BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA _______________________________ ) Order Instituting Rulemaking on ) R.94-04-031 the Commission's Proposed ) Policies Governing Restructuring ) I.94-04-032 California's Electric Services ) Industry and Reforming ) PHASE III COMMENTS OF Regulation ) PACIFIC POWER & LIGHT ________________________________ ) COMPANY (U-901-E) ) Order Instituting Investigation ) on the Commission's Proposed ) Policies Governing Restructuring ) California's Electric Services ) Industry and Reforming ) Regulation ) ________________________________ Following are the Phase III Comments of Pacific Power & Light Company ("Pacific Power") regarding wholesale power markets as they relate to a restructured electric industry. Pacific Power is an assumed business name of PacifiCorp. PacifiCorp is the nation's largest private whole- saler of electricity with 1993 wholesale sales of approximately $500 million. Fundamental to the consideration of the Commission's electric industry restructuring proposal is a single issue: What benefits can be derived from retail competition that are not available from a highly-competitive wholesale power market? Those who are dubious about the benefits of retail competition through direct access envision a continuing role for distribution utilities acting as "portfolio managers" on behalf of ultimate consumers and shopping for required generation on the wholesale market. Advocates of direct access believe customers should have the opportunity to be their own portfolio managers and that greater economic efficiency and freedom of choice will result from their doing so. It is not now possible to predict the extent to which end users will have an interest in direct access or whether they can do a "better" job of meeting their electricity requirements than utilities. Pacific Power does not understand the Commission's restructuring proposal to be prejudging issues such as these. Rather, the Commission envisions, at least for a transition period, that utilities and some ultimate consumers will be carrying on portfolio management activities in parallel and essentially "shopping" in the same bulk power market--a market that does not need to be characterized as either "wholesale" or "retail." Therefore, Pacific Power does not perceive a "wholesale" market to be separate from, or a precursor to, the "retail" market that would be created by direct access. Neither utilities nor consumers can be effective shoppers or portfolio managers unless they have a reasonably- efficient market in which to shop. In order for the bulk power market to be reasonably efficient, there needs to be a number of competitors and reasonably-available information concerning what market competitors have to offer. The appropriate standard is whether the market is "workably competitive." The fact that purchasers do not possess perfect information or 2 - PHASE III COMMENTS OF PACIFIC POWER & LIGHT COMPANY (U-901-E) access to all potential sellers is not a basis for concluding that a market will not yield significant efficiency gains. Some commentators in these proceedings have suggested that direct access should not be implemented until the competitiveness and efficiency of wholesale power markets is somehow optimized. Others suggest that direct access should await the establishment of new market institutions, such as power pools, that would establish short-term prices for all consumers. Pacific Power does not concur with these views for a number of reasons: 1. As indicated above, there is no clear reason that wholesale customers and retail (direct access) customers cannot avail themselves of the same bulk power market. Therefore, it may not be helpful to the debate to continue to differentiate between a "wholesale" bulk power market and a "retail" bulk power market. This is not to suggest that wholesale and retail customers will necessarily be purchasing the same sorts of products in the bulk power market. For example, absent a more formal power pool, smaller end users would find it burdensome to acquire short-term nonfirm energy. However, even if short- term trading is principally among wholesalers, end users can nonetheless enter into longer term bilateral contracts with wholesalers that incorporate spot market prices and/or interruptibility provisions. In this way, end users would be functionally participating in spot transactions, without the transaction costs associated with their actually doing so. 3 - PHASE III COMMENTS OF PACIFIC POWER & LIGHT COMPANY (U-901-E) Also, in this way, bilateral contracts can serve as a reasonable substitute for a formal power pool. If the ultimate issue is whether some or all direct access customers can better meet their electricity needs working on their own behalf, instead of relying on distribution utilities to do it for them, little insight will be gained on this issue as long as retail customers are denied access to the bulk power market and system operators do not gain experience with direct access. That is to say, improving the efficiency of the existing wholesale market, while a commendable goal, will not assist in understanding the potential benefits and problems associated with direct access. 2. An effort to optimize the efficiency of wholesale markets, as a prerequisite to direct access, could substan- tially delay the achievement of efficiency gains that are available in the bulk power market as it exists today. Comments filed in these proceedings indicate that those customers and sellers who support direct access opportunities believe that the existing bulk power market is sufficiently competitive to be attractive to them. Ironically, concerns over a lack of market competition have been largely voiced by interests that are not potential market participants. For those who perceive commercial opportunities from direct access, the right to trade in a workable, albeit it not optimal, market is better than being denied access to the market altogether. 4 - PHASE III COMMENTS OF PACIFIC POWER & LIGHT COMPANY (U-901-E) From an economist's standpoint, a market in which all consumers respond to hourly pricing differentials is likely ideal. However, it appears to Pacific Power (and seems to be confirmed by the United Kingdom experience) that real-time metering may be prohibitively expensive for residential and other small customers given current technologies. However, the fact that an optimally-efficient market is not now feasible should not stand in the way of achieving efficiencies that are now available. Even absent real-time pricing, Pacific Power believes mechanisms now exist for residential customers to benefit from direct access. 3. The view that the wholesale power market needs to be made to "work" prior to implementing direct access suggests that the existing bulk power market is not now working very well. Pacific Power believes it is a mistake to focus on existing shortcomings in the bulk power market to the point that its achievements are not sufficiently appreciated. While market imperfections and transmission bottlenecks unquestion- ably exist, there is nonetheless ample evidence of a robust bulk power market. This is demonstrated by: a. The extraordinary number of viable bids routinely received by utilities issuing requests for proposals. b. The dramatic recent drop in new resource costs as demonstrated by the last BRPU auction results. c. The substantial recent drop in short-term electric energy prices. 5 - PHASE III COMMENTS OF PACIFIC POWER & LIGHT COMPANY (U-901-E) d. The number of new market entrants who appear to believe that substantial opportunities are available to them. 4. The already competitive bulk power market is rapidly becoming more so as a result of competitive forces and the continuing development of institutions such as the Western Systems Power Pool (WSPP) and the Western Regional Transmission Association (WRTA). Spot-market trading of electricity can be accom- plished either through a central pool (such as that implemented in the United Kingdom) or through bilateral dealings between dispatchers. In order for bilateral trading to be effective, traders require good information on prices and availability of electricity. Pacific Power is a major participant in short- term markets and finds the present system of bilateral dealings to be quite effective in imparting market information. The existing spot market is extraordinarily vibrant. Market clearing prices usually change hourly and can change by more than 100% in any 30-day period. Utilities are increasingly relying on spot market purchases. The WSPP has served to further strengthen this market. Pacific Power is hopeful that the WRTA Governing Agreement will be approved by the Federal Energy Regulatory Commission during the next 60 days and that the Association will be substantially operational by the end of 1994. The WRTA should make a substantial contribution to enhancing transmis- sion access, improving communication among participants in the 6 - PHASE III COMMENTS OF PACIFIC POWER & LIGHT COMPANY (U-901-E) bulk power market and facilitating the construction of required new transmission facilities. The ability of the bulk power market to accommodate direct access should be assessed in the context of the January 1, 1997 date, by which time the Commission proposed to first implement direct access. There is presently active consideration of such concepts as market hubs, market indices and an electricity derivatives market. These innovations are all being pursued by private institutions independent of any direct encouragement or intervention by regulators. Pacific Power believes that during the next 29 months, an already robust bulk power market will become even more so. 5. There are real jurisdictional and practical limitations on the Commission's ability to prescribe a more efficient or competitive bulk power market. What the Commission can do is to create commercial opportunities which will in turn drive innovation and an assault on remaining market barriers. The potential of the bulk power market to achieve additional efficiencies through direct access can only really be tested if the Commission makes direct access available. A reluctance by the Commission to move ahead on a reasonably expedited basis will only retard the development of a more competitive power market because the Commission's tentativeness will give rise to market uncertainty and tentativeness on the part of bulk power market participants. 7 - PHASE III COMMENTS OF PACIFIC POWER & LIGHT COMPANY (U-901-E) 6. While Pacific Power's view of these issues contemplates something of a leap of faith concerning the further development of the bulk power market, the potential costs of this view being incorrect do not seem to be all that great. As customers are afforded direct access rights, they will only avail themselves of those rights if the bulk power market, as it then exists, offers superior opportunities to traditional utility service. At worst, the Commission will come to understand that for some classes of customers, direct access is not practicable. Assuming adequate protection against cross-subsidization is in place, there does not seem to be anything inherently unacceptable about a system in which some classes of retail customers pursue direct access and others continue to receive traditional utility service. CONCLUSION The Commission has a number of important responsi- bilities. They include assuring a safe, reliable and reason- ably-priced electricity system in California and preserving an opportunity for regulated utilities to earn a reasonable return on their investment. The Commission is now confronting a delicate balance between being unreasonably disruptive to existing institutions and being overly cautious. Mindful and respectful of this balance, Pacific Power nonetheless believes it is unrealistic to expect that all institutional arrangements necessary to neatly implement direct access can be in place before direct access is first implemented--market forces will 8 - PHASE III COMMENTS OF PACIFIC POWER & LIGHT COMPANY (U-901-E) not wait for this to occur. Furthermore, Pacific Power believes that the risk of being wrong on these issues is modest while the upside potential is substantial. Pacific Power believes that in 1997, the bulk power market will be more than sufficiently competitive to support direct access and that the Commission should move ahead on its previously-proposed schedule. Doing so constitutes the single greatest contribution the Commission can make to cause the bulk power market to be more competitive. Failing to do so in the hope of performing further analyses or fostering new market institution would be counterproductive to the Commission's goals. DATED: July 25, 1994. Respectfully submitted, ______________________________________ George M. Galloway Attorneys for Pacific Power & Light Company 9 - PHASE III COMMENTS OF PACIFIC POWER & LIGHT COMPANY (U-901-E)