[BETA] Fortnightly

The California legislature had taken an interest in electric restructuring from early on in the debate. Through policy committees of the Assembly and Senate, it had signaled that the CPUC would need the blessing of the lawmakers before it would be allowed to pursue the ideas spelled out in the commission's Final Policy Decision. Moreover, the December 1995 decision had drawn a divided reaction. Some parties had sought relief from the outcome of the December 1995 order. Others had simply grown impatient with the CPUC's slow, deliberative process.

Yellow to Blue to MOU

That process first emerged in 1992 with the CPUC's "Yellow Book" policy statement and had begun to take shape in California in April 1994, with the release of the "Blue Book." Starting with the objective of reducing California electric rates, which ran 50 percent over the national average, the Blue Book's authors kept a watchful eye on experimentation in the United Kingdom, with its competitive power pool and individual transactions. By May 1995, a divided CPUC had settled on a "PoolCo" through which all transactions would have to flow, with full recovery of stranded costs and "virtual" direct access through contracts for differences.

But not everyone was on board. Unhappy with the idea of virtual competition, the state's influential industrial customers and independent power producers approached Southern California Edison Company (SCE), which needed backers for its proposal to accelerate the capital recovery of its San Onofre Nuclear Generating Station (SONGS). A Memorandum of Understanding (MOU) was struck, with encouragement from the Governor's office, which provided SCE with some of the stranded-cost protections it sought, plus accelerated capital recovery for SONGS. In return SCE acquiesced to a voluntary pool, with an ISO separated from the pool function to alleviate market power issues.

An Unwelcome Surprise

The momentum generated by the MOU helped the CPUC issue its Final Policy Decision, which adopted the MOU's model of a voluntary PoolCo ("Power Exchange") with a separate ISO, but also provided for bilateral contracts between nonutility buyers and sellers.

Nevertheless, the CPUC decision contained an unwelcome surprise for Pacific Gas & Electric Company (PG&E), which now was ordered to file a plan for its Diablo Canyon nuclear plant that would be similar to SCE's SONGS plan, even though PG&E had previously worked out a special Diablo Canyon rate agreement with the state Attorney General and the CPUC Division of Ratepayer Advocates. Given the terms of that agreement, PG&E recognized that accelerating capital recovery would put upward pressure on rates. PG&E would be forced to undertake painful cost-cutting or eliminate billions of dollars of stranded-cost recovery associated with the plant.

In fact, PG&E's Diablo Canyon agreement had allowed it to avoid an extensive prudence review by accepting what was essentially a performance-based mechanism, somewhat like that of California's independent power interim Standard Offer #4 contracts. With its high capacity factor, Diablo Canyon had generated strong earnings, albeit with a high unit cost. At the same time, PG&E realized that its revenue requirements would fall during the next several years with declining gas costs, lower inflation,