These short comments address the following three items identified in the Group B Workplan:
--Retail Regulatory Jurisdiction
--Forms of Regulatory Oversight: Certification, etc.
--Determine List of Activities Potentially Subject
to Regulation.
The discussion presumes that our task is how the
State of California should regulate competitive generation suppliers,
including generators, aggregators and marketers, and, possibly
scheduling coordinators, (collectively referred to herein as "generation
suppliers") with respect to the generation of electricity
and the retail sale of energy to consumers. This discussion is
not intended to address activities or entities that come within
the jurisdiction of the Federal Energy Regulatory Commission.
In addition to asking specific questions, the discussion
attempts to draw certain distinctions and to describe various
regulatory approaches. I hope this discussion will help the group
develop a consensus as to the structure and scope of the new market
rules.
The CPUC has jurisdiction over "electrical corporations" as defined by Cal. Pub. Util. Code ' 218: "'Electrical corporation' includes every corporation or person owning, controlling, operating, or managing any electric plant for compensation within this state . . . ." (For purposes of this discussion, the current statutory exemptions are ignored.) "Electric plant" is defined to include "all real estate, fixtures and personal property owned, controlled, operated, or managed in connection with or to facilitate the production, generation, transmission, delivery, or furnishing of electricity for light, heat, or power, . . . ." Cal. Pub. Util. Code ' 217. "Electrical corporations" are defined to be "public utilities." Cal. Pub. Util. Code ' 216.
It is unclear whether new market entrants, such as
aggregators and marketers, who may not be directly in the business
of the generation of electricity, would be "electrical corporations"
within the meaning of Cal. Pub. Util. Code '
218. Since they would be using their assets "in connection
with or to facilitate the production, generation, transmission,
delivery, or furnishing or electricity for light, heat, or power,"
Cal. Pub. Util. Code '
217, these new market entrants could be held to be "electrical
corporations."
1. Should generation suppliers that are expected
to compete (i.e. not UDCs and not generation subject to PBR due
to locational market power) be subject to uniform regulation?
2. If so, should all competitive generation suppliers
be defined as "electric corporations" subject to CPUC
regulation, or should competitive generation suppliers be expressly
exempt from the definition of "electric corporation?"
Even if all generation suppliers are "electrical
corporations" subject to CPUC jurisdiction, many changes
will be necessary. The most obvious one is that generation suppliers
must be exempt from CPUC rate-making.
At the other end of the spectrum, generation suppliers
could be expressly excluded from the definition of an "electrical
corporation." This would not mean that generation suppliers
would be completely unregulated. Competitive generation suppliers,
like market participants in other competitive markets, would be
subject to various statutes and regulations that regulate the
market place. For example, the California Cartwright Act, Cal.
Bus. & Prof Code ''
16600 et seq. codifies California's anti-trust law and prohibits
various unfair trade practices. (Market participants would also
be subject to federal anti-trust laws.) In addition, market participants
would face civil liability for breach of contract and tort causes
of action. These laws would apply to the competitive generation
market.
Further, whether generation suppliers are defined
as electrical corporations or not, there will likely be a need
for new industry specific rules. See discussion below.
3. Should the rules differentiate between firms that
operate assets that physically produce electricity from those
that do not?
4. Should there be specific rules for generation
suppliers that are affiliated with regulated utilities, such as
the Utility Distribution Companies (UDCs)?
5. Should there be specific rules for each type of
generation suppliers, i.e. generators, marketers, aggregators
and supplier coordinators? or specific rules for generation suppliers
that pursue physical bi-lateral contracts, as opposed to generation
suppliers that operate through the Power Exchange?
There appear to be three types of regulations appropriate to the new electricity market:
-- Regulations designed to protect the safety and reliability of the system and to deal with system-wide effects.
-- Regulations designed to keep the market place fair for competitors.
-- Consumer protection regulations.
Because of the interconnectedness of the transmission system, the new market place will be more integrated than other market places. This suggests the need for market place rules that will minimize the likelihood of unanticipated system effects that impair safety and reliability. These rules should focus on requirements that enhance the likelihood that generation suppliers will be able to perform in accordance with their bi-lateral contracts. See discussion, below, regarding registration/licensure, financial integrity and bonding requirements.
The interconnectedness of the system also suggests
that there should be a mechanism to permit those adversely affected,
but who are not parties to a bi-lateral contract (those adversely
affected could include both private parties and the PX purchasers),
to recover costs (if any) imposed on them as a consequence of
a party's failure to perform. Although the ISO settlement process
is being designed to assign costs to responsible parties, it may
be advisable to devise a mechanism for collecting and distributing
funds. Again, see discussion below concerning financial integrity
and bonding.
In addition to the existing generic statutes and regulations, such as the anti-trust laws, DAWG B should consider industry specific regulations to ensure a market place that is both competitive and fair. In particular, DAWG B should consider proposing a "Code of Conduct" which would govern how regulated utilities, UDCs and their affiliated generation suppliers, conduct their business to prevent non-regulated affiliates of regulated utilities from taking unfair advantage of their affiliation. The code should include rules governing the use of customer information.
There are various models that can be used. See e.g.
Proposed rule 11.06 Corporate Rules of Conduct of the Mass. Dept.
of Public Utilities. (These draft regulations were distributed
at the May 31 meeting of DAWG B.)
Regulations that ensure safety and reliability of the system and promote competition should also have substantial consumer protection benefits. Additional specific recommendations for other consumer protection regulations are within the scope of DAWG D. In light of the experience of the telecommunications industry, however, anti-slamming regulations appear appropriate.
Other possible consumer protection regulations might
include: redlining prohibitions, 3-day cancellation provision,
and full disclosure of terms and conditions in plain english.
This approach requires would be market participants
to disclose relevant information to a public entity that would
be available to the public. For example, generation suppliers
who seek to do business in California might be subject to registration
requirements consisting of: (a) legal name and all names under
which they conduct business; (b) business address; (c) information
concerning the nature of the business organization, i.e. if a
corporation, copy of Article of Incorporation and name, address
and title of each officer and director; proof that Corporation
is good standing; (d) proof that entity is authorized to do business
in the State of California (for example, if entity is incorporated
out-of-state); (e) Name, title and telephone number of customer
service person; (f) Name, title and telephone number of regulatory
contact person; (g) description of the nature of business being
conducted; and (h) Evidence of financial soundness such as surety
bonds. Market participants would be required to update the information
quarterly and anytime in the event of a material change. (This
registration rule is based on proposed Rule 11.07 of the Mass.
Dept. of Public Utilities.) Depending on how the market unfolds,
additional informational requirements could be imposed. In addition,
the information and the applicants would be subject to audit.
Many industries and business that affect the public
health and safety require licenses. For example, it is illegal
to operate a hospital or nursing home with out a license. The
licensing authority for hospitals and nursing homes in the State
Dept. of Heath Services. Not only is an applicant required to
submit detailed information, that information must satisfy specific
criteria. Many licensed business are highly regulated, subject
to inspection and license revocation actions in the event of a
violation of regulatory requirement. In addition, many of the
persons employed by these entities require professional licenses.
(Most professional licenses are issued by the Dept. of Consumer
Affairs.)
A certification program is another alternative. The
criteria would be similar to those that would be appropriate for
licensure but the program might be could be under the oversight
of an industry watch DAWG organization. This approach would give
the industry a chance to police itself with the risk that government
could impose a more heavy-handed approach if industry fails to
do an adequate job.
A combination approach might include a registration
plus a bonding requirement in an amount sufficient to compensate
those adversely affected by a failure to perform. Requiring a
bond (like a performance bond on a construction project) or letter
of credit has at least two beneficial consequences. First, ability
to obtain a bond, or a letter of credit, is proof of financial
soundness. Second, it would create a source of funds that could
be used to pay for system-wide costs in the even of non-performance.
Another form of regulatory oversight might is to
monitor the functioning of the market. This would impose additional
information reporting requirements and could be added to the registration
requirements, but maintained as confidential. This oversight activity
might only be necessary during the transition, or until the market
is functioning competitively.
Issue: DAWG B should attempt to agree on a regulatory model and determine what entity should have regulatory oversight.