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 ) OPENING COMMENTS OF INDUSTRIAL USERS ON BLUE BOOK POLICY ISSUES (ROUND IV) I. Introduction The Commission now turns to address the issue of direct access and its role in the proposed electric industry restructur- ing. Coming as it does in the wake of the extended OIR proceed- ings to date, the Commission's examination of the direct access issue might be regarded as just another of many similar steps in the OIR process. Such a perception, however, vastly understates the importance of direct access in the context of the Commis- sion's restructuring goals. As framed in the Blue Book itself: In the policies we propose for California, consum- er choice through direct access -- "retail wheel- ing" in the jargon of the industry -- represents the cornerstone of our vision for the electric services industry. Blue Book, p. 14. 1 Thus, in focusing on direct access, the Commission now examines the concept which lies at the core of its restructuring proposal. Further, while a number of collateral issues either have been examined or remain to be examined in the OIR process, the Commission is now presented with the ultimate issue of the direction it will impart to California's electric services indus- try. The basic question to be addressed? Simply stated: May the Commission reasonably reaffirm the validity of its direct access proposal on the basis of the stakeholder showings to date in the OIR proceedings? Industrial Users1/ believe the OIR record to this point overwhelmingly ratifies and validates the Commission's direct access proposal. A substantial majority of the commenting par- ties, representing a broad spectrum of stakeholders, unequivocal- ly support direct access as the means by which the Commission may attain its OIR goals. The same parties also conclude that exist- ing market institutions and procedures provide an adequate foun- dation for immediate implementation of direct access. Further, they urge the Commission, in moving to direct access, to build on existing market competition and to reject the contrary counsel of a few to design and mandate alternative market structures. Thus, not only with respect to the Blue Book end goal, but also as to the means of getting there, the Commission's OIR proposal finds a solid base of support among the commenting par- 1. The Industrial Users intervenor group is comprised of Airco Industrial Gases; Air Liquide America Corpora- tion; Air Products and Chemicals, Inc.; Amoco Chemical Company; Anheuser-Busch Companies; The Chevron Compa- nies; Dow Chemical USA; Eastman Chemical Company; Ford Motor Company; General Motors Corporation; Hughes Air- craft Company; Kimberly-Clark Corporation; Libbey- Owens-Ford Company; Liquid Carbonic Industries; Nabisco, Inc.; New United Motors Manufacturing Company (NUMMI); Owens-Corning Fiberglas Corporation; Praxair, Inc. and Steelcase, Inc. 2 ties. A diverse range of stakeholders support the kind of approach reflected in the following statement from the Blue Book: We look principally, though not blindly, to mar- kets and the private sector, rather than to com- mand and control regulation, as the preferred means to achieve the goals established and bene- fits identified. Where competition, or the poten- tial for competition, exists, our proposal at- tempts to exploit rather than ignore it. Our pro- posed vision and strategy attempts to guide rather than dictate. We intend to provide for all stake- holders the flexibility and signals required to make mid-course corrections and respond nimbly to changing circumstances. Blue Book, p. 9. In light of the substantial support for its proposal, Industrial Users urge the Commission to reaffirm its direct access goal, even as the Commission prepares to move on to consi- der any remaining policy issues to be resolved before the imple- mentation phase investigations may begin. Some of those issues, e.g., the transition cost question, will require careful scrutiny and considerable creative thought. However, the broad measure of support accorded to the Commission's OIR vision in the comments to date should embolden the Commission to take that next signifi- cant step toward direct access now. II. Direct Access is the Key to Attainment of the Commission's Central Objective of Lowering the Cost of Electric Service to California's Residential and Business Consumers A. A Competitive Wholesale Market is Not Enough In Itself to Assure Attainment of the OIR Goals As decisively brought home by the preceding round of comments, a competitive wholesale market in itself is wholly in- adequate as a means of attaining the Commission's OIR goals and objectives. The hallmark of such a market would be the continu- ing dominant position of the electric utilities currently provid- 3 ing retail electric service, whose excessively high rates are the central problem addressed in the Blue Book. In similar fashion, the customers of those utilities would remain the captives of the electric utility system, wholly dependent upon the discretion and judgment of the serving utilities and the efficiency of their operations. The parties' Round III filings are replete with comment noting the inherent advantages the utilities would continue to enjoy and exploit in that kind of "single gatekeeper" scenario. The utilities would have no incentive to capture whatever addi- tional efficiencies might be produced by a restructured wholesale market.2/ Neither would they have any compelling incentive to pass along any such savings to end users. Absent some more fundamental competitive check on utility market power, the re- structured wholesale market alternative at best would be a super- ficial makeover of the egregious industry conditions giving rise to the Commission's Blue Book concerns. B. Customer Choice Via the Implementation of Direct Access is the Essential Element to be Provided if the Commis- sion's OIR Vision is to Materialize Direct access is the "truing up" mechanism which will bring to fruition the fully-competitive market envisioned by the Commission. Absent direct access, the prices paid by the utili- ties for their purchased and generated power will not be subject to a valid market test. As stated by Independent Energy Produc- ers (IEP): 2. Pertinent here are the Round III observations of CLECA and DRA concerning the limited impact of wholesale com- petition on the utilities' existing generation assets and the modest cost savings one might expect in any event from wholesale market restructuring. CLECA Opening Comments, p. 3; DRA Opening Comments, pp. 7-8. 4 Wholesale competition by itself is insufficient to achieve the Commission's objectives. Retail com- petition and customer choice is the ongoing, self- correcting mechanism which keeps wholesale markets truly competitive. IEP Opening Comments (Round III), p. 3.3/ In a similar vein, Watson Cogeneration (Watson) com- ments: Watson strongly believes that direct access for retail customers to a competitive generation mar- ket is the correct course for California. The best means for the Commission to increase competi- tion and efficiency in electric services, and thus to lower consumers' bills, is to create a market- place for those services, a market that features a large number of willing buyers and sellers. In Watson's view, none of the parties have called into question the basic premise of the Commis- sion's restructuring initiative: direct access for retail electric customers is necessary to provide California's electric consumers with efficient pricing and varied service options. Watson Open- ing Comments (Round III), pp. 2-3. A further benefit of direct access would be the tailor- ing of electricity services to meet the innumerable service vari- ations desired or required by particular customers. This aspect of direct access would bring a new reality to the concept of cus- tomer choice. "One size fits all" would no longer be the norm for electric service. Electricity markets would respond as never before to provide a wide range of innovative services. 3. The validity of IEP's characterization of the pivotal role of direct access in assuring market-disciplined pricing efficiency is readily apparent in the sequence of events occurring in the restructuring of the natural gas industry. Industrial Users' Opening Comments (Round III), p. 4. See also Opening Comments of FEA (Round III), p. 16. 5 The capacity of direct access to accommodate the multi- plicity of customer needs and preferences was cited in the Round III comments of many of the parties pointing out the inadequacy of proposed wholesale market approaches to the Commission's Blue Book goals. Thus, as noted by CLECA: [W]holesale transactions, with the utility acting as an agent for all end-users, impose a single purchasing strategy and risk management approach on all customers. One of the very substantial benefits of retail competition is that customers would be able to create their own portfolios of power and make their own decisions about their needs. . . . [I]n the context of gas industry re- organization, the Commission itself considered and rejected proposals by several parties that gas utilities should act as wholesale agents in an un- bundled natural gas market for large noncore cus- tomers rather than allowing gas transportation for end users. The Commission determined that it was appropriate for those customers to structure their own portfolios of gas supplies to meet their own unique risk and service requirements. CLECA sub- mits that subsequent events have demonstrated the Commission's wisdom in this regard. CLECA Opening Comments (Round III), pp. 4-5. The California Cogeneration Council (CCC) offers simi- lar comment: Consumers have widely different demand patterns, reliability requirements, sensitivity to price volatility, and investment priorities. Providers operate under different terms and conditions, have varying ability to follow load, and must consider their relationship with fuel suppliers and (for cogenerators) their steam hosts. Like consumers, service providers vary in their sensitivity to price volatility and in their investment priori- ties. . . . The CCC submits that the virtue of market econo- mies lies precisely in their ability to match many buyers and sellers, many needs and means. . . . This multiplicity of arrangements is not chaos, it is what makes competitive markets efficient com- pared to rigid marketing schemes or central plan- 6 ning. CCC Opening Comments (Round III), pp. 3-4. In sum, the record is replete with statements attesting to the merits and advantages of direct access, as the ultimate check on market prices and as the key factor assuring maximum customer choice and market efficiency. Clearly, the Commission's policy choice in favor of direct access finds ample support in that record. The Commission is on the right track and should not waver in pursuing its OIR proposal. III. In Pursuing the Implementation of Direct Access, It is Im- perative the Commission Rely on Intrinsic Market Institu- tions and Dynamics Rather Than Any Attempt to Redesign or Simulate Competition From the outset of the comment process, Industrial Users have stressed the importance of the Commission relying on the dynamics of the marketplace itself rather than preconceived structures or formats from other jurisdictions as the means of introducing major changes into electricity markets. They do so once again here in the context of the Commission's direct access goal. Experience in functioning retail electricity markets is lacking, of course, for the very reason this proceeding was initiated, i.e., the substantial constraints of the current in- dustry structure and related regulatory framework on the exercise of customer choice. However, there is no cause to doubt the capacity of the market to accommodate the introduction of retail competition. To the contrary, electricity markets in the Western U.S. have been remarkably resilient in the face of other market innovations, e.g., the emergence of substantial amounts of privately-produced power under the impetus of PURPA. 7 Robert Glynn, testifying for the Western Systems Power Pool (WSPP) at the August 4 full panel hearing, addressed the issue of the capacity of existing market institutions to adapt to the introduction of direct access. Mr. Glynn noted that the mar- ket "had certainly survived . . . the onset of the qualifying facility industry's very substantial market penetration into California". He also observed: The fact that they [existing market institutions] don't have today the characteristics that we all know they will have to have to meet a much more competitive direct access world is simply, in my personal view, an artifact of the fact that we don't yet have a direct access world and the sys- tems haven't been put in place. Tr. 4: 1041. Many other commenting parties express a similar level of confidence in the market's capacity to provide whatever addi- tional institutions or procedures may be required to facilitate direct access. These parties make the point that the market has amply demonstrated the capacity to respond to major changes. They also note the delimiting effects of prescribed regulatory solutions, and the counterproductive, hard-to-correct results of formats imposed from outside the market. Typical of the comment in this regard is that of South- ern California Gas Company (SoCal). Noting the extensive prog- ress in Western electricity markets under the aegis of institu- tions like the Western Systems Coordinating Council (WSCC) and the WSPP and the advent in those circles of experienced marketers like Enron and Louis Dreyfus, SoCal comments: [T]his market is likely to be highly competitive and efficient, so there would be no public policy basis for Commission intervention. To the extent market conditions are favorable to competition, Commission intervention could hurt rather than help customers. A broad policy embracing competi- tion would be more constructive than trying to 8 manage competition. Opening Comments (Round III), p. 7; emphasis added. Similar comment is forthcoming from the private produc- er sector. Thus, Destec Energy, Inc. comments: Destec generally supports the development of mar- ket institutions by market participants rather than by government fiat. This is the case for other markets such as agricultural and mineral commodities, including energy-related commodities such as natural gas and petroleum products. Gov- ernment-mandated markets are the exception rather than the rule, and in an area where markets have not yet been fully tested, it seems unlikely that a state-imposed market structure will succeed in "getting it right." Instead, the participants in this new market must shape the institutions, the types of transactions, and the methods of coordi- nating the market to meet the needs of consumers whether they are wholesale or retail. Opening Comments (Round III), pp. 5-6. Jefferson Electric, Inc., a subsidiary of Jefferson Gas Systems and a prospective marketer in the restructured industry, draws on the natural gas industry restructuring process in offer- ing counsel along much the same lines: Just as FERC did not create the secondary market for interstate natural gas transportation capaci- ty, the Commission should not attempt to mandate the intricacies of the emerging market. In gas, FERC widely recognized that a market was naturally emerging that offered consumers greater benefits than the prior regulated system for allocating capacity. This Commission has a similar opportu- nity to recognize the emerging structures in the electric services industry and the desire among consumers for choice. Thus, the Commission's role should be limited to accepting consumer choice and protecting the market as it emerges to ensure it remains a mechanism for ongoing change. Opening Comments (Round III), pp. 12-13. 9 The foregoing comments fairly represent the prevailing view that the Commission need not, indeed must not, undertake a laborious effort to construct the "right" market framework for retail competition. Instead, the Commission's best course is to step aside and allow the market to respond to the introduction of direct access as it has responded to other market innovations in the past. As cogently stated by Professor Robert Michaels: In reality, the right institution already exists. It is today's bulk power market. All that direct access customers need from the CPUC is permission to use it. Opening Comments of Coalition for Choice in Electricity (Round III), pp. 30-31. IV. Conclusion Despite the efforts of some stakeholders to conjure up visions of various "Chamber of Horrors" results if direct access is implemented, the Commission's own OIR vision continues to draw steady, straightforward support from a sizable majority of the stakeholders. That central fact should not go unrecognized. In- deed, it should be regarded by the Commission as a reliable benchmark of the essential "rightness" of the Commission's OIR proposal. The heavy emphasis in the comments to date on the im- portance of direct access itself also reflects the fact that im- plementation of the Commission's proposal, absent direct access, would do little, if anything, to remedy the egregious electric rate problems that are the focus of the Blue Book. Direct access is the linchpin of the entire OIR proposal, without which the Commission's restructuring effort would amount to little more than cosmetic reshuffling of the status quo. The Commission can avoid that kind of disastrous result by staying the course 10 announced in April. Industrial Users strenuously urge the Commission to do just that. Respectfully submitted, Philip A. Stohr Ronald Liebert Downey, Brand, Seymour & Rohwer Attorneys for Industrial Users EAST-107827.1 11