R. 94-04-031 / I. 94-04-032

D. 97-12-131

Commissioner Jessie J. Knight, Jr., Concurring:

As anyone can guess who is familiar with my ardent support for direct access since my arrival at this Commission in 1993, I am deeply disappointed with the announcement of a three month delay to the start up of the California Independent System Operator (ISO) and Power Exchange (PX). Every person involved with electric restructuring at this Commission has worked valiantly to meet the 1/1/98 deadline for direct access and a new world order in the electric industry and it is discouraging that despite all of the efforts by this Commission, a delay by the ISO and PX -- two agencies beyond our direct control -- has brought our march toward competition to a screeching halt.

It is natural to search for someone to blame at this juncture. But blame is not the issue - accountability is the issue. Unfortunately, assigning accountability to any one individual or entity is not possible today. In my mind, the deadline of 1/1/98 was not unrealistic and the resources had been provided to make it happen.(Endnote 1) But while the Commission cannot identify a culpable person or entity at this time, the events of the past week surrounding the announcement of delay raise some significant questions in my own mind that I will endeavor to have this Commission address should the delay extend beyond March 31, 1998. Two immediate questions that I raise for my colleagues to reflect upon in the near future are:

1) What are the negative impacts and actual dollar costs to California consumers and the competitive market players of each day of delay?

2) Who is ultimately responsible for this delay, and can this Commission ensure they bear the costs of some appropriate penalty?

With regard to the first question, each day of delay beyond 1/1/98 brings costs to new entrants such as additional financing burdens, higher capital costs, new marketing costs, and the loss of opportunity for new providers to garner revenues from the marketplace. The potential for a spillover delay of divestiture raises costs to the utilities selling their plants, and perhaps ultimately to utility ratepayers. Depending on its duration, the ISO/PX delay could result in a reduced market value for the plants because of more plants coming on the market across the nation. Delay also raises market power concerns in the fledgling electric market since each day that a customer must stay with his or her incumbent utility beyond 1/1/98 is that much more of a hurdle to getting that customer to ultimately change providers out of potential fears raised by this new uncertainty. A delay might also raise transition costs because the absence of a PX price for three months decreases headroom and potentially restricts the early pay-off of transition costs.

Most importantly, a delay costs those consumers who were prepared to begin new contractual relationships with their chosen new providers the day after tomorrow. Consumers who had already exercised their choice could have realized immediate savings through these new commercial arrangements, but now they only get delay and the status quo. What about them? Finally, there are potential additional costs to ratepayers for the start up expenses of the ISO and PX which must be considered - one of the few levers left for this Commission to influence and motivate a speedy end to the delay.

My concern with who is to blame in the second question centers around who will ultimately pay for the costs of this delay? Who is accountable? Why did it take the ISO and PX until barely 7 days before 1/1/98 to announce the need for 90 more days of testing? Even a purely technical glitch has a source, and that source could likely have been overcome given enough resources and motivation. I do not mean to imply that the reliability of the electric system does not warrant extra attention and time to ensure all systems are "GO." Prudency requires diligent testing. But I do question, given the current circumstances, who is motivated to get the ISO and PX up and running fast? How can the parties bearing the costs of this delay exact any retribution for non-performance? Non-performance clauses are typical in projects like this. I would like to understand whether contractual protections or penalties for occurrences such as this had been considered. A competitive market would provide accountability and accounting for these costs, and a means for recovery. Perhaps this Commission should consider methods to mirror those market forces and the incentives they provide. If the Commission cannot accomplish this through its own jurisdiction, it should undertake appropriate discussions with and intervention at FERC to provide accountability for the costs of unreasonable delays, if in fact these are unreasonable delays.

Dated December 30, 1997 in San Francisco, California.

/s/ Jessie J. Knight, Jr.

Jessie J. Knight, Jr.

Commissioner

Endnote 1: The Commission voted out $250 million in support of the ISO and PX in D.96-08-038, as modified by D.96-10-044, plus an additional $50 million in D.97-11-077.