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 ) (Filed April 20, 1994) 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 COMMENTS OF THE MAY DEPARTMENT STORES COMPANY REGARDING THE RESTRUCTURING OF CALIFORNIA'S ELECTRIC SERVICES INDUSTRY THE MAY DEPARTMENT STORES COMPANY Angela Gordon 611 Olive Street St. Louis, Missouri 63101 Dated: July 26, 1994 Telephone: (314) 342-6567 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 ) (Filed April 20, 1994) 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 COMMENTS OF THE MAY DEPARTMENT STORES COMPANY REGARDING THE RESTRUCTURING OF CALIFORNIA'S ELECTRIC SERVICES INDUSTRY Pursuant to the procedural schedule established by Ordering Paragraph No. 2 of R. 94-03-031, as revised by the Assigned Commissioner's Ruling dated July 8, 1994, The May Department Stores Company hereby respectfully submits these comments in the third round of this proceeding addressing the policies proposed by the California Public Utilities Commission ("Commission") for governing the restructuring of California's electric services -1- industry. The Competitive Wholesale Electric Market: Role, Structure and Efficacy Wholesale markets have been developing and growing for over 15 years through federal and state initiatives. With the passage of the Energy Policy Act of 1992, wholesale electricity transactions have become an even more integral and vital part of the national electric system. These wholesale transactions are subject to oversight by the Federal Energy Regulatory Association ("FERC"). And given recent FERC decisions, this segment of the industry is becoming increasingly competitive providing more options for meeting energy requirements to end-users across the nation. May applauds FERC's movements towards increased interstate competition through the development of RTG's and wholesale wheeling access. The Commission's proposals complement these developments in expanded access and greater service options. The Assigned Commissioners Ruling dated July 8, 1994 questions whether California has a "sufficiently robust wholesale market" to allow for direct access by end-users now. The direction of the proposed reforms should not be driven by the perceived strength of the existing wholesale market, but rather by the inherent weaknesses of the existing retail market. Will -2- the maturation of the wholesale market alleviate these weaknesses? Will a growing wholesale market result in improved efficiencies for investor-owned utilities and lower cost to end- users? Generally, no. The status quo (or worse) will continue for the stranded customers within IOU's service territories. Municipalities and other wholesale customers will be permitted some gains from more service options but they do not compare to the anticipated benefits of pervasive competition. "Uneconomic bypass" options will continue to be considered and employed by end-users that have the means to generate their own requirements. Will a strong wholesale market in itself result in technological improvements and new service options for all industry participants? No. Again, these improvements will be limited to the players in the wholesale industry. Some benefits may trickle down, but, generally, retail consumers will continue to be subject to the inefficiencies and restrictions of their market. May does not see the development of a strong, competitive wholesale market as a precursor to a healthy competitive retail market. Nor can a competitive wholesale market be a substitute for a competitive retail market. A competitive wholesale market is a natural complement to a healthy, competitive retail market as developed and guided by the Commission. -3- The only "wholesale" market focus that May finds acceptable in light of the current electric industry is one which will provide direct and tangible benefits to all end-users. For instance, expand the concept of the wholesale market to allow independent brokers -- entities which take title to purchased power for the purpose of resale -- to purchase wholesale power and sell it to any end-user in the state of California within the IOUs' franchised territory. Such brokers should be required to sell their electricity at nondiscriminatory, equitable rates to all end-users and should be subject to federal anti-trust legislation including the Clayton Act (which prohibits price discrimination and tying contracts). The rates charged by these retailers should not be closely regulated by the Commission. To the extent possible, the market should be permitted to regulate the price of electricity in order to send appropriate signals to generators and end-users, though actual rates may be subject to FERC oversight. IOU's should be required to unbundle their rates and offer transmission and distribution services to any customer requesting this service. May does not advocate forced divestiture of generating capacity owned by the utilities. We believe that the utilities will ultimately divest themselves of this capacity either by selling or retiring it, or by creating separate, independent generating companies in order to benefit from the increased opportunities of -4- a competitive electric industry. However, it is up to the management of the utilities, in response to shareholders' wishes, to determine the appropriate and necessary actions for the company in response to these reforms. This type of expansion of the wholesale market (which results in reform of the retail market) is acceptable to May as it will result in benefits to all end-users. However, it is not the ideal. Entities and individuals with the capabilities to evaluate and determine their energy requirements could reap greater economic gains via bilateral contracts. Ideally, the California reforms will maximize the net societal gain. May believes maximizing this gain requires all customers of this industry be permitted to meet their energy needs through a variety of options (i.e. bilateral contracts, self-service wheeling, independent electricity corporations or brokers). Market Institutions in the Restructured Electric Industry May does not support the "pool" concept. While we agree that a "pool" may simplify the evolution of the industry, we believe that this methodology results in a reduction of competition. By consolidating the supply, generators would not be confronted with the competitive pressures to contain costs through discipline and -5- innovation. Furthermore, the pool experiences of other nations do not -- and cannot -- be applied to California's situation. The nations that have been discussed and held up as examples of reform in these proceedings created pools for the purpose of privatization. These electric systems, which were owned and operated by government entities, were privatized in an effort to increase efficiencies. But California already has privately-owned electric companies. The state is progressively moving on to the next step: competition. It would be a step backward to adopt methods employed by those nations with pooled electric systems that are less efficient than California's current system. The Commission was very astute in proposing a two track reform process. This recognizes that the weaknesses of the existing industry are two fold: First, there is a lack of incentive to the IOUs for superior performance given the current regulatory (rate base-motivated) structure. And, second, the continued regulatory command-and-control of the generation segment of the electric services industry results in market distortions because this segment of the market is no longer a natural monopoly. To the extent the problem is insufficient incentives, performance-based regulation will help. The second aspect of the problem requires reduced regulatory involvement and direct access options to all consumers. -6- The following discussion describes the future market institutions and participants as we see them. Generators -- This segment includes all parties involved in the generation of electricity, including IPP's, QF's, NUG's, utility- owned generation capacity, and end-user-owned capacity. These facilities should be subject to quality-requirements and inspections in order to protect environmental quality and system reliability. All new capacity built in California should meet all state and federal codes and requirements. The generating companies should be required to sell any available capacity to any entity or individual within California. This provision should be mandated as a condition of service to prevent cream- skimming. Brokers -- Brokers purchase electricity for the purpose of reselling it to end-users. A business or individual can contract with a broker to meet all or a part of their energy requirement. In turn, the broker will be required to own a sufficient supply of electricity to meet their customers' needs. They should be licensed by the state of California after proving that they have the necessary resources (i.e. knowledge, capital, etc.) to reliably serve their customers. There would be minimal to no regulatory oversight to the rates charged by brokers. Brokers would be required to serve any customer requesting service. Discriminatory pricing would not be permitted and their practices -7- would be subject to existing anti-trust legislation. Competition will serve to keep broker's costs reasonable. Electricity Supply Companies -- Electricity Supply Companies are similar to Brokers; however, they differ in that these companies own generation capacity. They should be licensed but have minimal regulation of their day-to-day operations. Like brokers, they should be required to serve any end-user in a nondiscriminatory manner. The market should regulate prices. Marketers -- Marketers would act as contracting agents on behalf of end-users for the purpose of securing electricity requirements. They would not own or take title to the electricity. They should be licensed but not subject to the same degree of scrutiny as brokers and electricity supply companies as the end-user would possess the ultimate responsibility to satisfy their energy requirements. Investor-owned Utilities -- Investor-owned utilities should be allowed to continue operations within their franchised service territory. However, they would no longer be permitted exclusive rights to that territory. Brokers, Electricity Supply Companies and Marketers would be allowed to supply electricity within their service territory. As long as the IOUs continue to own and operate generation capacity, they would be subject to an obligation to serve within the service territory. Also, there -8- would be continued regulatory oversight of generation costs and prices due to the IOUs automatic market share. The primary responsibility of the IOUs would be transmission and distribution of electricity within their franchised service territory. This monopolistic function would be subject to full regulatory oversight by the Commission. The utilities would be responsible for delivery of service to the end-users' meters and for maintenance and upgrades of transmission and distribution lines and end-user's services to the meter. The utilities would continue to read customers' meters. Finally the utilities would be responsible for monitoring the system to guard power quality and reliability. Transmission service would be a wholesale function between the supplier and the utility company. The supplier (or entity that holds title to the electricity) would be billed for transmission services. In the case of self-service wheeling, the supplier is the end-user, so the end-user will be billed. Distribution services will be billed to the end-user. Finally, utilities will be responsible for government mandated social policy programs -- which would be listed separately on the bill. Energy Services Companies -- These companies will offer energy -9- efficiency and load management technologies and services to end- users. These companies will benefit, as end-users take more and more responsibility for their electricity purchases, by offering new and better products and services. End-Users -- End-users are the retail consumers that ultimately purchase and use the energy. As these customers are given more options to meet their energy requirements, they will become educated consumers and take greater control over their consumption patterns, as well as their total cost. End-users will be permitted to select their supplier. They will be billed by their supplier for contracted electricity and transmission service. Utilities will bill for distribution services. Customers will be allowed to continue to receive full service from the IOU as long as it is offered. Should the IOU divest itself from the electricity generation business, the customer would have to select a new supplier. May strongly believes California's economy would benefit from opening the electric industry to new participants. This does not mean there should be open entry and exit from the market. Electricity is an essential product and thus should be protected from those with less-than-sincere intentions. Suppliers (i.e. brokers, marketers, etc.) of electricity should be required to establish proof of aptitude and means to supply California's -10- electricity consumers before being licensed to do business within the state. This is essential to prevent the carpetbagging that would inevitably occur without the appropriate barriers to entry. Furthermore, any suppliers purchasing or contracting for capacity produced outside of the state of California must show proof of the necessary and appropriate FERC approval. There must be protection against sudden exits from the market, also. Suppliers that cannot continue to meet their customers needs on their own, must be required by law to find suitable alternative sources of supply for their customers. In order to protect end-users and system reliability, suppliers should be subject to annual (confidential) audits of their system contracts and finances to establish soundness. May does not see California's electric services industry as being purely competitive. A continuation of today's reliable electric system will require major capital investment by private entrepreneurs and shareholders. As this industry continues to develop, it is probable that the resulting system of electric suppliers will neither consist of a monopoly nor be purely competitive with many small suppliers. May foresees an oligopoly with perhaps four or five primary suppliers to the state's energy consumers. The impetus behind the gains accrued from these reforms will not be the number of suppliers available to end- users, but the mere availability of choice for all end-users. -11- Once again, The May Department Stores Company commends the California Public Utilities Commission on its progressive and thoughtful approach to the changing market conditions in the electric services industry. The Commission's proposed policies and the work of the parties to this rulemaking will result in lower operating costs for California businesses, heightened awareness of individual energy needs thereby increasing the efficiency of consumption, and generate new innovations and industries in the energy arena. Dated this 26th day of July, 1994 at St. Louis, Missouri. Respectfully submitted, THE MAY DEPARTMENT STORES COMPANY By Angela Gordon -12-