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, and the transformation of QF purchased-power contracts from high fixed costs to market pricing. PG&E's large customers wanted direct access as quickly as possible, and small customers, if anything, expressed more concern with system reliability in the wake of two major storm-related outages.
PG&E's Counterproposal
Accordingly, PG&E proposed that it be allowed to freeze its rates at current levels and collect stranded costs (the difference between the frozen rates and actual costs) through the year 2001. It would also reprice power from Diablo Canyon, foregoing several billion dollars in expected revenues as part of the effort to move more quickly to competition. Its new proposal, like SCE's MOU, offered attractive features for many of the state's influential players (em including labor unions, independent power producers, and industrial and agricultural customers.
Large industrial customers and agricultural customers liked the promise of an earlier end to stranded-cost recovery (up to four years sooner than might have occurred under CPUC orders) as well as PG&E's promise to support a freeze of cost allocation among customer classes. PG&E agreed with its labor unions to include worker retraining provisions in stranded-cost recovery. Independent producers, including the association representing oil company cogeneration projects, liked the proposed QF payment mechanisms and negotiated certain hard-to-get exemptions from the Competition Transition Charge (CTC) that would collect the stranded costs. PG&E did not, however, convince TURN to support its settlement package.
The Peacemaker
During this period, State Sen. Steve Peace (D-Chula Vista), chairman of the Energy, Utilities and Communications Committee, had made known his desire to resolve the disparate issues in an end-of-session conference committee. This unusual procedural move involved holding more than a dozen bills in committee throughout the legislative session. Many parties were skeptical that such a conference committee could come to grips with the multitude of issues involved in restructuring. Senator Peace, however, seemed undaunted, knowing that he had successfully used a similar mechanism to break the logjam over reform of California's worker's compensation laws.
The Final Push
By July, a six-member conference committee had formed and parties prepared for a final push to see if legislation could be crafted. Most of the parties were dubious that a major bill overhauling the state's $23-billion electric industry could find its way to the Governor's desk before the end-of-August deadline. Many times it appeared the process had stalled, but it lurched forward nonetheless.
The major players kept negotiating, using the PG&E and SCE agreements as a template for the legislation. But Senator Peace and the conferees had made it clear that the legislation would not simply codify a deal already struck between the big players. They insisted on a complete, if brutally tedious, review of every major issue in the restructuring debate, with an opportunity for parties left out of negotiations to plead their case to the conference committee. This process inexorably forced inclusion of all interests into both the hearings and the offline negotiating sessions.
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