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The Power Exchange: California Goes Competitive

Fortnightly Magazine - March 1 1996

the debate, as the utilities have already struck their own deals. The CPUC has published its ruling on San Onofre, which is owned by SCE and San Diego Gas & Electric. PG&E has a seemingly favorable deal over Diablo Canyon, by which it gets paid about 9¢/Kwh, and which it wished to protect at all costs. The CPUC requires PG&E to file an application with a proposal to price the plant's output at market rates by 2003 and complete recovery by 2005, while not increasing rates above 1996 levels. It is not yet clear whether this requirement will hit PG&E.

Fossil Plant

The Order allows the utilities to recover all the net book value of their fossil fuel units through the CTC. Nevertheless, the CPUC showed concern that utilities should retain an incentive to

minimize transition costs, that if utilities were indifferent they might be tempted to depress the market-clearing price to squeeze other generators, and that "customers should benefit at least to some degree." With a measure of sophistry, the CPUC claimed that recovery of transition costs is less risky than normal (cost of service) recovery, because the CTC carries no risk that plant will be found not used and useful. It thus ruled that the utilities should earn a reduced rate of return on equity, which it set at 90 percent of the net cost of embedded debt.

Assuming that one-half the capital cost is financed by equity at 11.5 percent, and the embedded cost of debt is 7 percent, then the difference of 4.5 percent points represents $2.25 million annually per $100 million of stranded investment treated in this manner. As noted (see discussion of market power on page 23), the utilities can augment their return allowance by divesting fossil plant.

Regulatory Assets

The Order grants full cost recovery through the CTC for regulatory assets, which include various deferred costs and taxes, nuclear decommissioning, and other costs, and "reasonable employee costs incurred as part of the transition to competition, including early and retirement and retraining costs."

QF Contracts

The QF and other contracts will be honored fully and recovered, but the CPUC hopes that the utilities will find incentives to renegotiate some of them to the benefit of both customers and utility shareholders.

Public Policy

The Order endorses special treatment for women, minorities, and disabled veterans, which will continue, but suggests that the legislature should adopt a "public goods charge" on retail sales to fund research, development, and demonstration, plus energy efficiency programs not otherwise provided by the competitive market that are in the broader public interest."

It also suggests that there is legislation authorizing a separate surcharge to fund low-income rate assistance and energy-efficiency programs, and recommends that the legislature consider whether continued support of economic development initiatives is warranted in a competitive environment.

Some Final Thoughts

The Order is a tour de force. The market proposals are economically sophisticated, while also democratic and politically astute, reflecting extensive consultation. Large customers and power marketers, who had some side agendas, had previously signed up to the MOU, which had