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Reforming California: Reflections on the Morning After

Fortnightly Magazine - December 1998

succeed, adjunct markets must be opened. Opening the natural gas market to greater competition will enable ESPs and gas marketers to take advantage of synergies, raising the bar for economies of scale and scope. These industries interact. California's unfortunate political delay in opening the gas market, mandated by Senate Bill 1602, will only retard competition in electricity. It will lock in protectionism that may serve to thwart gas innovations. My hope is that the California natural gas market will be open to greater competition in 1999, with an expanded core aggregation program and a more comprehensive restructuring in 2000.

6. Get Past the Rate Freeze. California needs to get the rate freeze period behind it as fast as possible. The rate cuts engendered by competition will then flow through to customers. The distortions created by the CTC collection and the rate freeze will be reduced in the post-rate freeze era. If one accepts the argument that these stranded costs are the hangover from the heady days of cost-of-service and rate-of-return regulation, then this excess baggage needs to be eviscerated from the system. The rate freeze and its interactions with how the CTC is calculated creates marketplace distortions.

7. Hasten the Transition. Generally, when people discuss the transition they are thinking of the CTC and the rate freeze. However, there is much more to be accomplished in the transition. In a broader view, the transition should change mindsets.

The transition began in December 1995. The passage of Assembly Bill 1890, the divestiture of generation plants, the development and implementation of the PX and the ISO, the development of a process that lets market participants exchange information, the unbundling of revenue cycle services and other proceedings (em all are part of the transition.

So far, the focus of restructuring has been "utility-centric." The commission proceedings dealing with cost unbundling, divestiture, rate reduction bonds, regulatory streamlining, and stranded costs have all dealt with the incumbent utility.

However, as we move toward competition, our regulation must become less utility-centric and more focused on issues faced by competitors: access to customers, fairness, enforcement of rules for competition, making it easier for consumers and ESP's to effectuate switching. Competition in distribution itself warrants further analysis.

Inviting Innovation

In the past, particularly in California, the vision and the business model have been driven by regulators and legislators. Now that the basic legal and regulatory framework is in place, the industry must shape its own future. New technologies for information and communications will drive innovation in metering, meter reading, and billing. New technologies based on turbine advances in the defense and aeronautics industries will spur lower costs and more efficient generation.

The electricity market is a narrow-margin business with high customer acquisition costs. New entrants will add customers slowly. As time goes on, cash flows and profits from existing customers will finance faster growth. Electric retailing won't require significant investment in plant and equipment, but it will demand expenditures in advertising, marketing, and customer service.

The competitor who figures out how to lower these acquisition costs, retain customers, increase margins