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Collision or Coexistence: The FERC, the CPUC, and Electric Restructuring

Fortnightly Magazine - October 1 1995

residential users might participate effectively. With a wholesale pool as the prime market for electricity, the ISO would act as a wholesale aggregator for all retail customers and direct the economic dispatch of generation resources. The CPUC majority believes that this regime will reveal price signals, spurring competitive forces and spreading the benefits of competitively priced power.

Both the CPUC and the FERC recognize that the vertically integrated nature of the electric utility industry is anathema to competition. Each would disaggregate the vertical functions of utilities by separating generation, transmission, and distribution. But they would do it differently.

The FERC would require electric utilities to unbundle transmission from the sale of electricity and operate transmission as common carriage. The utility maintains operational control, and contractual assignments provide transmission access, with native load presumptively accorded priority rights. By contrast, the CPUC would have pool participants transfer operational control of transmission to an ISO. The retail function of each participating utility would acquire its power from the wholesale pool. The generation function (participants and other generators) would submit bids to supply power. The ISO would accept power-supply bids on economic dispatch principles, and use the integrated capacity of the transmission grid to meet retail requirements. The difference in models is profound: The FERC invites buyers to shop for generation; the CPUC majority would have generators competing among themselves for the right to serve a single aggregate market. Generators and nongenerators would be permitted to compete for individual retail customers only pursuant to CfDs, but such contracts would not entitle generators to actually dispatch power. Generators would be required to bid into the pool to supply power under their CfDs, with a zero bid price perhaps necessary to ensure dispatch. Again, however, all power would flow through the pool, and prices would be set in the first instance by the pool clearing price.

The CPUC and the FERC also part company on "stranded costs," both on definitions and cost recovery.

The CPUC would measure stranded costs on an asset basis (em comparing book values to market values in a competitive environment. It would minimize stranded investment by bundling high-cost nuclear facilities with low-cost hydro. It would recognize retail stranded cost for rate purposes only to the extent that the net present value of the stream of market-priced revenue from nuclear/hydro fell below the book value of the combined assets. The FERC prefers a "revenues lost" approach that compares the revenue a utility reasonably expected to receive from a given customer against the price the utility could command for that power on the open market. The differential would represent stranded costs.

For cost recovery the CPUC would bill all current retail consumers through a "competitive transition cost" (CTC) surcharge. But the FERC would assign stranded costs individually to certain departing customers (those without notice provisions in their contracts).

Will the FERC Cooperate?

At the July 13th meeting both Chair Moler and Commissioner Massey pledged the FERC's cooperation in the California restructuring. They offered encouraging statements, seeing "much to like" in the CPUC's preferred industry structure.