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 ) ) COMMENTS OF THE CALIFORNIA MUNICIPAL UTILITIES ASSOCIATION ON DEVELOPING THE WHOLESALE MARKET August 18, 1994 The California Municipal Utilities Association (CMUA) is an organization representing 26 electric distribution systems and two joint powers agencies, serving approximately 25% of the population of California. We appreciate the opportunity to present our views on the important issue of retail wheeling. As we indicated in previous comments, the California Municipal Utilities Association supports the development and implementation of a competitive wholesale electricity market in California. Wholesale competition offers the most immediate benefits to all of the state's ratepayers. Wholesale competition is dependent on open transmission access. We believe the most efficient means of achieving open transmission access and therefore the best way to pass the benefits of wholesale competition to all ratepayers is the Western Regional Transmission Association (WRTA) which is now awaiting approval by FERC. We are concerned that the PUC's proposal could detract from progress towards open transmission access and therefore actually delay the benefits to California consumers which could be achieved either through WRTA or the FERC Sec. 211 process. In the past several months many industry observers have opined that retail wheeling is inevitable. That may or may not be the case. It is clear, however, that it should not be inevitable as a result of regulatory mandate. If retail wheeling is truly inevitable it should come from market influences, not regulation. Forced retail wheeling could lead to severe consequences for the electric industry and the California economy. The PUC's Bluebook proposal does not allow market forces to work by getting regulation out of the way, rather it attempts to substitute regulatory mandate for market evolution. Any form of mandatory restructuring is likely to be less successful than market evolution. The PUC's proposal would meet this criteria if it were changed to allow investor owned utilities to offer direct access rather than force them to do so. WRTA, on the other hand, is a voluntary restructuring mechanism which allows for market evolution. PUC Comments - Developing the Wholesale Market Page 2 Recently both the San Diego Gas and Electric Company (SDG&E) and Southern California Edison Company (SCE) have proposed the formation of voluntary pools in California. There is, as yet, insufficient information about these proposals to determine if they offer potential advantages beyond those offered by WRTA. CMUA and its member utilities are participating in the discussion sponsored by SDG&E and SCE to determine if pools do further market evolution. We believe the voluntary nature of the pooling proposals better fit the evolutionary market criteria than does the PUC's direct access proposal and therefore at the very least offers more possibility of success. From a publicly owned utility standpoint, one of the most troubling aspects of Edison's POOLCO proposal (which is appropriately missing from SDG&E's pooling proposal) is the disqualification of participants with preference power and tax exempt financing from the pool. Any proposal which seeks to condition participation in the pool by requiring the relinquishment of preference power or tax exempt financing is doomed to failure by its effective exclusion of all California utilities. All utilities in California use substantial amounts of tax exempt financing and benefit from federally built and licensed power facilities(see our accompanying response to EEI). As stated previously, SDG&E's proposal does not suffer from this flaw. Open transmission access is key to any restructuring proposal. Any proposal, however, that does not improve the level of access available through a regional transmission group or the FERC Sec. 211 process is also doomed to failure. We also wish to stress that publicly owned utilities believe that any restructuring proposal must preserve the development of environmentally beneficial renewable energy resources and promote the deployment of cost effective energy efficiency measures. Finally, California should not lose sight of the fact that, with the amount of information currently available, the restructuring proposal which best accomplishes the above goals is the Western Regional Transmission Association. WRTA offers the best chance so far of achieving open transmission access which allows all distribution utilities and energy providers equal access to wholesale markets. California should not delay its implementation in favor of any of the other proposals now being offered. Progress towards either pooling or retail wheeling should not come at the expense of progress on open transmission access, but perhaps as supplements to open access. PUC Comments - Developing the Wholesale Market Page 3 Response to Comments by EEI The Edison Electric Institute has commented, in predictable fashion, about the unlevel playing field provided by municipal utility tax exempt financing and the use of preference power. This is an old, tiresome, investor owned utility argument. Once again, we will state the facts, and hope that future comments will be directed toward the real issues of restructuring and not the IOU ideological straw men of the past. With respect to tax exempt financing, it should be remembered that all of California's utilities rely on tax exempt financing. According to information provided by the California Debt Advisory Commission, between 1985 and June 30, 1994, tax exempt bonds had been issued in the following amounts for the state's investor owned utilities: PG&E $2,615,000,000 SDG&E 648,105,000 SCE 717,885,000 TOTAL $3,980,990,000 Tax exempt financing clearly is a substantial benefit to the state's IOU's. With respect to preference power, historically PG&E and Edison have often received more electricity produced by the Bonneville Power Administration (BPA) and the Western Area Power Administration(WAPA) than has been received by publicly owned utilities in California. According to FERC , Form 1 Reports, the amount of BPA and WAPA power received by the three investor owned utilities in comparison to the twenty seven preference distribution utilities receiving BPA and WAPA power for the years 1987 to 1992 is as follows (numbers are in gigawatt-hours): Twenty-seven 1992 1991 1990 1989 1988 1987 Preference Utilities 6897 9078 8247 7750 6739 8141 PG&E 547 5539 3016 1811 1783 5765 SDG&E 844 1197 1019 466 613 301 SCE 1362 2813 2374 1259 1644 3417 Three IOU's 2753 9549 6409 3536 4040 9483 Note: The Boulder Canyon Project was not included in these calculations as it is regulated by its own federal legislation and includes allotments for publicly owned and investor owned utilities. In two of the six years listed above the state's three investor owned utilities purchased more BPA and WAPA power than all of the states publicly owned electric utilities combined. In each of the six years SCE purchased more energy from BPA and WAPA PUC Comments - Developing the Wholesale Market Page 4 than did the Los Angeles Department of Water and Power, usually more than twice as much. Clearly preference for federally produced hydroelectric energy is not a disadvantage for investor owned utilities. SCE and PG&E also have far more federally licensed hydro power than do publicly owned utilities in California. Water resources, by law, are legally held in trust for the people of the country. All hydroelectric capacity in California is therefore federally licensed. All of the capital cost has been paid for by the utilities which use the power. Preference power capital costs have been paid for by the publicly owned utilities which have received the power, just as the capital costs of IOU federally licensed projects has been paid for by those utilities. California's investor owned utilities sponsored federal legislation several years ago which virtually guarantees the original hydroelectric licenses (in most cases investor owned utilities) will maintain those federal resources in perpetuity. So if the concern over preference power is the cost of the resource, then it is clear that investor owned utilities are not disadvantaged by preference power because of the large number of licenses that they hold. There are many more elements to the unlevel playing field. EEI mentions the disparity of legislative requirements. Legal requirements of public agencies are, in fact, quite different than those of investor owned utilities, ranging from public works bid requirements, prevailing wage requirements, Brown Act requirements, Conflict of Interest Code disclosures, and many others. Publicly owned utilities face advisory elections and referendum requirements on their resource plans, investor owned utilities do not. There are differences certainly between investor owned utilities and consumer owned utilities, but it is not at all clear to which side the playing field tilts. Respectfully submitted, Gerald L. Jordan Executive Director California Municipal Utilities Association 1225 8th Street Suite 440 Sacramento CA 95814-4809 R.94-04-031, I.94-04-032 CERTIFICATE OF SERVICE I certify that I have by mail this day served a true copy of the original attached Comments of the California Municipal Utilities Association to all parties of record in this proceeding or their attorneys of record. Dated August 18, 1994, at Sacramento, California. _______________________ Gerald L. Jordan