[BETA] Fortnightly

Will the Crown accept the olive branch offered by its colony, or will conflict ensue? That was the question posed on July 13 by Thomas Page, CEO of San Diego Gas and Electric Co., at the "Western States Workshop on California Restructuring," the first industrywide meeting to discuss the policy proposals issued six weeks before by the California Public Utilities Commission (CPUC).The Crown sent its emissaries. Arriving from the Federal Energy Regulatory Commission (FERC), both Chair Elizabeth Moler and Commissioner William Massey attended the meeting and pledged their cooperation. But their royal prerogative they would not cede. The colony may experiment, but the Crown will decide.

Common Faith, Diverging Paths

The CPUC and the FERC share a common faith that, on a macroeconomic scale, the generation market is or can be made workably competitive, allowing policymakers to lower the price of electricity by effectuating competition among sources of electric generation. Nevertheless, each agency has mapped out a different path to its desired result.

The CPUC's "Majority Pro-posal"1 does not effectuate retail wheeling. It offers a model fashioned on a wholesale pool of generation that would forge a real-time, spot market in electric power. An independent system operator (ISO) would run the transmission system and dispatch generating plants to ensure supply and delivery of wholesale power. The ISO would do this independently of any generator or owner of transmission facilities. Thus, the majority proposal represents a form of wholesale market restructuring; retail assets are converted to wholesale supply. Retail competition is furthered through Contracts for Differences (CfDs) (a financial hedge against the wholesale pool price), thereby permitting "virtual direct retail access." These contracts would act as a financial hedge, with settlements based upon the spread between the pool price and the contract price for bulk power. But by electing a reform of wholesale markets, the CPUC acknowledges FERC authority over many of the essential features of the state's plan.

The FERC has selected a different model. It proposes to restructure the interstate transmission and bulk-sales market. The FERC's Open-Access Model2 requires all utilities subject to its jurisdiction to file transmission tariffs that provide point-to-point and network transmission services that are open, unbundled, and nondiscriminatory. It effectuates competition through the idea of transmission provided as an independent commodity, with power traded via bilateral contracts.

Perforce, the FERC ostensibly addresses competition only at the wholesale level (em the nominal extent of its jurisdictional reach under the Federal Power Act (FPA). That market historically has featured long-term transactions in which bilateral power contracts were the norm. Over time, the number of market participants has grown with more interconnections. And, with the passage of the Energy Policy Act of 1992 (EPAct), participation levels are growing with the tide of exempt wholesale generators and power marketers.

The market structure at the state level is far different. The retail market is characterized by a wide variety of consumers, ranging in power-purchase expertise from large, savvy industrial concerns to residential neophytes. Whereas direct retail access through bilateral contracts would permit large firms to reap immediate benefits, it remains unclear how