[BETA] Fortnightly

"It could have been worse."

"It says to the market, `It won't be so bad.' It will take longer now, so that's better for the utilities."

"It creates a new bureaucratic entity that will make regulatory choices."

"It's regulated deregulation. It's alarming if that's the prototype for the nation."

That's the word, respectively, from Barry Abramson at Prudential Securities, Edward J. Tirello, Jr. of NatWest Securities, Steven Fetter at Fitch Investors Service, and Dan Scotto of Bear Stearns. I spent some time on the phone a few weeks ago with each one, asking for their thoughts on the latest proposal (two, actually) from the California Public Utilities Commission (CPUC) to restructure that state's electric utility industry.

It began in April 1994 with the "Blue Book." The CPUC announced what it called "A Vision for the Future of California's Electric Services Industry." Out with centralized government planning. In with consumer sovereignty. But the "vision" soon stalled at a crucial juncture: Where do we start? With the retail market, through direct customer access and one-on-one (bilateral) energy contracts? Or in the wholesale market, with a central pool ("PoolCo") that would manage the transmission systems and decide which plants would run and which would not?

Last winter, we put the vision to the test. In our issue of January 1, 1995, we invited a dozen or more experts to comment on that key issue, PoolCo vs. Bilateral Markets. Sadly, it didn't do any good. On May 24, the CPUC gave up. Led by president Daniel W. Fessler, the CPUC voted 3-1 to propose both a statewide PoolCo (abandoning retail wheeling for now) and direct customer access (an alternative view offered by dissenting commissioner Jessie J. Knight, Jr.). Two proposals. Twice the vision?

Who Won?

When you hear Abramson, Tirello, Fetter, and Scotto talk about PoolCo, understand one thing: They speak for utility investors (em who loath change or uncertainty. But there's more to it than stock prices.

Listen to Scotto from Bear Stearns. "The concept of a bidding process and pooling generation seems valid conceptually," but there's an oversight. The proposal talks about 'cooperative federalism' with the FERC [Federal Energy Regulatory Commission] regulating PoolCo rates. So PoolCo entails pricing constraints." Scotto adds, "It will restrict incentives for broad-based competition in generation. While they like to call it deregulation, it isn't (em it's a very select blending of generating resources. It doesn't make for a vibrant market."

Here's the rub: The PoolCo proposal cites competition in electric generation as a key driving force for opening up the wholesale market, but PoolCo, as envisioned by the CPUC, would not treat all generating plants equally. Fessler's PoolCo would attempt to mitigate stranded investment by placing all nuclear and hydroelectric in a special category that apparently will be dispatched first (presumably at the eventual pool price, but that's not clear). The majority proposal would also force the state's three major investor-owned electric utilities (Pacific Gas & Electric Co., Southern California Edison Co., and San Diego Gas & Electric Co.) to sell into and buy back from the Pool, subject