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California Rides the Tiger

Fortnightly Magazine - January 1 1995

Natural Resources Defense Council (NRDC), told commissioners that retail wheeling will necessitate an environmental impact statement to comply with the California Environmental Quality Act. Expanded demand-side management programs have saved Californians $2 billion in life-cycle net benefits since 1990, Cavanagh said, but the conservation momentum won't survive in a retail-wheeling environment. Approximately 11 percent of the state's electric generation comes from renewable energy sources, one of the highest levels in the nation, state officials assert.

DOE, while endorsing efforts to make wholesale markets more competitive and pledging cooperation on a regional basis, recommends delaying the CPUC's ambitious direct-access proposal. Direct access raises state/federal jurisdictional issues, especially if utilities try to recover stranded costs through something that resembles a transmission charge, said Susan Tierney, DOE assistant secretary for domestic and international energy policy. "[W]e expect that the Supreme Court will be deciding this case," Tierney said.

The CPUC also must allay the fears of California's municipal utilities. While the restructuring is aimed principally at the state's investor-owned electrics, municipal utilities believe they will be affected as well. The Los Angeles Department of Water & Power, the nation's largest municipal utility, wants the CPUC to scrap direct access and give wholesale competition more time to evolve. "We believe that it's quite possible that wholesale competition may be the primary answer to lowering California electricity prices," said Eldon Cotton, assistant general manager for the Los Angeles utility. Average residential customers receive a 25- to 35-percent subsidy in their bills, he says, expressing doubt that residential customers will benefit from direct access. Currently, the Los Angeles utility can sell only short-term, surplus electricity outside its service territory, Cotton said, but it would be forced to seek authorization to sell long-term outside the city, and state as well, in order to compete and retain its industrial/ commercial base.

As the hearings turned to the future structure of wholesale and retail markets, the battle shifted to complex jurisdictional issues and a debate between two distinct schools of thought (em the United Kingdom style "PoolCo" concept versus a system of bilateral markets, typified by commodity futures trading. Professor William Hogan, member of the Harvard Electricity Policy Group, sought common ground, arguing that the PoolCo model proposed by SDG&E, a company he advises in the restructuring proceedings, is compatible with a "very efficient" bilateral market. The PoolCo (em roughly defined as an independent system operator responsible for dispatching the transmission system on a nondiscriminatory basis and taking care of ancillary services such as spinning reserves and reactive power (em could be designed to facilitate an open spot market that would facilitate trading, Hogan said. If parties don't want to rely on the hourly pool price, they can still bargain among themselves.

Under Southern California Edison's PoolCo proposal, the utilities would relinquish control, but retain ownership, of the transmission systems (see, PUBLIC UTILITIES FORTNIGHTLY, 10/15/94, p. 13). Robert Levin, senior vice president of the New York Mercantile Exchange (NYMEX), remains unconvinced: "We have opposed implementing a mandatory pool mechanism." NYMEX, which is developing an electricity futures contract for the western United