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To Wheel or Deal? Electric Industrial Pricing in California

Fortnightly Magazine - April 15 1995

the minimum price that must be obtained from that service. A price above incremental cost yields a net financial improvement to the telephone company while one below incremental cost yields a net financial detriment."2

In November 1994, the California Energy Commission projected that three of the state's five largest electric utilities would have sufficient generating capacity for the next decade: Pacific Gas and Electric Co. (until 2004), Southern California Edison Co. (until 2005), and Los Angeles Department of Water & Power (surplus capacity of over 1,000 megawatts (MW) through 2005). The other two, San Diego Gas & Electric Co. and Sacramento Municipal Utility District, have an immediate need for additional capacity.3

The current surplus of generating capacity, teamed up with competition from NUGs, points overwhelmingly to market pricing. NUG rates are not burdened with the massive embedded costs of rolled-in utility rates. A requirement for rolled-in rates would effectively foreclose utilities in their role as utilities from being competitors. Such a rule would narrow competition, not enlarge it (em quite the opposite of what the retail wheeling proposals intend.

The PG&E Proposals

In a blockbuster proposal, Pacific Gas & Electric Co. proposed on February 17, 1995, to wheel and deal simultaneously (em to offer voluntary retail wheeling in exchange for the opportunity to negotiate a discounted generation price with its large industrial customers.4 That proposal follows on the heels of an earlier move, announced March 1, 1994, to adopt market pricing for a deregulated "Large Electric Manufacturing Class" (LEMC).5 Both ideas are under consideration at the CPUC.

The retail wheeling proposal of February 1995 essentially would allow a large customer to negotiate the generation price component of the bundled retail tariff already in place. Here's how that would work:

The customer could select any electric generator it preferred to provide its power supply, including PG&E. The customer and PG&E would negotiate a generation price. PG&E would then return to the bundled tariff, deduct a hypothetical cost assumed to be equal to the generation cost component of the tariff,6 and add back the negotiated price as a proxy for generating cost. The customer would then pay a traditional bundled tariff rate, albeit a tariff containing a separately negotiated generating cost element. This service amounts to retail wheeling (em not mandated, but offered voluntarily by the utility itself, at a de facto unbundled rate.

In return, PG&E would gain permission to compete for the customer's purchase with other alternative suppliers on an equal basis; that is, without regulatory constraint as to the prices it could negotiate. The result is competitive pricing fully consistent with incremental or value pricing. PG&E goes beyond the requirements of the theory, however, by agreeing to absorb any revenue loss resulting from the price it offers: "PG&E shareholders will be at risk for the difference between the applicable [regular tariff rate] and the price negotiated with the customer," and "lower revenues to the utility . . . [cannot] be offset through rate increases to other customers."

PG&E envisions the experiment extending statewide in California, with similar filings by the other