKET . . . . . . . . . 2 A. How Markets Maximize Value . . . . . . . . . 2 B. To Pool or Not To Pool: Is That the Question? 4 C. How POOLCO Would Abort Competition . . . . . 4 IV. THE COMMISSION SHOULD CONSIDER ADDITIONAL MEANS TO FACILITATE UNDERSTANDING AND COMPARISON OF PARTIES' POSITIONS . . . . . . . . . . . . . . . . 6 V. CONCLUSION . . . . . . . . . . . . . . . . . . . . 8 i A:\303183.doc [12856/86] BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Order Instituting Rulemaking on the ) Commission's Proposed Policies ) R.94-04-031 Governing Restructuring California's ) Electric Services Industry and ) Reforming Regulation ) ) ) Order Instituting Investigation on the ) Commission's Proposed Policies ) I.94-04-032 Governing Restructuring California's ) Electric Services Industry and ) Reforming Regulation ) ) OPENING COMMENTS (THIRD FULL PANEL HEARING, AUGUST 4, 1994) Jerry R. Bloom Lynn M. Haug MORRISON & FOERSTER 345 California Street San Francisco, CA 94104-2675 (415) 677-7533 Attorneys for the California Cogeneration Council July 26, 1994