[BETA] Fortnightly

The California Memorandum of Understanding (MOU) is an agreement between Southern California Edison Co. (SCE), the California Manufacturers' Association, the California Large Energy Consumers' Association, and the Independent Energy Producers. It tackles three major issues:s recovery of stranded assets

s market power

s market structure.

If the MOU is eventually endorsed, it might be a landmark in electric restructuring \(em and not only in California. But there would still be a long way to go.

Stranded Assets

By far the most significant item on the agenda of California's investor-owned utilities (IOUs) is the recovery of potentially stranded assets: nuclear power that is not too cheap to meter, expensive contracts with qualifying facilities (QFs) under the Public Utility Regulatory Policies Act (PURPA), and other costs (such as nuclear decommissioning). In the MOU "the parties agree in principle that, as the industry makes the transition to a new competitive market structure, SCE should fully recover its prudently incurred past investments and obligations made to fulfill its historical obligation to serve." This proposition should warm the cockles of IOU management and shareholders throughout the nation.

The parties favor a nonbypassable, Competitive Transition Charge (CTC) as a condition to restructuring. The CTC would be levied on all customers connected to the system, and imposed either on distribution, or on meters, or as a general surcharge (analogous to the nuclear levy in Britain). The CTC would enable SCE to recover the difference between the charges authorized under performance-based ratemaking (PBR) and other arrangements for the cost of the stranded assets and the market price. The CTC would run until 2004 for the generation assets, until 2005 for QF contracts, and until 2013 for the rest. At the end of this period, there would be a final CTC based on the difference between the "market-valued price" and the net book value of the assets. The CTC should enjoy state legislative backing and stand challenge-proof. To further that end, the Federal Energy Regulatory Commission (FERC) would define what qualifies as distribution facilities within California jurisdiction.

Special arrangements are proposed for SCE's share of the nuclear plant at San Onofre units 2 and 3 (1,600 megawatts (Mw)) and at Palo Verde (600 Mw): Depreciation will be accelerated so that they are written off by 2004, and SCE will accept a reduced rate of return. SCE proposes to offer its interest in Palo Verde for sale within five years of the start of the new market. Once sold, the plant owner will be free to market output without regulation. If the sale proceeds are negative, the shortfall will be added to the CTC.

SCE also proposes to develop and implement a PBR mechanism for its fossil plants (12,000 Mw) by 1997. The PBR will promote efficient plant operation and mitigate the exercise of market power during the transition period. At the same time, SCE will be allowed to release tranches of plant into the market \(em 10 percent by the end of the second year, and 100 percent by the end of the fifth. SCE will also develop a PBR mechanism