COMMISSIONER P. GREGORY CONLON'S COMMENTS
REGARDING ELECTRIC RESTRUCTURING
MADE AT THE COMMISSION'S MEETINGS OF
DECEMBER 20, 1995 AND JANUARY 10, 1996
Although the Commission's vote on December 20th was not unanimous, it still signified widespread agreement among all Commissioners that California needs to promote competition. This competition should provide long-term rate reductions and give customers greater choices. Reviewing both orders side-by-side reveals that we are in agreement on probably 90% of the issues before us. These include the desirability of customer choice, the need to address market power issues, the need to preserve the existing utility's financial integrity, and the need to continue worthwhile public purpose programs.
What we differed on, is "how fast do we get there?" With the proposed clarifications that I issued to the decision on December 29, 1995 through an Assigned Commissioner's Ruling (ACR) that was adopted by the Commission on January 10, 1996, the position of my two dissenting colleagues appears to be very close to that of the majority decision. The majority order still goes further towards promoting competition than in any other state or jurisdiction. The order lays out a minimum framework to phase-in and increase competition over time.
Our decision builds upon our May, 1995 decision on this issue. It also incorporates the input of a wide variety of parties to our proceedings. It recognizes the advance in thinking that was developed in a Memorandum of Understanding submitted to the Commission by Southern California Edison, the California Manufacturers' Association, Independent Energy Producers, and others (known as the MOU parties) regarding market structure. It also incorporates suggestions made by a widespread coalition of consumer, environmental, and business groups that provided a "framework" to deal with restructuring issues (known as the framework parties). The contribution of both of these groups, as well as the thoughtful comments of others, have been incorporated into our decision. We look forward to continued input from all parties as we move towards implementation.
After the widespread power outages that resulted from the early December's storms in Northern California, I want to reiterate that in our decision we are not deregulating transmission and distribution (T&D). The poles, wires, and transformers will continue to be regulated by the Commission and subject to our service and safety standards.
I would like to briefly address what our order does in four key areas; market structure, transition costs, market power, and public purpose programs.
Our decision adopts a hybrid approach to customer choice that was first proposed by the MOU parties; the simultaneous introduction of both a pool-like institution (called the Power Exchange) and Direct Access. Our decision would urge the creation of the following entities:
Participation in the Power Exchange is voluntary for all energy suppliers (such as out-of-state and municipal utilities) who are strongly encouraged to participate. Participation in the Power Exchange is mandatory for all power plants owned by the existing investor-owned utilities which are subject to CTC recovery. These utilities will bid in all generation and purchase all of their energy requirements out of the pool. The Power exchange price should serve as benchmark for reviewing the "reasonableness" of utility purchases thereby eliminating our traditional and time-consuming reasonableness reviews of utility operations. Over time, as the existing utilities divest themselves (through sale or spin-off) of up to 50% of their fossil-fueled generating plants (as discussed below in market structure), or as utility power plants undergo market valuation, the amount of energy purchases required to go through the Power Exchange will decrease.
The phase-in and increased use of real-time meters should allow customers to better control their energy use, and could save them money if they are able to switch their energy usage to off-peak times (such as evenings and weekends) when energy costs are cheaper.
Our decision tries to balance the competing goals of ensuring recovery of prudently incurred past investments, minimizing rates, and ensuring that existing utilities do not have an unfair competitive advantage in the future marketplace that we are creating.
In order to solve these problems, we reaffirm our May decisions which created a Competition Transition Charge (CTC). The CTC reflects the above-market costs of our past regulatory requirements which must be collected during our transition to competition. In order to ensure that all parties are treated equally, we ensure that all customers, regardless of which energy supplier they choose, will pay the CTC charge. The CTC charge will be non-bypassable, and fairly paid for by all customer classes. Each customer choosing direct access will be required to sign a contract agreeing to pay his or her share of the CTC.
We also adopt several important CTC principles, namely 1) all CTC should be identified and put into the CTC account by the year 2003; CTC collection will end by the year 2005; and most importantly, collection of the CTC will result in rates to consumers being no higher than they are as of January 1, 1996 with no adjustment for inflation.
Our proposal adopts different treatment for different types of utility assets, consistent with the above principles:
Fossil plants owned by the utility must bid their output into the Power exchange and the utilities are responsible for recovering all of their variable fuel; operating and maintenance costs; and any future plant-related capital expenditures from the energy prices they receive from the Exchange. The utilities are responsible for any shortfall, but also are allowed to keep any profits up to 150 basis points above the rate-of-return allowed for their distribution plant.
Some portion of each utility's fossil-fueled plants may be subject to Performance Based Ratemaking (PBR) but only if they are necessary for providing necessary ancillary services such as voltage or grid support needed to maintain system reliability.
First, it suggests the need for the separation of the existing investor-owned utilities into separate legal entities to handle transmission, distribution, and generation functions. This will help prevent vertical market power. Our order directs the utilities to respond to this issue within a reasonable time period.
Second, it recognizes that the existing investor-owned utilities control most of the generating capacity within California. Our order recognizes this problem of horizontal market power and provides incentives for the utilities to divest some of their generating assets. Our order strongly encourage utilities to voluntarily divest themselves of 50% of their fossil-based generating assets. In order to provide them with an economic incentive to do so, we propose increasing the rate-of- return on the CTC by 10 basis points for each 10% of fossil assets divested.
These programs would continue to be funded through a Public Goods Charge (PGC) that would be paid for by all energy consumers. Our order also requires that a portion of all energy sales be from renewable energy sources, and establishes a marketable trading mechanism to achieve that goal.
There are a number of procedural and implementation issues that need to be resolved in order to move forward with our policy. Therefore within 45 days we will issue a road-map decision, similar to what we adopted for our telecommunications proceedings, that will lay out a procedural schedule. Third, we publicly announce that we will voluntarily conduct an environmental review of this project consistent with the guidelines of the California Environmental Quality Act (CEQA). Finally, we recognize the importance of working with FERC and recognize the important role that they will play in carrying out our program. We reiterate our previous call that FERC work with us and other state PUCs in a spirit of "cooperative federalism" needed to make this program a success.