California's Electric Market: Are Customers Necessary?
A FREQUENTLY ASKED QUESTION UNDER CALIFORNIA's NEW electricity framework is, "Where have all the suppliers gone?" At a recent industry symposium, one large customer noted during negotiations with competitive energy suppliers that all five finalists had disappeared. The experience at my firm has been so draconian, but I have found that it is not unusual for half of the finalists to disappear in the bargaining. And when I say "disappear," I'm talking about something more extreme than simply reaching an irreconcilable difference. I'm talking about a telephone call bluntly informing the customer that the seller is leaving the bidding unilaterally.
What explains this peculiar behavior? A careful review shows that the California Public Utilities Commission, guided by the torturous language of Assembly Bill 1890, the state's electric restructuring law, has created a situation where customers are not necessarily a part of a competitive market. While that may sound peculiar, not to say counter-productive, it simply reflects the PUC's preoccupation with theoretical market issues and its lack of interest in short-term customer welfare. As the PUC has stated many times, its major interest was in achieving a transparent pricing and market structure. It may well have succeeded but at the cost of giving up market access for the customers themselves.
Part of the explanation behind the PUC's "success" lies in the fundamental policy decisions made in AB 1890, which required California's investor-owned electric utilities to allow customers to choose their own energy supplier beginning in 1998. AB 1890 created the Power Exchange and the Independent System Operator, the structures designed to handle pricing and delivery of power in the competitive market. Until March 31, 2002 %n1%n, the IOUs will have an opportunity to recover stranded costs for investments in generation with costs above market. The stranded cost charge is identified on each customer's bill as a "competitive transition charge."
More importantly, however, AB 1890 also set rules governing the interplay of energy prices, ratemaking and stranded cost collection. Customers cannot bypass the CTC simply by obtaining energy from a competitive supplier. Instead, CTC revenue will be collected through retail rates, but those rates will capped at June 1996 levels above the cost of providing service where they will remain frozen for the entire transition period. It is these rules, which allow the CTC to float with variations in energy prices, that have proven so discouraging to competitive suppliers and that have made customers less than enthusiastic about their competitive choices.
Structure: Tariffs, Rate Caps and the CTC
The collection of stranded costs through the CTC is not, in and of itself, a disincentive to offer or seek competitive energy supplies. So long as a customer sees the identical CTC whether he stays with the UDC (the "Utility Distribution Company," the poles and wires business of the IOU) or goes to a new supplier, the playing field is level and all should be able to fairly compete on the commodity price.
The problem stems from the way the CTC is calculated. It is not a fixed, predictable amount. Rather, the CTC is derived from