On January 1, 1998, California will "deregulate" the state's electric utilities. The Western Power Exchange (WEPEX) and the independent system operator (ISO) will start up, creating an open market for wholesale power.

Elizabeth A. Moler, chair of the Federal Energy Regulatory Commission (FERC), says she'll be there: "We'll all be celebrating the deregulation of electricity in California, on January 1, 1998, at the Rose Bowl."

Take It or Leave It

"If it comes down to a take-it-or-leave-it decision, then my advice is to take it."

William W. Hogan, research director for the Harvard Electricity Policy Group, touts WEPEX and the ISO as the quickest route to deregulation. He led a parade of notables who trundled down to Washington, DC, on a hot day in August to testify at the FERC's technical conference on governance, market power, and transmission pricing for WEPEX.

Others flew in from the big three investor-owned electric utilities (IOUs) (Pacific Gas and Electric Co., Southern California Edison Co., and San Diego Gas and Electric Co.), municipal utilities, advocacy groups, and even a gas distributor, Southern California Gas Co. (SoCalGas). Their attendance marks the end of the love fest at the California Public Utilities Commission (CPUC).

Hogan remains uncompromising: "The combination of bid-based economic dispatch, locational marginal-cost pricing, transmission-access charges, and transmission congestion contracts provides a system that meets the FERC's test."

Not everyone agrees.

"The [California] legislature has not bought into all of this," warns Jan Schiori, general manager at the Sacramento Municipal Utility District (SMUD). "They are very concerned about the CTC [competition transition charge], stranded investment, and whether rates are going to go down."

Eric Woychik, representing the Utility Consumers' Action Network (UCAN), has little faith: "Except for California's IOUs, who need a reference point to determine the CTC, the power exchange [WEPEX] has no major constituency that supports it."

A Wall Around California

One of the most interesting questions concerns the pricing of electric transmission into and out of WEPEX.

As I understand it, a three-way battle has erupted between the major IOUs, the munis, and SoCalGas. The IOUs favor a single, utility-specific charge to gain access to the entire ISO system, plus charges for line losses and congestion. The municipal utilities reportedly want a two-part access fee: a single regional rate to aggregate the regional transmission facilities of the IOUs, and a separate local rate differentiated by utility. One source said that idea might serve as a "very good goal in the long run. But in the short run, you end up with significant cost shifting. It would cost IOU ratepayers a lot to absorb the embedded cost of the munis."

Then you have SoCalGas, which insists on a mileage-based transmission tariff to block Midwest utilities from exporting cheap, coal-fired power to California to displace gas load that SoCalGas now sells to power producers. According to Fred John, senior vice president of Pacific Enterprises, the parent corporation of SoCalGas:

"If you end up ignoring distance questions, it will mean more coal-fired generation coming into California. Our studies indicate a possible loss of 50 billion cubic feet. You have to look at the total delivered price, including the transmission price."

Another source notes that SoCalGas will also lose gas load because WEPEX will make more efficient dispatch decisions. "Interestingly," he adds, "Enron is taking no stand on the issue, apparently estimating that drops in its pipeline throughput and gas sales will wash out against increased revenue for its electric operations outside California."

Back at Edison, grid dispatch manager John Balance wants full value for his company's transmission system: "If a utility is bringing more load into the ISO than transmission capacity, then it needs to pay a fee. I don't know how to track distance in a network transaction. He [Fred John] is trying to allocate sunk costs in a variable rate." Edison's CEO John E. Bryson accuses SoCalGas of wanting to "build a wall" around California.

Schiori at SMUD sees bypass: "Utilities would have a motive to avoid paying that [access] fee, and might operate certain inefficient plants to supply generation to support transmission to avoid paying the fee."

"I don't see a resolution," says Fred John. "I see an impasse."

The Last Refuge

Reliability is the last refuge of the scoundrel.

Another issue concerns generating plants labeled as "must-run" and "must-take." (Must-run plants energize the grid and maintain reliability. Must-take plants include nukes and qualifying facilities that are guaranteed a market).

Must-run plants presumably will operate under some sort of performance-based regulation (PBR) that virtually ensures cost recovery. During load-load conditions, must-run and must-take plants threaten to cover the market, leaving no room for bids from competitive generation.

Testifying before the FERC, Jan Smutny-Jones (executive director, Independent Energy Producers Association) noted how must-run and must-take plants can steal the market:

"Incredibly, SDG&E has indicated that approximately 2,000 Mw of its generation [equal to its peak load] are must-run units. PG&E indicates in its PBR and market-power filings that approximately 94 percent of its generating units should be handled in whole or in part outside the market. ... Edison has proposed that approximately 5,500 Mw (over 50 percent) of its fossil units located within its service territory are 'must-run' for reliability purposes."

Keith R. McCrae, representing the California Manufacturers Association, notes that some must-run plants will operate in must-run status only for a few hours during the year, under call contracts that cover their fixed costs. "Thus, at other times, these same plants will be free to bid into WEPEX for competitive dispatch, knowing that their fixed costs are already covered. That's a problem."

"Must-run plants have market power no matter who owns them," says Vikram S. Budhraja, senior vice president for Edison's power grid business unit.

Generation and transmission are often interchangeable. In documents filed on July 15, Edison reportedly told the FERC that it will eliminate must-run status for many units by upgrading transmission by 1/1/98. If so, then who should oversee transmission upgrades? Who decides if a plant is must-run?

Back at the FERC, I swear you could see visions of turf dance in front of the commissioners' eyes as the debate continued between Moler and Donald F. Santa, Jr. of the FERC on one hand, and Woychick, Smutny-Jones, and MIT Economics Professor Paul Joskow on the other:

Santa: "What should [we] look at to determine whether a plant really is must-run?"

Smutny-Jones: "Use generic engineering criteria, not unit-specific."

Moler: "How do we minimize the chunk of must-run units?"

Woychik: "The definition ... is not a matter for regulation. It should be decided by the ISO."

Moler: "Does everyone else agree on that?"

Joskow: "Yes. Engineers have to look at the system and then mutter all sorts of things the rest of us don't understand."

Editor

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