BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Order Instituting Rulemaking on the ) Commission's Proposed Policies Governing ) R.94-04-031 Restructuring California's Electric Services ) (Filed April 20, 1994) Industry and Reforming Regulation ) ) ) Order Instituting Investigation on the ) Commission's Proposed Policies Governing ) Restructuring California's Electric Services ) I.94-04-032 Industry and Reforming Regulation ) (Filed April 20, 1994) ) COMMENTS OF DESTEC ENERGY, INC. IN RESPONSE TO ASSIGNED COMMISSIONERS' RULING OF JULY 8, 1994 Gregory T. Blue Regional Manager Regulatory Affairs Destec Energy, Inc. 1676 N. California Boulevard Walnut Creek, California 94596 (510) 746-5277 Dated: July 26, 1994 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Order Instituting Rulemaking on the ) Commission's Proposed Policies Governing ) R.94-04-031 Restructuring California's Electric Services ) (Filed April 20, 1994) Industry and Reforming Regulation ) ) ) Order Instituting Investigation on the ) Commission's Proposed Policies Governing ) Restructuring California's Electric Services ) I.94-04-032 Industry and Reforming Regulation ) (Filed April 20, 1994) ) COMMENTS OF DESTEC ENERGY, INC. IN RESPONSE TO ASSIGNED COMMISSIONERS' RULING OF JULY 8, 1994 Introduction and Summary Destec Energy, Inc. (Destec) is pleased to submit these comments in response to the Assigned Commissioners' Ruling of July 8, 1994. The Commissioners request comments on two issues: the role and structure of competitive wholesale markets and market institutions in the restructured electric industry. Both issues are significant; neither should lead the Commission to delay progress toward the goal of a fully competitive power market for all participants. 1 Destec believes that the benefits to California ratepayers of a vibrant wholesale market have already been amply demonstrated. Certain issues remain to be addressed in allowing the participants in the wholesale market to compete fully, in particular the unbundling and fair pricing of transmission, distribution, and other services for all market participants and real structural reform that eliminates the inherent conflict faced by integrated utilities who both generate power and distribute it to end users. Addressing these issues must not be taken as a reason to delay progress toward a fully competitive market at the end user level. The development of fair rates for unbundled services and the need to disaggregate vertically integrated utilities must take place for both wholesale and retail competition to be fair and effective. The Assigned Commissioners have requested comments on the proper institutional structures for a competitive market, in particular the benefits of a centrally-defined pool such as the "PoolCo" proposed by Southern California Edison (SCE). Destec generally supports the development of markets by the participants in that market rather than by government fiat. In any case, the participants will react to a competitive market by creating the alternatives that best suit the economics of that market. If a "PoolCo" is established, no doubt market participants will find ways to develop a useful range of bilateral agreements that build from the "PoolCo" structure. In a market-based structure, it is likely that some form of pool arrangement will evolve without government mandate that will meet the needs of the pool participants. Now is not the time to become caught up in a debate over the relative merits of these two approaches at the expense of moving forward with developing the competitive market each approach would support. The Commission should stay on course, moving toward the introduction of a fully competitive market at all levels. Destec agrees with Independent Energy Producers that the most important task facing the Commission today is to provide the conditions that will allow both wholesale and retail markets to develop in a rational, timely fashion. Wholesale Reforms Should Not Delay Implementation of a Fully Competitive Market at All Levels The success of the Commission's QF program, the maturing business relationship between independent producers and their utility customers, and most recently the striking competitiveness of the participants in the BRPU auction all confirm that the wholesale sector is capable of providing economic long-term power, with substantial benefits for the state's ratepayers. The short-term wholesale market is also active, as the many transactions in the economy energy market and through flexible pools such as the Western States Power Pool demonstrate. Wholesale market transactions are already deep and widespread; participation is strong despite the obstacles to full participation by non-utilities. The wholesale market participants are ready now; the Commission should focus on providing a fair and reasonable basis for that market to continue developing in a cost-effective fashion. To that end, the Commission should:  begin immediately the development of unbundled rates for transmission, distribution, dispatch and other necessary functions to provide comparable service for all market participants, allowing them to reach customers on a non-discriminatory basis;  move toward complete and definitive separation of the competitive generation function from the monopoly transmission/distribution functions of the utilities;  encourage industry participants to develop market mechanisms that can adapt to this rapidly evolving competitive environment rather than strap the market into a pre- ordained central-market approach; 3  maintain a fair and reasonable regulatory and business climate which does not threaten existing contractual relationships or the willingness of business and industry to invest in California. These steps will foster the continued development of the competitive wholesale market while building the framework for an equally competitive retail sector. In no case should implementation of such steps be taken as a reason to delay movement toward a fully competitive market at both the wholesale and retail levels. Instead, the Commission should stay on the course signalled in the April 20 Order -- providing open and non-discriminatory access to a full range of competitive power supply choices for all consumers. Such actions will both consolidate the gains made in moving the wholesale market to competition and lay the foundation for competition throughout the electric services market. Market Institutions in the Restructured Electric Industry The July 8, 1994 Assigned Commissioners' Ruling requests parties' views on the market institutions appropriate to a restructured electric market. In particular, the Commission seeks comment on the variety of views expressed by parties on the "pool" concept used in the United Kingdom, which is similar in many respects to the "PoolCo" proposal put forward by Southern California Edison (SCE). Destec generally supports the development of market institutions by market participants rather than by government fiat. This is the case for other markets such as agricultural and mineral commodities, including energy-related commodities such as natural gas and petroleum products. Government-mandated markets are the exception rather than the rule, and in an area where markets have not yet been fully tested, it seems unlikely that a state-imposed market structure will succeed in "getting it right." Instead, the participants in this new market must shape the institutions, the types of transactions, and 4 the methods of coordinating the market to meet the needs of consumers whether they are wholesale or retail. Those new market structures are being built today in such forums as the Western Systems Power Pool (WSPP) and the numerous bilateral transactions that occur every day in the electric industry. That is why Destec is actively pursuing measures to become the first non-utility generator to join the WSPP. As has been described by representatives of the New York Mercantile Exchange in recent testimony before the House Subcommittee on Energy and Power, the western U.S. electricity markets already exhibit a remarkable degree of innovation and experimentation by the market participants (Statement of R. Patrick Thompson, President, New York Mercantile Exchange, Before the U.S. House of Representatives Subcommittee on Energy and Power, July 21, 1994). The Commission should encourage existing market arrangements and should work with the parties who use them to continue to build on that valuable experience. In many ways the two points of view on pool formation described in the July 8 Ruling are not "either-or" alternatives. In a market that responds to the participants' needs, it is more than likely that some type of pool arrangement that allows common pricing and dispatch will be developed as a key component of a working market. Similarly, a government-imposed pool would undoubtedly have a wide variety of transactions derived from pool operations or taking place independently of the pool. In other words, either the top-down state "PoolCo" or the bottom-up market approach will have many similarities in practice. Once again, this suggests that the Commission should move forward with solidifying the wholesale market and building the basis for retail competition rather than become caught up in a debate over "PoolCo" versus bilateral transactions. This is not to say that government has no proper role in oversight and regulation of power markets. Clearly the Commission must monitor market operations and may need to step in if the public interest demands intervention. For example, such intervention might be required due to the exercise of improper 5 anti-competitive behavior. Similarly, to the extent tariffs or contract provisions are based on public proceedings or regulatory findings, these aspects of the market will continue to require Commission action. Those electric service functions that continue to be provided by monopoly holders, such as distribution and local dispatch control, will continue to require scrutiny by the Commission. Conclusion Destec urges the Commission to recognize that wholesale markets exist and are providing substantial benefits to California ratepayers every day. Rather than attempt to overhaul that market the Commission should consolidate the success of the wholesale sector by unbundling rates for comparable service, encouraging market participants to continue developing appropriate market structures, and providing for a fully competitive market by separating regulated from non-regulated market functions. These actions will also help the Commission build the basis for a fully competitive market in the retail sector, providing a full range of power supply choices for all consumers. This is not the time to become entangled in a debate over the merits of particular wholesale market structures. The Commission should get on with the job begun on April 20, taking steps that will continue progress toward the goal of a fair and competitive market for electric services. Respectfully submitted, 컴컴컴컴컴컴컴컴컴컴컴컴컴� Gregory T. Blue Regional Manager Regulatory Affairs Destec Energy, Inc. 1676 N. California Boulevard Walnut Creek, California 94596 (510) 746-5277 6