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Financial News

Fortnightly Magazine - July 15 1995

The California Public Utilities

Commission (CPUC) moved a tortured step closer to deciding how it will reform its regulation of the

state's electric utilities when it

adopted a Proposed Policy Decision in its proceeding on competition by a 3-to-1 vote on May 24. The Proposed Decision retreats from the free-market approach the CPUC took when it presented its "Blue Book" proposal in April 1994. Indeed, the Proposed Decision amounts to a tacit admission that the CPUC cannot accomplish the task of implementing competition, and begins a transfer of the task from regulators to legislatures. Competition will, thus, evolve more slowly than if the CPUC had followed the course envisioned by the Blue Book; however, the delay is unlikely to have much effect on the ultimate emergence of competition, which is driven by technological and economic forces beyond the control of regulators.

What is the New Proposal?

In contrast with the CPUC's original Blue Book proposal, the Proposed Decision revolves around the sponsorship of a pool, which would create a spot market and operate the state's transmission facilities, much like the U.K. pool. The pool would be operated by an "independent" entity. Sellers participating in the pool would make bids offering their capacity in half-hour or hourly increments, and participating buyers would enter bids to purchase power for similar intervals. The pool operator would accept enough offers to meet the demand, and the price paid to sellers for a particular interval would equal the highest offering price of the accepted bids. The three major utilities in the state would be required to belong to the pool and would sell all of their power to the pool. IPPs, municipals, and out-of-state utilities would be encouraged to sell power to the pool, but not required to do so.

The three major utilities would also be required to buy all the power they distribute from the pool, and municipals would be encouraged to buy power from the pool. The buyers would pay a price equal to the pool's clearing price plus add-ons designed to placate various stakeholders. The add-ons would provide funding to honor high-cost qualifying facility (QF) contracts and compensate utilities for stranded costs.

The pool's bidding process would be structured to facilitate recovery of these costs. Both QF power and power generated by nuclear and hydroelectric plants would be bid into the pool at a price of zero to ensure that this power would be scheduled and dispatched. This power would be paid the same market-clearing pool price as other power, and the amount by which the actual cost of this power exceeds the pool price would be collected from ultimate customers as a separate line item.

A similar add-on to the pool price would be used to cover the costs of utility-administered social, conservation, and environmental programs that might otherwise fall victim to market forces. These add-ons are referred to as a competitive transition charge (CTC) and would increase the bill of every customer by the same percentage to prevent cost-shifting. The CTC would obviously limit the extent to which the pool would