BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ) Order Instituting Rulemaking on the ) Commission's Proposed Policies ) Governing Restructuring California's ) R.94-04-031 Electric Services Industry and ) Reforming Regulation ) ) Order Instituting Investigation on the ) Commission's Proposed Policies ) Governing Restructuring California's ) I.94-04-032 Electric Services Industry and ) Reforming Regulation ) ) THIRD ROUND OPENING COMMENTS OF THE CALIFORNIA MANUFACTURERS ASSOCIATION Keith R. McCrea Glen S. Howard SUTHERLAND, ASBILL & BRENNAN 1275 Pennsylvania Avenue, N.W. Washington, D.C. 20004 (202) 383-0705 Counsel for the California Manufacturers Association July 25, 1994 TABLE OF CONTENTS PAGE SUMMARY OF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 I. THE COMMISSION SHOULD FOCUS ON PROMOTING CUSTOMER CHOICE AND ON DIVESTITURE OF UTILITY-OWNED GENERATION ASSETS. DIRECT ACCESS IS CONSISTENT WITH THESE OBJECTIVES; ATTEMPTS TO RESTRICT COMPETITION TO THE WHOLESALE MARKET ONLY ARE NOT . . . . . . . . . . . . . . . . . . . . . . . . . 3 II. REGARDLESS OF WHETHER THE COMMISSION PURSUES "WHOLESALE-ONLY" OR RETAIL WHEELING, THE FIRST CRITICAL STEP IN CREATING A COMPETITIVE ENVIRONMENT IS DIVESTITURE OF UTILITY-OWNED GENERATION ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 A. Allowing the Utilities to Retain Generation Assets Would Give Them An Overwhelming Competitive Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 B. The Commission Can Properly Adopt Mechanisms To Encourage Voluntary Divestiture of Utility Generation Assets . . . . . . . . . . . . . . . . . . . . . 6 III. ATTEMPTING TO LIMIT COMPETITION TO THE WHOLESALE MARKET ONLY WOULD BE COUNTERPRODUCTIVE AND CONTRARY TO THE INTERESTS OF CALIFORNIA CONSUMERS . . . . . . . . . . . . . . . . . . . . . . . . 8 IV. FROM A LEGAL PERSPECTIVE, THE ESTABLISHMENT OF A WHOLESALE MARKET WOULD ELIMINATE COMMISSION JURISDICTION OVER MOST FACETS OF THE INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . 12 V. MARKET INSTITUTIONS: THE COMMISSION SHOULD ESTABLISH POLICIES AND GUIDELINES THAT ALLOW THE NECESSARY MARKET INSTITUTIONS TO BE DEVELOPED BY THE MARKET ITSELF . . . . . . . . . . . . . . . . 16 CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ) Order Instituting Rulemaking on the ) Commission's Proposed Policies ) Governing Restructuring California's ) R.94-04-031 Electric Services Industry and ) Reforming Regulation ) ) Order Instituting Investigation on the ) Commission's Proposed Policies ) Governing Restructuring California's ) I.94-04-032 Electric Services Industry and ) Reforming Regulation ) ) THIRD ROUND OPENING COMMENTS OF THE CALIFORNIA MANUFACTURERS ASSOCIATION In accordance with the Assigned Commissioners' Ruling issued July 8, 1994, the California Manufacturers Association (CMA) hereby submits its opening comments on the designated topics, Competitive Wholesale Electric Markets: Role, Structure, and Efficacy and Market Institutions in the Restructured Electric Industry. SUMMARY OF COMMENTS CMA is strongly opposed to the notion proffered by certain utilities and academicians1/ that the Commission's role in these proceedings should be limited to promoting a competitive wholesale market only. Wholesale market competition alone is not enough. Direct access is essential if ratepayers Ä rather than utility shareholders only Ä are to enjoy the benefits of lower electric rates and a more competitive electric industry. There is much less to the so-called "wholesale-only" approach than meets the eye. Proposals such as POOLCO are yet another attempt to achieve through regulation that which can best be achieved through 1/ Professors Hogan and Joskow readily acknowledge in their earlier comments that they have consulted with SDG&E and SCE in these proceedings. open and fair competition. At bottom, the "wholesale only" proposal appears little more than an artifice intended (1) to delay and divert the Commission from pursuing the important objectives outlined in the OIR and (2) to buy as much risk-free time as possible to allow the utilities to gear up for the inevitable Ä direct access. "Wholesale-only" may be a profitable strategy for utilities such as Southern California Edison (SCE), San Diego Gas & Electric (SDG&E), and their allies, but it would be demonstrably bad policy Ä contrary to the best interests of California consumers Ä for this Commission to sanction that "half-a-loaf" strategy in lieu of the OIR's originally stated goals. In this case, half a loaf may well be worse than none; the full loaf Ä wholesale and retail market competition Ä is required. Any delay in implementing direct access comes at the direct expense of California consumers and California jobs. Consistent with the scope of the third full panel hearing scheduled for August 4, CMA's comments herein primarily address the reason why the Commission should not adopt the "wholesale-only" approach. Then, in the upcoming fourth round of comments (Customer Choice Through Direct Access: Role, Structure and Efficacy), CMA will demonstrate why adoption of the Commission's original direct access proposal is preferable. I. THE COMMISSION SHOULD FOCUS ON PROMOTING CUSTOMER CHOICE AND ON DIVESTITURE OF UTILITY-OWNED GENERATION ASSETS. DIRECT ACCESS IS CONSISTENT WITH THESE OBJECTIVES; ATTEMPTS TO RESTRICT COMPETITION TO THE WHOLESALE MARKET ONLY ARE NOT. In response to a question raised in the July 8 Assigned Commissioners' Ruling (at 2), CMA respectfully submits that further development of a competitive wholesale market is not a necessary precursor to direct access and workable retail competition. Indeed, National Power PLC's first round reply comments (June 21, 1994, at 2) correctly emphasized an important truth as to the real source of competitive benefits: National Power supports the POOLCO concept put forth by Southern California Edison Company, but not in the absence of simultaneous direct access. The majority of the real benefits from competition come from direct access, not the Pool mechanism itself. California should introduce both elements into the restructured market. (emphasis added) Simply put, if the benefits of a competitive electric market are to be brought home (literally) to California consumers, they cannot be held captive to their existing utility system as the sole - 2 - provider of electric power. Customer choice is the fundamental driving force behind meaningful competition. And fundamental to meaningful "customer choice" is getting California utilities out of the generation business as part of their regulated activities. Utilities' generation assets must be spun off and exposed to the discipline of market forces; and utilities' efforts to compete in the generation market should in no way be subsidized by the rates consumers must pay for transmission, distribution, or other monopoly services. As described in more detail below, neither the OIR itself nor the discussion in this proceeding to date have adequately addressed the near term disposition of utility-owned generation assets. In CMA's view, this is an issue which the Commission must resolve as an integral part of whatever competitive model it ultimately adopts. II. REGARDLESS OF WHETHER THE COMMISSION PURSUES "WHOLESALE-ONLY" OR RETAIL WHEELING, THE FIRST CRITICAL STEP IN CREATING A COMPETITIVE ENVIRONMENT IS DIVESTITURE OF UTILITY-OWNED GENERATION ASSETS. CMA strongly supports the OIR-proposed schedule for implementing direct access and believes that, after all the various rounds of comments are submitted in these proceedings, the Commission's final analysis will persuasively demonstrate that direct access is far and away the best approach. Proponents of the "wholesale-only" delaying strategy portray it both as administratively less complicated and as offering considerable economic benefits. But even these proponents cannot (and, to their credit, do not) contend that "wholesale-only" would provide the same level of economic efficiencies as are available under direct access. Further, it is far from clear that limiting competition to wholesale markets only would be any less complicated than implementing direct access. In any event, the Commission certainly does not define and determine its responsibilities by the perceived path of least resistance. Were that the case, the simplest course of action would be to do nothing. Given, however, the Commission's key determination that "electric rates are simply too high," doing nothing is obviously an untenable policy choice; and the "wholesale-only" approach places a close second behind doing nothing. A. Allowing the Utilities to Retain Generation Assets Would Give Them An Overwhelming Competitive Advantage. - 3 - The most glaring deficiency in the arguments advanced by the "wholesale-only" advocates is their failure to say anything regarding the disposition of utility-owned generation assets in a competitive wholesale market. For example, despite the hundred-plus pages of comments submitted by SCE to date in this proceeding, it has yet to address how its own generation assets would be treated for purposes of bidding into its proposed POOLCO. Although resolution of this issue is critical to success under either a wholesale or retail competitive model, failure to put the utilities fully at risk with respect to their generation assets would be particularly egregious under the "wholesale-only" approach. In particular, if uneconomic generating costs are determined by reference to the so-called "system average marginal cost" and are imposed in their entirety on consumers (as proposed in the OIR), the utilities would emerge from restructuring with a substantial competitive advantage vis-a-vis non-utility generators (NUGs). This competitive advantage would be exacerbated to the extent that, in addition to any transition costs, utility customers must continue to pay bundled rates which include any of the fixed costs associated with generation facilities. In the worst case scenario, the utilities would enjoy freedom to "compete" for market share in a POOLCO-type arrangement solely on the basis of their variable costs, while consumers remain saddled with both fixed generating costs and transition costs. Clearly, in this situation the utilities' artificially superior competitive position would be built squarely on the backs of its existing customers. In order to assure truly arm's length market prices, in either a retail or wholesale market, the utilities' generation assets must be completely removed from consumers' rates and from the control of transmission capacity owners. In short, in a competitive environment, common ownership of generation facilities and monopoly functions such as transmission creates an inherent conflict. Failure to provide for the segregation of a utility's generation assets from its monopoly functions would undoubtedly lead to abuses and create the potential for unfair and certainly unearned profits for utility shareholders. B. The Commission Can Properly Adopt Mechanisms To Encourage Voluntary Divestiture of Utility Generation Assets. The essential prerequisite to development of a competitive generation market Ä at either the wholesale or retail level Ä is complete separation of investor-owned utilities' generation assets from their - 4 - transmission and distribution functions. Undoubtedly, IOUs will argue, among other things, that the Commission lacks authority to require divestiture of generation assets. While CMA disagrees with this position, there are, in any event, mechanisms the Commission can lawfully adopt to encourage the utilities to divest their generation assets voluntarily. For example, if a utility were voluntarily to decide to seek bids on the open market for all of its generation assets through an open season arrangement, true market prices would be established for each of its generation facilities. Each such market price, when compared against its net book value, would determine the extent to which transition costs are positive or negative for the facility in question. (CMA would not even object to the utility's unregulated affiliate submitting bids for such facilities or perhaps even having a right to match any winning bid.) If the utility then were to decide to proceed with the sale of its assets as a result of the open season process, an appropriate portion of the uneconomic costs, if any, would be eligible for transition cost treatment. CMA emphasizes once again that utility shareholders should be responsible for a portion of any such uneconomic costs; such shared responsibility is critical if the utilities are to have any meaningful incentive to minimize those costs. Accordingly, as part of its final policy statement, the Commission should determine an equitable sharing formula for shareholder/ratepayer responsibility for eligible transition costs. On the other hand, if a utility were to decline the Commission's invitation to proceed with an open season and choose instead to continue to hold its generation assets, the Commission should (1) require the unbundling of all of that utility's generation-related costs from its customers' rates, (2) proceed with direct access under the phased-in approach set forth in the OIR, and (3) deny any transition cost treatment with respect to that utility's own generation assets. Thus, under the direct access schedule set forth in the OIR, any utility choosing to proceed in this fashion would appropriately and increasingly be at risk in competing for its own native load. This type of voluntary mechanism would provide each utility with a clear choice and a corresponding level of risk/reward depending upon the option selected by utility management. Regardless of competing views as to the Commission's authority to order divestiture of generation assets, such a voluntary - 5 - mechanism is clearly within the Commission's authority and is analogous to the approach the Commission has pursued with respect to California gas utilities. It bears emphasis that, in the natural gas restructuring process, pipeline and LDC shareholders have properly been held responsible for some portion of costs associated with previously approved projects which, although possibly reasonable at time they were executed, became uneconomic due to other circumstances. The most recent example of this type of equitable sharing is found in the SoCalGas global settlement (D.94-04-088). Under the June 20 Decision approving a modified settlement in that case, SoCalGas shareholders will absorb approximately 18 percent of uneconomic gas costs arising from the PITCO and POPCO gas supply projects during a five year transition period. After that transition period, any remaining uneconomic costs associated with these projects are the sole responsibility of SoCalGas shareholders. It is more than a bit ironic that SCE, as a party to that settlement, was a strong supporter of shareholder responsibility for some portion of these previously approved gas projects. Now, however, when shareholder responsibility strikes closer to home, SCE finds it to be in its interest to assert that it would unfair to hold its shareholders responsible for an uneconomic portion of SCE's own generation assets (see SCE Comments, June 8, 1994, p. 51).2/ III. ATTEMPTING TO LIMIT COMPETITION TO THE WHOLESALE MARKET ONLY WOULD BE COUNTERPRODUCTIVE AND CONTRARY TO THE INTERESTS OF CALIFORNIA CONSUMERS. The major problem with "wholesale-only" proposals such as POOLCO is that they simply will not achieve the level of economic efficiency available under direct access. Even if the playing field can be leveled between utility generation assets and NUGs, the "wholesale-only" approach is still handicapped by being a "one size fits all" concept. Under it, consumers remain captive to a fully bundled rate structure, and the essential underpinning of any competitive market -- customer choice -- is thwarted. 2/ CMA is willing to consider insulating shareholders from transition costs arising from Commission-mandated programs, assuming, of course, that the utility has acted prudently in minimizing those costs and in exploring buyouts and buydowns of such obligations. Fortunately, as a result of the tenth year "QF cliff," a significant portion of these uneconomic costs disappear during the proposed direct access phase-in period. - 6 - First, aside from whatever economic efficiencies are gained due to head-to-head competition among power suppliers on a level playing field, there are substantial additional efficiencies to be gained through the bilateral contract process. Indeed, from a consumer's perspective, the bilateral contract itself is where the real efficiencies are to be gained. Bilateral contracts provide customers with real choices; such contracts can be customized to meet an industrial plant's operating characteristics. Plant equipment and operations can be designed to optimize production, rather than jury-rigged to minimize the consequences of some essentially artificial time-of-use rate design employed by the local utility system. In short, bilateral contracts allow the customer to shop for an electric power supply source which best matches the load profile and power support needs of its own operations Ä not those of some hypothetical average customer. These types of individual arrangements simply cannot be replicated in a regulatory environment, and efficiencies are lost when customers are forced into a Procrustean bed of utility "service" that does not really match their needs. In fact, CMA understands the chief criticism of the U.K. pool system to arise from the difficulty, if not impossibility, of structuring meaningful bilateral contracts. It appears that the U.K. pool tends to thwart competition due to the pool price being available to any supplier, regardless of its bid level.3/ Moreover, although the U.K. pool permits contracts for differences, price is only one aspect of a contract. For many industrial users, contract provisions other than price can produce their own economic efficiencies. Stated differently, even if a fully competitive and fair wholesale marketplace were to exist, the establishment of a "transparent spot price" would, at best, represent only a part of the equation for many industrial consumers.4/ Despite SCE's assurances, CMA has no reason to believe that the POOLCO proposal would facilitate bilateral contracts or customized arrangements any better than does the U.K. pool. 3/ See, e.g., First Round Comments of ENRON Power Systems and NYMEX. 4/ One of the attributes of POOLCO touted by SCE is that it would provide transparent pricing (SCE comments, June 8, p. 30). But, as far as the "transparency" of the wholesale market is concerned, the same transparency could be achieved under the current structure of the Western Systems Power Pool through use of electronic bulletin boards of the type so common in the gas industry. - 7 - The U.K. pool was developed from a unique set of circumstances: the privatization of a government-owned electric power system. While the U.K. pool may represent a reasonable solution in those circumstances, it makes no sense for California to attempt to replicate the U.K. pool. Such a pool is unnecessary and, as National Power urges, certainly should not be considered to the exclusion of direct access. PG&E too (Reply Comments, June 21, pp. 5-8) agrees that POOLCO and the U.K. pool are inappropriate for California. Second, the "captive customer syndrome" prevalent under the POOLCO-type proposal eliminates any incentives for the utility to achieve purchased power savings for customers. Indeed, the utility would be indifferent as to whether or not POOLCO operates to achieve the lowest possible wholesale prices. Nor is it likely that any type of performance-based ratemaking could create incentives comparable to those at work in a fully competitive retail market. Professor Hogan's proposal to rely on wholesale spot prices and time-of-use (TOU) rates warrants some comment here. Most importantly, competitive spot prices at the wholesale level only do not ensure direct economic benefits for the ultimate consumer. Indeed, a purely spot market does not reflect a competitive market wherein a mix of long-, mid-, and short-term contracts are likely to be encountered. With respect to TOU rates, California has led the nation in implementing such rates for larger customers. Nevertheless, California's electric rates are among the highest in the nation. Aside from his highly theoretical discussion, Professor Hogan has failed to provide any analytical explanation of how greater implementation of TOU rates in California -- even in conjunction with a competitive wholesale market -- would produce significantly lower electric rates for consumers. CMA submits that to the extent TOU rates offer benefits, those benefits already have been realized. Frankly, we do not understand why anyone would suggest that the "solution" to California's high electric rates is a concept which for the most part has already been implemented.5/ That suggestion does, however, underscore that the "wholesale-only approach," TOU rates, and 5/ It also is worth emphasizing that available time-of-use meters do not reflect recent technological advances and, at best, would be a poor proxy for real time pricing. - 8 - other bells and whistles attendant to yet another regulatory artifice are but indirect, second-best means of achieving the goals that can best be achieved directly through competitive market forces at the retail level. Finally, the Commission must recognize that, as a purely practical matter, any attempt to limit competition solely to the wholesale level will be short-lived and unsuccessful. Such a half-measure would simply promote uneconomic bypass of the utility systems. Customers would engage in even greater levels of self-generation, self-service wheeling, municipalization of utility systems, plant closures, and transfers of production (and jobs) to other states. In short, the Commission will eventually be forced to open the doors to direct access anyway. The utilities' and their consultants' calls to limit competition are indeed merely delaying tactics to better position themselves for inevitable competition. The Commission should not cooperate in this tactic. The Commission has the opportunity now to establish its vision and to guide the development of a competitive retail market for electric power. It should not let this critical opportunity pass. IV. FROM A LEGAL PERSPECTIVE, THE ESTABLISHMENT OF A WHOLESALE MARKET WOULD ELIMINATE COMMISSION JURISDICTION OVER MOST FACETS OF THE INDUSTRY. It is well-settled that FERC has exclusive jurisdiction over interstate transmission of electric power and the sale of electric power for resale. Accordingly, this Commission has no authority to mandate the establishment of a competitive wholesale market or to prescribe the terms and conditions under which such sales occur. Specifically, in reference to the proposed POOLCO arrangement, this Commission would have (1) no jurisdiction over any sales of power to POOLCO, (2) no jurisdiction over the terms and conditions established by POOLCO for solicitation of power bids or for the control and dispatch of purchased power, (3) no jurisdiction over utilities' power purchases from POOLCO, and (4) no jurisdiction over the terms and conditions for the transmission of that power across interstate facilities to the utilities' load centers. In short, it appears that most of this Commission's regulatory authority over the California IOUs would be transferred to FERC if a POOLCO-type concept were adopted. Although the Commission would still have jurisdiction over the sale of power by the utilities to ultimate consumers in California, all of the - 9 - relevant costs would be determined at the wholesale level, beyond the jurisdiction of this Commission. Clearly, such a result seems inconsistent with the Commission's desire, as expressed in the OIR, to play a significant role in restructuring the electric industry in California. That result, however, may well not be at odds with the POOLCO proponents' own intentions. CMA does not believe that this Commission should cede to FERC its legitimate authority over restructuring the California electric industry. By the same token, this Commission should not attempt to duplicate FERC's current efforts to expose wholesale markets across the nation to the rigors of competition. FERC's emerging transmission policies are aimed at developing network services (including network wheeling), comparability of service principles, and a broad definition of undue discrimination.6/ Overall, FERC is applying pressure on the owners of transmission facilities to unbundle generation costs from transmission costs in order to ensure comparability of service to all generators. In terms of the wholesale power market, CMA believes that this Commission's proper role is not to attempt to mandate the creation of, or the terms and conditions for, such a market. To the contrary, CMA recommends that the Commission support FERC's efforts to fully implement the provisions of EPAct and to ensure that the availability of transmission services under reasonable terms and conditions is determined without reference to the ownership of the power supply. Clearly, FERC and this Commission have the same goals in mind for the respective segments of the marketplace over which they have jurisdiction. Moreover, FERC's successful establishment of open access principles for the interstate electric transmission system will certainly facilitate the implementation of this Commission's direct access principles. Although, clearly, the interstate transmission of retail power will remain subject to terms and conditions established by FERC, there is nothing in FERC's proposals to date to suggest any hostility towards retail wheeling mandated by state regulatory authorities. 6/ Florida Power & Light Co., 67 FERC  61,326 (1994); American Electric Power Service Corp., 67 FERC  61,168 (1994). On June 29, FERC issued a notice of proposed rulemaking (Docket No. RM94-7-000) regarding recovery of stranded costs. Further, FERC's proposed rule on transmission pricing is scheduled to be considered at its July 27, 1994 meeting. This new policy likely will address, among other things, competition, capacity allocation, loop flows, parallel path flows, cost of service, opportunity costs, and network wheeling. - 10 - The recent decision of the U.S. Court of Appeals for the D.C. Circuit in Cajun Electric Power Cooperative, Inc. v. FERC (No. 92-1416, July 12, 1994) casts some doubt on FERC's ability to allow recovery of "stranded" utility generation costs from competing power suppliers seeking to use the wholesale generator's transmission system. With that case now having been remanded to FERC, it is premature at this point to speculate as to what recovery mechanism, if any, for stranded wholesale generation investments will withstand judicial scrutiny. The Court's concern in Cajun was focused on the tying aspects of attempting to recover stranded investment costs from competitors seeking to use the wholesale generator's transmission system. In that context, the Court succinctly observed: "[T]here really is no such thing as stranded investment, only a failure to compete" (mimeo at p. 12). The D.C. Circuit's observation underscores the need to create competitive incentives for utilities to minimize their claims of "stranded" investment costs. Unfortunately, the OIR's proposed insulation of utility shareholders from all risk associated with uneconomic generating costs would likely maximize the level of such claims. The momentary uncertainty created by the Cajun decision also highlights the importance of one of CMA's earlier recommendations. Although this Commission certainly does have the requisite statutory authority to implement retail wheeling, CMA understands that all parties do not agree on this point. But, regardless of one's position on that issue, it is beyond doubt that this Commission can require California utilities to perform buy/sell services for their customers; this alternative is clearly free of potential preemption under the Federal Power Act. Specifically, the utility would purchase electricity from a generator designated by the customer and resell the power to that customer at a rate equal to the purchase cost plus a margin which would take into account the cost of interstate transmission. Such a transaction clearly would involve local retail sales falling plainly within the jurisdiction of this Commission. The experience of both the Commission and non-core customers with buy/sell programs for gas utilities was very positive and provides a good model for fashioning a similar program for electric utilities. Although FERC ultimately ordered a halt to gas buy/sell programs for fear that they would conflict with efforts to establish a nationwide uniform capacity release mechanism, there is no comparable - 11 - conflict between this Commission's efforts to promote retail competition and FERC's efforts directed at the wholesale market. Further, since the retail sale of the power that the utility has purchased at the customer's request remains subject to this Commission's jurisdiction, the buy/sell arrangement provides a vehicle for the recovery of any bona fide transition costs the Commission may deem appropriate. In sum, the so-called "jurisdictional difficulties" supposedly associated with retail wheeling are, in fact, not insurmountable and, depending on how the program is structured, may not exist at all. In contrast, the "wholesale-only" approach is likely to strip this Commission of much of its current jurisdiction over the California electric utility industry. V. MARKET INSTITUTIONS: THE COMMISSION SHOULD ESTABLISH POLICIES AND GUIDELINES THAT ALLOW THE NECESSARY MARKET INSTITUTIONS TO BE DEVELOPED BY THE MARKET ITSELF. In addition to the jurisdictional and competitive concerns expressed above with respect to the "wholesale-only" approach, CMA submits that it would be simply bad policy to attempt to predict at this point what types of market institutions will be required over the next several years in a more competitive electric industry. Very few, if any, successful market structures come into being as a result of command- and-control decisionmaking. Rather, market structures evolve as market conditions dictate. In such an evolving environment, the Commission's primary function should be to ensure that an adequate safety net exists in the event that market institutions fail to develop promptly or are not sustained. For example, at the July 1 full panel hearing, the Commission quite properly expressed concern as to the consequences of suppliers not performing in a direct access environment. ELCON responded to that question in reply comments, dated July 20, 1994, providing an excellent technical discussion of how retail customers can indeed acquire reliability assurances at both the unit power and system power levels. The emerging trends towards providing network wheeling for NUGs will also greatly facilitate independent power suppliers' ability to ensure system reliability. Given the Commission's proposed seven-year phase-in of direct access (with only a relative handful of customers even being eligible for direct access during the first few years), there is ample time for the market to develop and put in place the necessary market institutions. - 12 - If, however, the Commission continues to have concerns regarding system reliability and integrity during the first few years of the program, it could require the utilities to provide backup or standby services at compensatory rates. CMA believes that the need, if any, for this type of utility service will be temporary. In any event, however, concerns such as these certainly do not justify the creation of a POOLCO or attempting to arbitrarily restrict the scope of competitive forces to the wholesale market only. Once again, the Commission's focus should be on (1) the de-integration of investor-owned utilities' generation facilities and (2) the promotion of policies that provide consumers with the greatest array of choices. Commission-mandated market institutions cannot possibly take into account all of the options required by direct access customers and, therefore, can only restrict rather than promote customer choice. If a competitive generation industry is allowed to develop fully under the Commission's direct access program, the necessary market structures will develop as a complement to a competitive generation industry. - 13 - CONCLUSION For the foregoing reasons, the California Manufacturers Association respectfully urges the Commission to reject the "wholesale-only" approach and to adopt the direct access proposal set forth in the OIR. Respectfully submitted, Keith R. McCrea Glen S. Howard SUTHERLAND, ASBILL & BRENNAN 1275 Pennsylvania Avenue, N.W. Washington, D.C. 20004 (202) 383-0705 Counsel for the California Manufacturers Association July 25, 1994 CERTIFICATE OF SERVICE I hereby certify that copies of the foregoing document were mailed on July 25, 1994 to all parties who have requested such service. - 14 -