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 ) Industry and Reforming Regulation ) __________________________________________) ) Order Instituting Investigation on the ) Commission's Proposed Policies Governing ) I. 94-04-032 Restructuring California's Electric Services ) Industry and Reforming Regulation ) __________________________________________) PACIFIC GAS AND ELECTRIC COMPANY (U-39-E) COMMENTS ON COMPETITIVE WHOLESALE ELECTRIC MARKETS AND MARKET INSTITUTIONS IN A RESTRUCTURED ELECTRIC INDUSTRY I. INTRODUCTION Over the past century, the nation's electric utilities have built what is without doubt the world's finest electric supply system, a system which provides light, heat, and power to virtually every American at an exceptional level of reliability, safety, and performance. This system was developed largely as an integrated business, with local utilities building and owning the generation, transmission, and distri- bution systems required to meet their customers' needs. Today, that traditional, vertically-integrated system is changing. Congress began that change in 1978 with passage of the Public Utility Regulatory Policies Act, wherein it encouraged the development of power plants fueled by renewable resources or by more efficient cogeneration technol- ogy. In the ensuing fifteen years, a robust and competitive independent -1- power production industry has emerged, capable of supplying electricity to millions of consumers. That industry received further impetus in 1992, with the passage of the Energy Policy Act of 1992, which estab- lished electric wholesale generators as a new class of generators. The direction of change is clear. The generation of electricity is no longer a monopoly business, the exclusive and inevita- ble territory of the distribution utilities. Today, this is a competi- tive business, with major players vying for the opportunity to build power plants to serve growing consumer needs. PG&E believes that competition in the supply of electricity is desirable. More than five years ago, PG&E joined with Bechtel Corporation to enter the independent power production business through a partnership, U.S. Generating Company. We believed then, and we believe today, that the development of future electric generation will rest more in the hands of independent entrepreneurs, and less in the hands of vertically-integrated, regulated monopolies. In fact, restructuring is a reality in the true economic sense, and competitive electric generation supply markets already exist. The only question is how soon the framework of regulation will recognize and accommodate the reality of multiple suppliers to allow them to become directly associated with multiple, ready, willing retail buyers. The clamor that followed the issuance of the Electric Industry Restructuring OIR in April has been intense, with numerous parties expressing approval of the Commission's proposal and others registering deep concerns about the future which the Commission de- scribed in its proposal. Rarely has a piece of regulatory policy received such nationwide, and even worldwide, attention from utilities, -2- legislators, environmentalists, consumers, and academic economists, not to mention the legion of lawyers and consultants who inevitably surround any major change in regulatory policy. PG&E has made it very clear that we agree with the end point which the Commission has described. We share the Commission's vision of the future: we believe that all consumers can and should have the opportunity for direct access to the competitive electric generation market, and that distribution utilities should provide that access in a manner which ensures continued equity and reliability. We also believe that, as this competitive electric genera- tion business matures, consumers should obtain the full benefit of the lower prices it will produce. To a large extent, this benefit is being realized through the wholesale markets that have been facilitated by the Energy Policy Act and by various regional pools. But, ultimately, the full benefit will accrue to consumers only if they have the ability to choose among competitive suppliers in the same way that, today, they can choose among providers of long-distance telephone service or of natural gas supply. The Commission should expeditiously resolve the legitimate issues which have been raised, and move forward into the future. II. In its original proposal, the Commission outlined five principles to guide its efforts. PG&E agrees with those principles and believes that it is possible to craft a transition to direct access -- along the lines of PG&E's proposal to the Commission -- which will achieve them all. -3- The first principle is that, to the extent that competition creates lower prices, those benefits should flow to consumers. This may not occur overnight. But it is essential that, if prices come down through the working of an open and competitive marketplace, the savings should be felt by consumers in their pocketbooks. Allowing customers the ability to participate directly in that marketplace, through direct retail access, is the only way to truly ensure that consumers receive the full amount of those benefits. The second principle is that the financial integrity of the utilities will not be impaired. The utility business is a highly capital-intensive business. It is essential that utilities continue to have the financial strength to raise the capital they need, at a reasonable cost, so they can build and maintain the extensive infra- structure essential to ensure reliable utility service. It is equally important that shareholders not be penalized for investing their savings in the utility industry. Hundreds of thousands of individual sharehold- ers have invested in California's utilities, with the faith and confi- dence that, under the traditional regulatory compact, their investments would not be confiscated by regulatory actions. The transition to direct access must not betray that trust and reliance on sound public policy. The third principle is that consumers must continue to receive reliable energy supplies, and that the new regulatory system must continue to assure that all consumers have access to electricity. The Commission will need to look closely at the traditional utility obligation to provide universal service. We will need to recognize that, in a competitive marketplace, the utility obligation must, over -4- time, become an obligation to provide access to electricity -- an obligation to connect customers to the distribution grid so they can buy power from whomever they choose -- and not an obligation to plan for and to build the actual facilities which produce that power. The fourth principle is that one group of consumers must not unfairly benefit at the expense of another group. We must be vigilant in assuring that, in implementing direct access, the rates charged for utility service continue to reflect the cost of serving each group of customers, and that the rates paid by one customer group do not subsi- dize low-cost power for others. The fifth principle is that consumers should continue to receive the benefits of environmental and social assistance programs which currently are delivered through the vertically-integrated utility system. We must be certain that customer energy efficiency, low-income energy assistance, and other similar programs -- which directly or indirectly benefit everyone -- continue to be borne by all consumers, and that those who opt for direct access cannot escape their fair share of these costs. PG&E believes that this can be achieved in the direct access future. In commenting on these five principles, some have noted that while they are as unassailable as motherhood and apple pie, it simply is not possible to achieve them all. PG&E does not agree. While it may take time, we believe they can be achieved through a carefully designed transition to direct access along the lines we have proposed. And we believe that such an orderly transition can be implemented in California if the parties focus on that objective rather than on all of the obstacles to achieving it. -5- In no way should this be seen as minimizing the concerns raised by many of the parties. They are legitimate and, in fact, many are the same issues which we, ourselves, have flagged for the Commis- sion's attention. But they should not become reasons to decide that providing consumers greater choice simply isn't possible or isn't worth the effort. They are critical. They must be addressed. But they are not show stoppers. III. Several parties have proposed that, instead of direct access, the Commission should create a state-mandated wholesale power pool. They argue that many of the benefits of direct access can be achieved through such a mechanism, while avoiding the many difficulties posed by retail competition. PG&E agrees that wholesale competition is a desirable first step. In fact, that step has been taken, and a wholesale market already exists in the West. For wholesale pools to offer significant additional benefits to California electric consumers, either (a) there would have to be an absence of existing wholesale pooling arrangements, or (b) existing wholesale pooling arrangements would have to be inefficient and incapable of capturing full benefits for consumers. Neither is the case in California and, thus, time, energy, and money spent enhancing or reinventing the existing wholesale system will yield little if any incremental value. The economic efficiencies associated with electric generat- ing plants are presently captured in several ways in California; each of these constitutes a form of wholesale pooling, and each captures wholesale pooling economic benefits. -6- First, every four seconds, PG&E's electric dispatching system optimizes the generation level of almost 500 distinct generating units, consistent with the economics of their operation or the terms and conditions of the agreements that govern their operation. This second- by-second dispatch captures virtually all the economic benefits permitted by the physical characteristics of the generating units and the contractual and regulatory arrangements under which they operate. California's other electric utilities have similar systems. Second, the California Power Pool--a FERC-approved wholesale pool consisting of California's three investor-owned utilities and representing the majority of California's consumers -- already provides an efficient mechanism for capturing and sharing the benefits which arise from the small difference in second-by-second dispatch costs between California's utilities. These cost differentials are extremely slight since, at virtually all times, these companies have identical resources at the margin: fossil-fueled power plants of about the same age and size, fueled by natural gas which it costs each company about the same price to purchase. Third, another FERC-approved entity, the Western Systems Power Pool (WSPP), provides a wholesale spot market for generation and transmission transactions. The WSPP has among its members a wide variety of electric industry participants, including investor-owned utilities, government-owned utilities, independent power producers, and marketers. The WSPP extends from the western Canadian provinces to the Mexican border, and from the Pacific Coast to east of the Mississippi. Its purpose is to provide a vehicle for identifying (through an elec- tronic bulletin board) and completing (through a FERC-approved pricing -7- mechanism) spot market transactions in generation and transmission. Further, PG&E is actively working now with other industry participants to produce and publicize, in real-time, a market clearing price index to provide the basis for financial instruments and financial decision making. Together, these three mechanisms capture materially all of the economic benefits available from existing resources at the wholesale level. Because of the high level of efficiency and coordination which already exists, imposing a government-mandated power pool would not provide additional efficiency benefits for consumers. A wholesale power pool also is unnecessary to facilitate the development of new resources. The supply of new resources into Califor- nia's wholesale market currently is governed primarily by competitive bid. And each bid to date has been greatly over subscribed, indicating the presence of a robust competitive market. This market is clearly capable of delivering the full benefits of a competitive supply of new generation to wholesale markets. PG&E and others have noted inefficiencies resulting from regulatory policies associated with these bidding protocols. These concerns should not be misinterpreted as a lack of confidence by PG&E in the underlying ability of the independent power production industry to meet future generation needs in an efficient manner. To the contrary, PG&E has consistently reaffirmed that confidence and indicated our willingness to withdraw from constructing any new utility electric generation in our service territory provided that the bidding procedures are reformed so that our customers will be assured that we can purchase reliable resources and the lowest available price. What is needed is -8- less regulation in this area, not yet another regulatory system to manage and control wholesale transactions. Wholesale transmission access is provided through the Energy Policy Act of 1992 (EPAct) and implemented by the FERC, who has clearly indicated that wholesale transmission access at just and reasonable rates will exist. Implementing the wholesale transmission access provisions of EPAct, coordinating regional and sub-regional transmission planning and resolving internal disputes relating to these topics will be tasks for FERC-regulated regional transmission groups. PG&E is a charter member of the Western Regional Transmission Association (WRTA) along with over 30 other industry participants representing major transmission owners and users, energy suppliers marketers and brokers. These WRTA members filed for FERC approval as a regional transmission group in May, 1994. Thus, numerous wholesale entities already exist to provide the wholesale pooling functions lauded by many OIR commenters. The Commission should recognize this and proceed with an orderly transition to direct access that will provide retail customers with choice in a competitive generation marketplace. It should be emphasized that a fully functioning retail power pool probably will be one of the essential pieces of the infra- structure needed before direct access is extended to large numbers of customers, such as residential and commercial customers. However, such a pool is not a prerequisite to beginning direct access. Existing contractual approaches can handle the transactions resulting from the first groups of direct access customers. -9- The schedule PG&E has proposed to phase in direct access, starting with the largest customers in 1996, would permit the devel- opment of a mature retail power pool over the same time as an increasing number of customers become eligible for direct access. Such a pool would form naturally, based on the needs of buyers and sellers, and need not and should not be mandated by the Commission. IV. CONCLUSION The debate on direct access will continue for many months and years. It is an important debate worth engaging in, because it deals with fundamental changes in one of this nation's most important industries. There will be some who say "it can't be done," and others who say, "do it quicker, do it now." Balancing those competing inter- ests and views will take time, patience, and commitment. /// /// /// -10- But we believe it can be done. It would be naive to believe that any proposal will satisfy everyone. It won't--it can't. But if properly crafted, it will balance the interests of the parties suffi- ciently so that, over time, all the major objectives can be achieved. Ultimately, as we have seen in so many other major industries, competition will replace monopoly, and consumers will have choices. Dated this 26th day of July, 1994, at San Francisco, California. Respectfully submitted, LINDSEY HOW-DOWNING MARK R. HUFFMAN By______________________________ LINDSEY HOW-DOWNING Law Department PACIFIC GAS AND ELECTRIC COMPANY P. O. Box 7442 San Francisco, CA 94120 (415) 973-4126 Attorneys for PACIFIC GAS AND ELECTRIC COMPANY PROOF OF SERVICE I am employed in the County of San Francisco, California. I am over the age of 18 years and not a party to the within action. My business address is 77 Beale Street, San Francisco, California 94106. On July 26, 1994, I served the within: PACIFIC GAS AND ELECTRIC COMPANY (U-39-E) COMMENTS ON COMPETITIVE WHOLESALE ELECTRIC MARKETS AND MARKET INSTITUTIONS IN A RESTRUCTURED ELECTRIC INDUSTRY on the parties in this action, by placing a true copy thereof in a sealed envelope, each envelope addressed as follows: See Service List Attached (BY MAIL) I caused each such envelope, with postage thereon fully prepaid, to be placed in the United States mail at San Francisco, California. I declare under penalty of perjury under the laws of the United States that the foregoing is true and correct. Executed at San Francisco, California, on July 26, 1994. ______________________________ JOYCE C. RAUCH -12-