BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ) Order Instituting Rulemaking on the ) Commission's Proposed Policies ) R.94-04-031 Governing Restructuring California's ) Electric Services Industry and ) Reforming Regulation. ) ) ) Order Instituting Investigation on the ) Commission's Proposed Policies ) I.94-04-032 Governing Restructuring California's ) Electric Services Industry and ) Reforming Regulation. ) ) BURBANK, GLENDALE, PASADENA, AND IMPERIAL IRRIGATION DISTRICT ROUND THREE REPLY COMMENT Submitted by: Norman A. Pedersen Jones, Day, Reavis & Pogue 555 West Fifth Street Suite 4600 Los Angeles, CA 90013-1025 (213) 243-2810 Attorneys for Burbank, Glendale, Pasadena Dated: August 18, 1994 and Imperial Irrigation District LAMAIN Doc: 82565.1 Printed: 08-26-94 10:39 TABLE OF CONTENTS Page No. I. A NOTE ON PROCESS . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. SUMMARY OF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . 3 III. ARE MORE GAINS TO BE MADE FROM IMPROVING THE EXISTING WHOLESALE INFRASTRUCTURE? . . . . . . . . . . . . . . . . . . . . . . . . . . 4 IV. POOLCO, OPCO, AND IMPROVING THE BILATERAL MARKETPLACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 A. Both Poolco and Opco Are Variants on the Same Theme, Both of Which Should Be Contrasted With The Development of The Existing Wholesale Market Infrastructure . . . . . . . . . . . . . . . . . . . . . . . 6 B. A Monolithic, Centralized Dispatch Authority May Not Reduce Disputes and Attendant Litigation . . . . . . 8 C. Would Poolco Speed Up or Delay The Process? . . . . . . . . . 8 V. THE COMMISSION SHOULD SERIOUSLY CONSIDER THE TEHACHAPI COMPROMISE . 9 VI. ANY REFORM SHOULD BE CONSISTENT WITH THE PRINCIPLES OF THE CMUA . . 10 VII. CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 LAMAIN Doc: 82565.1 Printed: 08-26-94 10:39 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA ) Order Instituting Rulemaking on the ) Commission's Proposed Policies ) R.94-04-031 Governing Restructuring California's ) Electric Services Industry and ) Reforming Regulation. ) ) ) Order Instituting Investigation on the ) Commission's Proposed Policies ) I.94-04-032 Governing Restructuring California's ) Electric Services Industry and ) Reforming Regulation. ) ) BURBANK, GLENDALE, PASADENA, AND IMPERIAL IRRIGATION DISTRICT ROUND THREE REPLY COMMENT In accordance with the July 8, 1994 Assigned Commissioner's Ruling, Burbank, Glendale, Pasadena, and the Imperial Irrigation District (jointly, "BGP/IID") hereby submit their Round Three Reply Comment in the captioned proceedings. I. A NOTE ON PROCESS. At the August 4, 1994 hearing, CPUC President Fessler suggested that the Commission wants to achieve consensus among the interested parties in this proceeding. To that end, he urged that interested parties "talk to each other" and not simply "hold isolated pep rallies." BGP/IID applaud President Fessler's admonition. Even though, as publicly-owned utilities, they are not subject to regulation by this LAMAIN Doc: 82565.1 Printed: 08-26-94 10:39 -1- Commission, they have participated actively in these proceedings. This is the fourth written comment that they have submitted, and they have either spoken or requested permission to speak at two of the three hearings conducted to date. Additionally, they have reached out to engage in dialogue with other interested parties. For example, they participated actively in the July 29, 1994 "Competitive Power Market Working Group" meeting in San Diego, and Mr. Donald Coltrain of IID is chairman of one of the two primary committees appointed by the Working Group. BGP/IID believe that both the Commission's proceedings and the meetings of any working or settlement groups should, consistent with President Fessler's admonition, be open to and inclusive of all interested parties. Thus, BGP/IID believe, for example, that the Commission would be well served if it expanded the time allowed for hearings so as to obtain the views of substantially all interested parties who are willing to make the commitment of time and energy necessary to participate in the proceedings. Likewise, BGP/IID believe that any working groups such as the Competitive Power Market Working Group should avoid becoming formalized and restrictive so as to exclude either parties or points of view. LAMAIN Doc: 82565.1 Printed: 08-26-94 10:39 - 2 - II. SUMMARY OF COMMENTS. In this Reply Comment, BGP/IID reply to some of the points raised in the July 26, 1994 "Round Three" opening comments as well as to some comments made orally at the August 4, 1994 hearing, which BGP/IID attended. In summary, this Reply Comment raises the following points:  Much more can be done to improve the operation of the wholesale market within the existing infrastructure of power pools and Regional Transmission Groups ("RTGs") at a low cost but with a high probability of success and meaningful rewards.  Vikram Budhraja's statement that "municipals support Poolco" must be qualified, at least for now.  Professor William Hogan's "Poolco" and "Opco" are variations on the same theme. While there are important differences between them, both should be compared to bilateral contracting through further development of the existing infrastructure, including the Western Systems Power Pool ("WSPP") and the new RTGs.  The single dispatch Poolco model appears to be similar to the integrated dispatch arrangements which resulted in years of litigation between municipal utilities and investor-owned utilities in California.  In response to Sally Streiter Hunt, England and Wales started from a very different point, suggesting that the time they would have required for developing a fully functioning, open bilateral market as opposed to a monolithic single-dispatch system probably has little heuristic value for California.  Serious consideration should be given to Philip O'Connor's "Tehachapi Compromise". LAMAIN Doc: 82565.1 Printed: 08-26-94 10:39 - 3 -  Any development of a Poolco or Opco should not erode local authority, municipal preference, or tax-exempt financing, consistent with the principles expressed by the California Municipal Utilities Association ("CMUA"). III. ARE MORE GAINS TO BE MADE FROM IMPROVING THE EXISTING WHOLESALE INFRASTRUCTURE? At the August 4, 1994 hearing, CPUC President Fessler succinctly summarized one of the primary factual questions that must be addressed by the Commission in this proceeding, namely, the question of whether significant efficiency gains can be attained by improving the existing wholesale infrastructure so as to further enhance wholesale competition, or whether there must be a leap from wholesale competition to direct access and retail competition for the next significant increment of efficiency gains to be realized. Both the Department of Energy (Peter Fox-Penner) and TURN (Scott Hempling) responded that further enhancement of wholesale competition would yield significant gains. Scott Hempling pointed out, additionally, that retail wheeling is unlikely to be an adequate substitute for fully developing a robust competitive wholesale marketplace. BGP/IID agree that substantial efficiency gains remain to be made by further improving the wholesale market infrastructure. WSPP President Robert Glynn noted that WSPP procedures already provide substantial benefits. BGP/IID believe more can be realized. As BGP/IID pointed out in their July 26, 1994 Round Three Comment, significant gains can be made at a relatively low cost by further developing and upgrading WSPP Electronic Bulletin Board ("EBB") trading procedures. Also, the efficient functioning of the wholesale market may be substantially enhanced by implementing RTGs. Neither of the two RTGs that have been proposed to the Federal Energy LAMAIN Doc: 82565.1 Printed: 08-26-94 10:39 - 4 - Regulatory Commission ("FERC") for approval -- namely, the Western Regional Transmission Association ("WRTA") or the South West Regional Transmission Association ("SWRTA") -- have yet been approved, let alone implemented. BGP/IID believe that improvement of the procedures of WSPP and other power pools1, implementation of RTGs, and attendant developments such as establishment of trading centers and a robust wholesale futures market would result in intensified wholesale competition that would melt away excess generation costs effectively without need for the experiment of direct access. IV. POOLCO, OPCO, AND IMPROVING THE BILATERAL MARKETPLACE. Southern California Edison Company ("Edison") and San Diego Gas and Electric Company ("SDG&E") have proposed centralizing the short-term energy dispatch function in a new power pool that they and Professor Hogan generally call "Poolco". Very few of the interested parties who filed comments on July 26, 1994 supported Poolco. In fact, aside from Edison and SDG&E, only the Department of Energy and the Environmental Defense Fund unequivocally supported Poolco. Other parties who normally battle each other expressed reservations or outright opposition. The Division of Ratepayer Advocates ("DRA"), for example, said, "Rather than creating a new infrastructure, the Commission should look to encourage and empower the evolution of the existing infrastructure to respond to the changing needs of the changing market." DRA July 26, 1994 Comments, at 16. Pacific Gas & Electric Company ("PG&E) opined that "enhancing or reinventing the existing wholesale system will yield little if any incremental value." PG&E July 26, 1994 Comments, at 7. 1 Burbank, Glendale, and Pasadena are members of the Southern California Utility Power Pool ("SCUPP"), which also includes the Los Angeles Department of Water & Power ("LADWP"). LADWP serves approximately 1.3 million meters, making it the largest municipal utility in the nation. SCUPP members are working on enhancing the benefits that can be realized through SCUPP. LAMAIN Doc: 82565.1 Printed: 08-26-94 10:39 - 5 - At the August 4, 1994 hearing, Vikram Budhraja (Edison) told the Commission that "municipals support Poolco." As noted above, BGP/IID are actively engaged in discussions about Poolco with Edison, SDG&E, and other parties. However, BGP/IID and, to their knowledge, other California publicly- owned electric utilities are far from being able to state that they unequivocally support Poolco. Vikram Budhraja's statement, at least for now, is erroneous. While BGP/IID are engaged in ongoing discussions with the Poolco proponents, BGP/IID can offer the following observations at this juncture: A. Both Poolco and Opco Are Variants on the Same Theme, Both of Which Should Be Contrasted With The Development of The Existing Wholesale Market Infrastructure. At the August 4, 1994 hearing and in a statement circulated to the Commissioners, Professor Hogan suggested that the debate between Poolco proponents and bilateral market proponents is a debate between Poolco and something that Professor Hogan calls "Opco". Under Poolco, all generation resources would be pooled and dispatched in merit order. Bilateral contracts would be, in essence, financial hedging arrangements similar to the "contracts for differences" under the English/Welsh model. With Opco, as BGP/IID understands Professor Hogan's concept, there also would be a centralized operator. The primary difference between Opco and Poolco is that the operator would have direct dispatch authority over a limited number of generation resources, which he would dispatch in merit order so as to maintain, in Professor Hogan's words, "balance" in the grid. Thus, the operator would use the resources subject to his direct control to perform a load following function and, presumably, other ancillary services such as voltage support. To use the natural gas analogy that has been used by both Professor Hogan and ENRON's Jeffery Skilling, it would be as though all pipelines serving LAMAIN Doc: 82565.1 Printed: 08-26-94 10:39 - 6 - California were put under a central operator which had at its command enough gas supply and storage to maintain balance in the system but which, otherwise, accepted all gas which was nominated for delivery into the system and delivered gas as usage required. Various parties have criticized Poolco for its "monolithic" structure. It appears that Opco is just the same, except that the Opco operator would have direct dispatch authority over fewer resources. If that is the case, both Poolco and Opco need to be contrasted with further development of the existing wholesale infrastructure and bilateral contracting, which does not involve creation of a monolithic, centralized grid operator. When Professor Hogan expressed the view that "there is a deal here" at the August 4, 1994 hearing, he was talking about a "deal" between Opco and Poolco, which share fundamental similarities, and not a deal between Poolco/Opco and a decentralized, freely functioning, further developed bilateral marketplace. LAMAIN Doc: 82565.1 Printed: 08-26-94 10:39 - 7 - B. A Monolithic, Centralized Dispatch Authority May Not Reduce Disputes and Attendant Litigation. The proponents for Poolco argue that centralizing dispatch authority in a single operator could reduce disputes in litigation. Historical experience may testify to the contrary, however. Some municipal utilities in both Northern California and Southern California have, from time to time, entered into integrated dispatch arrangements with the investor-owned utility in their region. Those agreements have, historically, resulted in voluminous litigation. Thus, it may be that the flexibility inherent in a fluid bilateral marketplace may reduce rather than increase the risk of litigation, at least in comparison to what would result if there were centralization of dispatch authority. C. Would Poolco Speed Up or Delay The Process? Some Poolco critics have opined that Poolco is a red herring designed to delay and diffuse the impetus towards meaningful reform. In rebuttal, Edison consultant Sally Streiter Hunt expressed the view that in England, sixteen months were spent trying to develop a bilateral market. When the decision was finally made to switch to a centralized dispatch "Poolco" model, it took only four months to develop the proposal and five months to implement the reform. BGP/IID have no reason to think that the Poolco proponents are anything other than completely sincere in promoting their proposals. However, BGP/IID believe that Sally Streiter Hunt's comment is inapposite. England and Wales were starting with the single company that controlled all generation, transmission, and distribution functions. In California, this Commission is starting with a radically different, decentralized marketplace in which there are multiple players, multiple control areas, and multiple jurisdictions. Moving from a centralized system to another centralized system may have been LAMAIN Doc: 82565.1 Printed: 08-26-94 10:39 - 8 - the easiest step to take in England. However, in California, it may be far easier and less time-consuming to move from our current decentralized structure to a further reformed decentralized structure rather than to try to switch to a centralized Poolco or an Opco. V. THE COMMISSION SHOULD SERIOUSLY CONSIDER THE TEHACHAPI COMPROMISE. Philip O'Connor testified at the August 4, 1994 hearing that the Commission should consider what he called the "Tehachapi Compromise". Under the Compromise, Edison and SDG&E, the proponents of Poolco, could form a highly centralized power pool involving themselves and any other utilities that wished to join. Others such as PG&E could go their own way. As Mr. O'Connor pointed out, this would, at least, negate the possibility that the same mistake would be imposed on the entire state. Furthermore, it would provide the Commission with a test of the various proposals that are being presented to it. BGP/IID support the concepts of pluralization and local control. These concepts lie at the heart of the public power movement. It is consistent with these principals to be receptive to the concept that multiple experiments ought to be permitted in order to ultimately determine the optimal course to follow. Thus, BGP/IID believe that the Commission should consider breaking from its usual pattern of adopting the same program for all regulated utilities in the state and consider adopting Mr. O'Connor's "Tehachapi Compromise". LAMAIN Doc: 82565.1 Printed: 08-26-94 10:39 - 9 - VI. ANY REFORM SHOULD BE CONSISTENT WITH THE PRINCIPLES OF THE CMUA. BGP/IID understand that CMUA, through the Association's Executive Director, Jerry Jordan, is going to file a comment on this date which, among other things, urges that any restructuring proposal meet certain criteria. For example, any restructuring program adopted by the Commission should not reduce or seek to alter or otherwise involve a reduction in the authority of locally elected officials to decide policy issues for publicly-owned utilities. Also, no restructuring program should adversely impact "preference" or tax-exempt financing. BGP/IID strongly support the position expressed by CMUA and its Executive Director. VII. CONCLUSION. Wherefore, BGP/IID urge the Commission to consider the following:  Much more can be done to improve the operation of the wholesale market within the existing infrastructure of power pools and regional transmission groups at a low cost but with a high probability of success and meaningful rewards.  Centralized, integrated dispatch arrangements have, in the past, resulted in extensive litigation, indicating that a decentralized, fluid bilateral marketplace might actually reduce the volume of litigation in contrast to what would result if the Poolco model were adopted.  Poolco and Opco appear to be variants on a similar theme, in which case they both should be compared to the model of the freely functioning bilateral marketplace.  It may be easier and more expeditious to reform the existing decentralized marketplace rather than trying to switch to a centralized dispatch model. LAMAIN Doc: 82565.1 Printed: 08-26-94 10:39 - 10 -  Consideration should be given to Mr. O'Connor's "Tehachapi Compromise".  BGP/IID support the general principles propounded by the CMUA.  Both this Commission's hearing and comment process as well as the meetings of any "working" or "settlement" groups should be open and inclusive of all interested parties in the interest of obtaining the benefit of the widest possible spectrum of viewpoints. Respectfully, ___________________________ Norman A. Pedersen Jones, Day, Reavis & Pogue 555 West Fifth Street Suite 4600 Los Angeles, CA 90013-1025 (213) 243-2810 Attorneys for Burbank, Glendale, Pasadena and Imperial Irrigation District Dated: August 18, 1994 CERTIFICATE OF SERVICE I hereby certify that I have this day caused a copy of the foregoing document to be served on all known interested parties of record in R.94-04-031 and I.94-04-032 by mailing by first-class mail a copy thereof properly addressed to each such party on the attached service list. Executed this 18th day of August, 1994 at Los Angeles, California. ________________________________ Barbara Prenatt LAMAIN Doc: 82565.1 Printed: 08-26-94 10:39 - 11 -