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Fortnightly Magazine - April 1 1995

define market price. (In fact, our goal in industry restructuring was to create a system that develops such a price.) The proposal by the California Public Utilities Commission (CPUC) envisions system marginal cost as a proxy for a market price, but determining and using that price would prove difficult. Further, the market price, and thus the size of the uneconomic assets, is changing every day. California utilities, in filings to the CPUC in November, recommended balancing accounts to ensure that uneconomic costs are adjusted to changing market prices. I'm not sure that's the answer.

Another problem is that nonutility generating assets also contribute to the uneconomic status of utility generation. The success of qualifying facilities (QFs) in California led the move toward competition, but also produced an inventory of contracts with prices greater than prevailing market prices. (Southern California Edison's recent CPUC filing estimates the uneconomic costs of their contracts with QFs at $5 billion.) The CPUC's restructuring proposal suggests that excessive contract costs should be factored into the CTC, but calculating those costs is not as easy as it might appear.

Of course, California utilities have their own ideas. The lessons in natural gas regulation learned by Pacific Gas & Electric (PG&E) are manifest in their mid-February filing with the CPUC. In that filing, PG&Erequested regulatory approval of a three-year experiment that would enable industrial and other large energy users to choose among electricity suppliers. The experiment would apply beginning in 1996 to customers with annual average demand above 7,500 kilowatts. Eligible customers could choose from any supplier of electricity inside or outside California (including their local utility) and would receive a credit on their bill equal to the cost the utility avoids by not having to supply the electricity needed by that customer. Prices would remain fully "bundled," and lower revenues to the utility resulting from the experiment would not be offset through rate increases to other customers. The proposal is similar to an interim experiment used successfully while natural gas competition took hold in California (em an experiment the FERC found acceptable.

On the other side, San Diego Gas & Electric (SDG&E) and Southern California Edison have

advanced a "PoolCo" concept. This idea (em a variant

of the United Kingdom's electric industry restructuring (em would limit participation to wholesale producers and consumers, although the utilities express an increasing willingness to allow some retail consumers to participate. Recovery of uneconomic costs would form an element of the price charged for power flowing out of the pool to either wholesale or retail consumers. PoolCo does not and cannot avoid uneconomic costs. PoolCo, and the UK experience in general, troubles me. The creation of a pool and the requirement that all transactions go through the pool strikes me as a form of "managed health care" where market forces are not allowed full play.

Transmission Planning

Reforms in transmission planning and pricing are essential to achieve the vision implied in the Energy Policy Act of 1992. As in telecommunications and natural gas, the electric industry must provide nondiscriminatory open access to monopoly facilities,