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

Fortnightly Magazine - October 1 1995

provided small assurance to the CPUC that market-power issues have been adequately addressed. The CPUC, for its part, is grappling with the undeniable fact that existing monopolies will have some measure of market power until a competitive market matures. The CPUC is considering divesture, but that might affect taxes and stranded costs.

The CPUC must also convince the FERC that pool prices will be "just and reasonable" under the FPA. Unlike the natural gas industry, where restructuring was propelled by explicit congressional deregulation of producer prices, there has been no alteration of the FPA mandate of "just and reasonable" rates (em which means cost-based rates, according to much judicial precedent. Under economic dispatch principles, baseloaded resources usually have a lower operating cost than marginal resources, which stand farther back in the dispatch queue. If the uniform clearing price of the pool is predicated upon the cost of operating the most marginal resource needed for a given period, operators of baseload resources may receive "uplifted" payments that do not reflect the cost of operation.

In the natural gas industry, the FERC permitted so-called "old gas" to be sold at market prices, while still subject to regulation under the just and reasonable standard. However, the FERC went to great pains to justify its action by setting an alternative, higher, reasonable price based on a replacement cost method. Historically, the courts have held it impermissible to rely solely on market forces to ensure that prices will be just and reasonable. The question will be whether the uniform pricing concept of the wholesale market, where all dispatched generators are paid the market-clearing price irrespective of their cost or bid, will pass muster at the FERC.

These issues take on greater significance in light of the FERC's procedural quandary. At the July 13th workshop, Commissioner Massey, while enthusiastic about the California proposal, stressed that he is but one of five FERC Commissioners, and noted that no California proposal was "before" the Commission. Chair Moler added that the CPUC policy preference needs "more meat" before it is amenable to FERC review: California must be prepared to show that state IOUs will not exert market power in generation in a pool structure.

Will it Matter?

Time may be running short for engaging the FERC in a meaningful exercise to consider a state restructuring scheme that is not the retail equivalent of the federal wholesale direct-access model. In a recent order, the FERC offered inducements for utilities to accept conforming open-access tariffs in advance of the final rule. If these inducements prove sufficiently attractive, the FERC may achieve de facto restructuring before the states can adopt variants on the FERC theme. A rapid transformation nationwide may temper the FERC's willingness to work with the states on any form of restructuring not in lockstep with the federal scheme.

And who can tell whether the California pool will end up reflecting truly competitive market prices? Will the generation "market" prove too shallow to yield a truly competitive price? The CPUC's pool model requires the ISO to dispatch nuclear, hydro, and qualifying facilities