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The Power Exchange: California Goes Competitive

Fortnightly Magazine - March 1 1996

computational, and system issues.

A fundamental difference separates electricity from all other products (including gas): Most products are sent from a factory to a customer, and a train of movement can be related to a sequence of money flows. Since electrons commingle, there is no physical relationship between production and consumption. Financial transactions have to be related to physical production and consumption via a settlement system, which sorts out who owes who how much for what.

Providing access for a few hundred or a few thousand large customers is easy. But the British found (to their cost) that extending access to tens of thousands of medium-sized customers is complex. The result was a data shambles, with hundreds of millions of dollars disputed, and recriminations all around. The proposals to extend competition to all customers involve a complex system, with estimates of $800 million for development and $125 million in annual operating costs (em all for a negligible customer benefit. Since pigs cannot fly, the absurd proposal will come to naught. But there are lessons for others.

Stranded Assets

While the debate raged over market structure (PoolCo vs. bilateral trading; direct access vs. virtual access), the main concern of the utilities lay with recovery of stranded assets.

The CPUC ruled that utilities should be able "to recover appropriate transition costs" through a nonbypassable Competitive Transition Charge (CTC), which is effectively a meter tax levied as a percentage surcharge on all customers. Although the CPUC hopes to enforce this provision by requiring customers to sign an agreement to pay their share of CTC as a condition of taking competitive supply, it would prefer legal backing.

The CTC would be assessed roughly as the difference between the allowed revenue on stranded assets less the amount they earn in the market, with an offset from the profit earned by hydro and geothermal plant, but capped so that prices do not rise in real terms beyond those prevailing on January 1, 1996. The CPUC's "goal is to get through this transition period as quickly as possible so that full competition can begin with minimal market distortions," and so generating assets will be market-valued by 2003 and (except for contracts) the costs of stranded assets should be settled by 2005.

Assets are uneconomic to the degree that book value exceeds market value (em transition costs represent the utility's net costs above market associated with its assets. The CPUC requires the net book value of all utility generation plants to be measured against the market within five years (by 2003), either by sale or independent appraisal, to form a final settlement. In the interim, it would calculate the CTC as the allowed income less income at market price.

The Order defines four categories of stranded assets:

1) nuclear plant, 2) fossil plant, 3) regulatory assets, and 4) very favorable contracts with qualified cogeneration and small power production facilities (QFs) mandated by the CPUC (which cost SCE an average of 8.5 cents per kilowatt-hour (¢/Kwh) of purchased QF power).

Nuclear Plant

Nuclear plant in large measure has fallen out of