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 ) 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 REPLY COMMENTS OF THE CALIFORNIA MANUFACTURERS ASSOCIATION Keith R. McCrea Glen S. Howard David I. Adelman SUTHERLAND, ASBILL & BRENNAN 1275 Pennsylvania Avenue, N.W. Washington, D.C. 20004 (202) 383-0705 Counsel for the California Manufacturers Association August 17, 1994 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 ) 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 REPLY COMMENTS OF THE CALIFORNIA MANUFACTURERS ASSOCIATION The opening comments on Competitive Wholesale Electric Markets: Role, Structure, and Efficacy and Market Institutions in the Restructured Electric Industry contain few surprises. By this time, it has become abundantly clear which parties fully support the Commission's vision of a fully competitive electric services market and which parties give only lip-service to that vision. The latter parties champion a half-measure Ä restricting competition to the wholesale market only Ä which would provide no assurance that consumers rather than utility shareholders, would actually get to enjoy the full benefits of lower electric rates in a more competitive California electric industry.1/ Consumers would have no such assurance because, unless subject to competition from sales at the retail level, utilities will simply not have sufficient, meaningful incentive either (a) to purchase the lowest cost power 1/ As a veteran of the restructuring of the natural gas industry, Southern California Gas Company ("SoCalGas") offers instructive views on some of the important lessons learned from that experience. See SoCalGas July 26 comments (at 4-5). It correctly observes that "a proposal to stop short of direct access would correspond to a gas industry in which utilities continued to perform all procurement for end-users other than resellers." Id. at 5. While such a sawed-off gas market, of course, seems quaintly anachronistic today, the electric utilities are nevertheless arguing for the same stunted market on the electric side when they urge the Commission to adopt the POOLCO concept in lieu of, rather than in addition to, direct access. (consistent with reliability) or (b) to pass through to their customers Ä California consumers Ä whatever lower prices may result from wholesale-level competition.2/ So long as retail customers remain captive, it will make little functional difference to them that their suppliers are participants in some elaborate wholesale pool. Without practical alternate sources of power,3/ consumers can expect few competitive benefits to "trickle down" to them from the wholesale-only market. In their respective July 26 comments, Southern California Edison ("SCE") and San Diego Gas & Electric ("SDG&E") assert that wholesale competition provides all the "market" that reasonable people would want or need.4/ This myth, however, is perhaps best debunked in SDG&E's own comments (at 21-22). Attempting to show how POOLCO would determine a "least-cost" dispatch of generation and load management, SDG&E describes (and shows graphically in its Figure 3) how the pool price for any given hour would be set "at the energy price of the last generator operated to meet system demand at that time." In the example shown, each generator receives the pool price of $26/MWh (set by the marginal generator's "bid") even though two of the generators ("G1" and "G2") are willing to sell into the pool at $21 and $22/MWh. Do consumers get the benefit of this "competition" at the wholesale level? No. G1 and G2 (i.e., members of the club) are the ones who benefit, receiving the $26 "market-clearing" pool price and pocketing the $4 and $5 windfall above 2/ It is no coincidence that the utilities' enthusiasm for "actively discussing ways to make the wholesale market more competitive" (SDG&E July 26 comments at 2) has begun to bloom only after the Commission opened this investigation into, among other things, the potential for direct access. 3/ While competing, third-party sources of power may be unavailable to consumers in a POOLCO world, the alternatives that are available to some consumers include self-service wheeling, more self-generation, municipalization of utility systems, transfers of production and jobs out of California, and plant closures. 4/ Injecting a most unwelcome ad hominem element into this important debate, SDG&E repeatedly asserts (e.g., at 3, 6, 12, 13) that opponents of its wholesale-is-enough approach are merely the "limited few," the "privileged few," the "elite few" who (it claims) are the only ones who would benefit from direct access. Such aspersions are both offensive and wrong, belied by the broad array of parties whose comments reflect that they are not fooled by the utilities' efforts to sell cartel-based schemes as the equivalent of vigorous wholesale and retail competition. See, e.g., Pacific Gas & Electric July 26 comments at 3-4. In any event, as Pacific Power & Light Company properly notes (July 25 comments, at 8): "[F]or some classes of customers, direct access is not practicable. [But a]ssuming 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." - 2 - what, as independent decisionmakers, they were willing to sell for. With the pool price available to each supplier, regardless of its bid level, meaningful competition is necessarily thwarted and consumers pay more than is economically warranted. This is not competition; it is just a dressed-up system of price supports. A fair reading of the opening comments in this round dictates at least two other important conclusions: ø First, while parties may differ as to precisely what degree of robustness has already been achieved by the wholesale power market, most seem to agree that market is developing and will continue to develop without governmental "encouragement." Given this widely shared consensus, it would be disappointing, to say the least, if this Commission's and the parties' enormous efforts Ä in this most- watched electric proceeding in the nation Ä were to yield little more than a resolution to lay an artificial regulatory construct over a naturally evolving wholesale market.5/ Indeed, the most significant thing this Commission can do to further the development of the wholesale market is to facilitate the development of retail-level competition via direct access.6/ ø Second, SDG&E's and SCE's POOLCO concept is not needed to achieve the most important benefits of pooling. California is already a part of such a pooling structure via the Western Systems Power Pool, and further vehicles are developing in the form of regional transmission groups to improve coordination across the grid in such matters as dispatch, system planning, scheduling, ancillary services, general 5/ By "regulatory construct," CMA means only a government-designed or government-engineered structure created with the intent of channeling competition only where it (or the quasi-competitors) want it to go, attempting to simulate what the market itself would develop. CMA does not, however, suggest that such a structure would be "operated by the government." (SDG&E July 26 comments at 8). In fact, CMA generally agrees with SDG&E not only (1) that the POOLCO which it and SoCal Edison envision would not be subject to this Commission's jurisdiction, but (2) that "it is likely that FERC would allow Poolco to be largely self-regulating, subject to general oversight and the right of aggrieved parties to appeal to FERC." Id. at 37. See also Jefferson Electric, Inc. July 26 comments at 12; Pacific Power & Light Company July 25 comments at 7; Independent Energy Producers Association July 26 comments at 12. 6/ Jefferson Electric (July 26 comments at 3) succinctly articulates this key point: "The Commission should not try to 'create' a competitive market but should safeguard the competitive market that is already emerging and release it from regulatory obstacles that prevent it from achieving the Commission's objectives." - 3 - operation, and emergency response.7/ POOLCO Ä with its emphasis on creating a single, pooled source of power at prices determined centrally by the pool operator Ä is not needed to afford the kind of enhanced reliability and operational integrity that such existing and already-developing structures offer. These desirable operational features of pools can be had without also folding in the centralized pricing and competition-limiting features so key to the utilities' POOLCO concept. CONCLUSION The opening comments of the "wholesale-competition-is-enough" advocates Ä their first significant opportunity to provide substantive support for their theoreticians' hypotheses Ä merely confirm that POOLCO-type proposals are a pale substitute for what the market itself could achieve if simply given a chance. Bona fide, meaningful competition should not have to wait in the wings while the Commission and the utilities struggle to manufacture a complex, synthetic version of that competition. CMA strongly supports the further development of the wholesale market. But, as many of the parties' opening comments recognize, that development is not a necessary condition precedent to adoption of direct access. Direct access and pools should co-exist and complement each other; virtually all proponents of direct access understand this. What they do not understand Ä and what the utilities and their allies have yet to explain Ä is what sound reason they have for wanting to prohibit or delay direct access as a key element of their pool concept. Does the reason lie in the utilities' concerns about recovering their investments in uneconomic generation assets? Is the "Great Pool Debate" merely a red herring, driven not by the reliability concerns expressed in several parties' comments, but rather by concerns about so-called stranded assets? Is the delay inherent in the "wholesale-only" approach its primary value to the utilities, intended merely to allow them more time to recoup their investments before the inevitable arrival of increased competition? 7/ This is not to say, however, that RTGs themselves are necessarily doing all they could to promote competition. For example, the Governing Agreement filed May 20, 1994 by participants in the Western Regional Transmission Association (FERC Docket No. ER94-1288-000) includes wholly inappropriate provisions excluding end-users as members and restricting members from providing retail wheeling. - 4 - Or is the answer perhaps found also in the explanation provided by a utility "convert" to competition: "POOLCO acts, by assumption, in the interest of the average, typical end- user. It will search the market and take risks that match the preferences of the average customer. It will shun arrangements that satisfy a few users but are too risky or otherwise inappropriate to the typical user. "Direct access implies that end-users can compete among themselves in searching out 'deals.' Those who expect to fare poorly in such competition might prefer limiting electric restructuring to the wholesale market and blunting retail competition. But, as in other markets, blunting competition means that fewer options are explored. On the other hand, if direct access and POOLCO co-existed, POOLCO would serve the interests of utility customers while direct access customers would be able to seek alternative suppliers and terms. Direct access provides market discipline to ensure the benefits of POOLCO are passed through to retail customers." SoCalGas July 26 comments at 8 (emphasis added). Commission-mandated market institutions cannot possibly take into account all of the options required by direct access customers and, therefore, can only restrict rather than promote customer choice. Accordingly, the Commission's focus should be on (1) the de-integration of investor-owned utilities' generation facilities and (2) the promotion of policies that provide consumers with the greatest array of choices. Wholesale-only competition cannot accomplish this. Rather, direct access is the essential ingredient needed to ensure that the benefits of the developing wholesale market are passed through to California consumers. For the foregoing reasons, then, the California Manufacturers Association, once again, respectfully urges the Commission to reject the "wholesale is enough" approach and to proceed to adopt Ä and implement without unnecessary delay Ä the direct access proposal set forth in the OIR. Respectfully submitted, Keith R. McCrea Glen S. Howard David I. Adelman SUTHERLAND, ASBILL & BRENNAN 1275 Pennsylvania Avenue, N.W. Washington, D.C. 20004 (202) 383-0705 Counsel for the August 17, 1994 California Manufacturers Association - 5 - CERTIFICATE OF SERVICE I hereby certify that copies of the foregoing document were mailed on August 17, 1994 to all parties who have requested such service.