Five commission chairs from states in all phases of deregulation ponder their changing roles. Will market success make them obsolete?

As most state electric competition plans are implemented within the next few years, regulators face an uncertain future. And they're already reflecting on their role in a changing industry.

Regulatory commissions in both Illinois and California have created panels to discuss the issue and the National Association of Regulatory Utility Commissioners (NARUC) has held closed-door sessions on the subject. If commissions do not begin to determine their role as regulators in the new millennium, some commission chairs say, state legislatures may do it for them.

In early October, for example, Kentucky's Bardwell City Council proposed to abolish the Bardwell City Utility Commission and bring its duties under the city's supervision to save money. Will state utility commissions also have to fight for their survival?

Many commissioners say they are under increasing pressure to justify the public utilities commission's existence and expense to the state legislature. The PUC's performance in electric and natural gas restructuring and its responsiveness to utility customers may be what determine its future, some commission chairs say.

"I really am intent on the whole relevance of regulation and the timeliness of regulation," says one commission chair. "We just have to do a better job. We just can't take months, or in some cases years, to decide issues, or I think we will become obsolete."

But how do regulators evaluate their performance, and will those deemed successful by the legislature have regulated themselves out of a job? The Fortnightly posed these questions and many others to commission chairs from Florida, Illinois, Ohio, Texas and California.

* Joe Garcia, chairman of the Florida Public Service Commission, explains why his state has decided to delay action on electric restructuring.

* Richard L. Mathias, chairman of the Illinois Commerce Commission, details the difficulties of making competition happen and what PUCs may learn from the Securities and Exchange Commission.

* Alan R. Schriber, chairman of the Public Utilities Commission of Ohio, argues that customer switching is not necessarily the mark of successful retail competition.

* Pat Wood III, chairman of the Public Utility Commission of Texas, explains how his state learned from the failures and successes of others in adopting an electric competition plan.

* Richard A. Bilas, president of the California Public Utilities Commission, tells why retail competition can't yet be declared a success in his state and what he is prepared to do about it.

The commission chairs reveal their visions of the PUC's future role, as today's policy successes and failures are shaping it. They discuss lingering issues in states that have deregulated electricity markets and obstacles that remain for those that have not. Finally, the chairs weigh in on whether the Federal Energy Regulatory Commission is infringing on matters of state authority with its plans to reorganize the national transmission grid through regional transmission organizations (Docket No.RM99-2-000).

Joe Garcia, chairman of the Florida Public Service Commission. His state has delayed major action on electric industry restructuring.

Where will Florida be in 10 years?

First, we are not in the process of restructuring our electric utilities in Florida. Clearly that is the purview and the policy issue that is to be handled by the legislature of our state.

What we have done in Florida is that we recently approved Duke Power to enter Florida's competitive wholesale market. It is the first time that a merchant, in essence, is allowed to come into Florida with a contract of only 30 megawatts to sell to the city, New Smyrna Beach, and then can sell the additional 470-plus MW into Florida's already competitive wholesale market.

That, of course, has drawn the ire of the investor-owned utilities, who have sued me at the state Supreme Court. Florida Power & Light, Florida Power Corp. and Tampa Electric Co. have sued. All three have filed against the project.

What does that project do?

That project, to a large extent, was very favorable because it is the first project that we ever had an environmental group in favor of. Second, it reduces the cost to the people of New Smyrna. Energy costs alone are some $3.1 million on a yearly basis. ¼ On top of that, Florida gets an additional 500 MW-plus being generated in our state, plus it gets a $160 million generation station in our state.

Is this a sign of things to come?

Florida is an attractive market for generators and clearly the wholesale market is where the biggest advantages are presented in terms of cost savings. ¼

I think if you are a generator and you are looking 10 years out, you are saying, where do I want to be. You can never catch the future if you are behind it. Clearly the future is going to be in Florida because Florida is going to continue to grow. That is why there are about seven or eight different companies that are looking for sites in Florida. PG&E filed [in September] for a 500-MW-plus generation station, which is also a merchant plant. We also have Louisville Gas & Electric which is looking, Constellation Power, which has a 950-MW combustion turbine peaking unit that it is building, Reliant just bought a 619-MW station from the city of Orlando.

Why hasn't Florida restructured?

We don't have the pressures that California or the Northeast has. Clearly we don't have those pressures because our pressures are not that far out of whack. ¼ We are low industrial and we have a lot of commercial clients. Those people are uniting on this issue.

If you have a Kmart in Rhode Island, for example, that ¼ got a 5 percent decrease in its electric rate, well, to that Kmart maybe that represented, I am guessing here, a $20,000 reduction in its electric rates. ¼ When you turn around and you are a Kmart guy in Florida, being 50 times the size of Rhode Island, the number two cost in Florida, after labor, is electricity. You have to ask yourself, if I get a 5 percent reduction in Florida, that may be somewhere in the neighborhood of a few million dollars.

Clearly, Florida uses a lot of electricity and people are looking to that, but I want to tell you this and I want to be clear and on the record here. I am not a big believer in retail competition. I do not think my grandmother is going to get up at four in the morning and do her wash ¼ because [that] is just not in the nature of how we use [electricity].

We have to remember that Florida's utility system was built not on the backs of industrial customers, but on the backs of retail ratepayers. We have been very careful where we are going. One of the great advantages that we have in Florida is that we are watching what everyone else is doing. ¼ California likes to be on the bleeding edge; we are fine with [that]. I think that we are going to learn a lot from our brothers in other states.

That said, I think you and I would agree [that] five years from now we are going to be in a much more competitive arena whether Florida likes it or not because of the nature of competition and the paradigm that our country has chosen. Florida will be a part of that.

What state would you say is in a similar position?

I don't. I think Florida is very unique in a lot of ways. First of all, if you look at the reliability or coordinating councils across the country, the only state that has its own is Florida. Texas, you can say it does, but Texas reaches into other states. Florida is very unique because we are a peninsula. We don't have massive transmission or gas lines cutting every which way across us. So we have to depend on our own system to be working and functioning to make sure that we can provide cheap and reliable energy to the people of Florida.

That said, we are looking at all of the states because some of them have done some brilliant things. I look at the public relations angle of the Pennsylvania model and I am astounded. It was brilliant. People feel proud about the fact that they are making choices. I look at the California model and their public relations side of it. I only talk about that because it is something we get to see quite often. Although it was a beautiful ad campaign, California has never understood what it was about. You look at the system that California has created, its ISO model, and they have replaced the system that was working at very little cost with great cost. You are talking about hundreds of millions of dollars.

We want to try to avoid that. All those issues are issues we have to look at before we go to the deep end of the pool. ¼ We have time to look at what works.

What do you think about FERC's NOPR?

I think it is a great working model. I think it gives you a framework if [you've] got to decide this problem, if you are at the door and you need to figure out a system. I don't think Florida is there. That is why we have objected to that to some degree.

Today, FPL is against that NOPR, but three or four years from now when it has another 2,000 or 3,000 MW of generation outside of Florida, it may need the FERC to step in because its investors may need reliability in terms of its investments. That is something that is going to happen on a broad scale.

When will Florida decide if it will enact electric competition legislation?

I think the legislature has adopted a go-slow approach. There is talk this year of putting together an energy policy commission by the legislature. When they feel it's ready it will be ready.

Where will the PSC be in 10 years?

Our role has to be protecting these companies from each other and making sure the consumers do not get hurt. ¼ We are going to be more of a consumer protection agency as opposed to an economic regulator.

By what benchmark will you rate success?

That we have reliability and reasonable prices that keep Florida on the cheaper side. And on the competitive side, I think the benchmark for that will be probably decided by the legislature to some degree and historians way after that.

What in your background is helping you bring competition to Florida?

I am uniquely unqualified to hold my post but the governor thought I was and the legislature thought I was. I am thankful for that. I have a law degree and what I have is an open mind. That is what the commission has had for the last few years.

Clearly, you have to look beyond the borders of Florida and make sure that what you are doing is the right thing. One of the great tricks of our founding fathers, whether they did it consciously or unconsciously, they designed a system that had 50 different experiments going on all the time in which you have hundreds of regulatory people working on trying to figure out better ways to serve the people and hundreds of companies trying to figure out better ways of trying to get around us.

There is nothing wrong with that. Keeping an open mind is what we want on the commission.

What experiences do you draw on daily?

I come ¼ from an agency that used to do public-sector work with private dollars. It taught us that there were a lot of ways that you could do things that government can't do. Now I am a believer that government can have a positive effect on people's lives. There is no agency that touches more Floridians on a day-to-day basis than the Florida Public Service Commission. ¼

Think about why commissions were set up. They were set up to try to create a competitive framework where none existed or try to simulate competition where there was none. Anytime we can let the market do that, besides ourselves - I may be a good regulator, but the market is much better. [End of Garcia interview]

Richard L. Mathias, chairman of the Illinois Commerce Commission. Illinois is in the process of restructuring electricity.

What did you learn from other states during your restructuring?

Each state is unique. What we learned is that restructuring is a very complex issue. Various terms or provisions or legislative policy enactments impact different utilities in different manners.

We have eight or nine - depending on how you count - major Illinois electric utilities. They each do business quite differently. Therefore, it is a challenge to promulgate rules that don't discriminate against one utility over another, as well as don't discriminate against the customers and the potential competitors of the utility.

Could a high wires charge erase customer savings in generation?

The incumbent utilities want to put as much of the cost into the transmission and distribution charge, which is continuing to be paid by all of the users of electric service in Illinois, [as opposed to putting the charges] in the generation portion, which is retained by the utilities in Illinois and which they have to sell their generation capacity on a more competitive basis. So obviously, theoretically, utilities would like to load up the transmission and distribution charges, which are paid by all of the customers, as [opposed to] keeping their generation costs as low as possible because those are not competitive services.

How did you make sure that didn't happen?

Through a long and arduous tariff proceeding called the delivery services tariffs, which are still before the commission, [then] were decided in October and now petitions for rehearing are before the commission. It was a very, very high-profile and very time-consuming process of deciding the amounts of the delivery service tariffs in Illinois. That was really an allocation of the costs - what those costs were and whether they should be allocated to delivery services or whether they should be allocated to generation capacity.

Was that the toughest problem?

It was one of the toughest. We continue to refine how the incumbent utility can interact with its affiliates. That is going to be an interesting dialogue. How do you have nondiscriminatory activity between the incumbent utility and its affiliate? You want to make sure there is a level playing field between the utility and any marketing and generation affiliate against the competitor who is out there in the marketplace.

What in your background prepared you for restructuring?

I have been a businessman in various executive positions in a number of companies over the past 25 years, and I think I have an understanding of how business operates and also the need for change in businesses, as well as recognition of the need for change in regulatory agencies.

Utility regulation that was in vogue in the 1980s seems to be in need of change if it is going to meet the demands of the new millennium. In that, I mean speed. Regulators can't sit back and take years to decide issues.

Illinois has been traditionally an exporter of power and it looks like that will not change in the near future. [There have been two primary concerns since I've been here. The first] has been focused in Northern Illinois and that is to make certain that the generation capacity, which has been paid for or is being paid for by customers, is, in fact, operating. Of course, that comment is directed towards the nuclear facilities owned by companies in Illinois.

Secondly, our concern is over the reliability of the transmission and distribution system - to make certain that the power which is generated can be transmitted and distributed to the end-user. We have had some difficulties in that regard in Illinois.

How does FERC's RTO plan figure into that?

We are a strong supporter of effective, vibrant regional transmission organizations and, in fact, have been pushing FERC to take more aggressive action in this regard.

What about infrastructure?

What has been interesting to us is that one of the consequences, whether intended or not, of the restructuring law in Illinois has been the sale or merger of five of the six or seven largest Illinois electric utilities. Four Illinois electric utilities have been purchased by out-of-state companies, and the fifth, Commonwealth Edison, is in the process of merging with PECO.

What does that mean for competition?

It is yet to be seen. It is obvious that there has been a rush to consolidation and whether that was triggered intentionally or unintentionally by the Illinois law, I don't know. That is certainly one of the definite results of the Illinois restructuring law.

How will regulators rate their performance in years to come?

This is an interesting question that all utility commissioners will have to answer in the future. That is exactly the process that we are going through in Illinois in ¼ the so-called "millennium review" commission, which we have established to look at the operation and objectives of the Illinois public utility commission.

We have to make our regulation more relevant. The old rate-of-return regulatory schematic is certainly no longer in vogue and I question whether the quasi-judicial approach to regulation ¼ is any longer relevant. It certainly can't be the only model that public utilities commissions can follow in the future. There has to be a more policy-making role and I would submit that we have to do a better job of collecting credible data and distributing that data to users so that the competitive market can work.

I look at the example of the Securities and Exchange Commission, which has rules and regulations as to the type of information which has to be reported to the SEC. [The] information is made publicly available and that allows the free market to operate.

I don't think we are doing that now. I don't think any commission is doing that now. To think that you can go from a monopolistic environment to a competitive environment and make no changes in your regulatory structure, I think, is naive.

How long before you decide you were successful in Illinois?

I don't know that there is one point in time. I think you have to measure yourself as you go along. I would think certainly with customer choice we can make value judgements probably quarterly or every six months as to how we are doing. But right now we are not structured to make that evaluation. I think we will be shortly. But we have to be able to monitor competitive aspects of what is occurring in our state. Public utilities commissions, including ours, are not well structured to do that as yet.

State vs. federal restructuring?

I think that that [struggle] is intrinsic in the form of government that we have and that [it] is not going to go away. The view from the Potomac is much different than the view from Bloomington, Ill. What is good on Pennsylvania Avenue is not necessarily going to be appropriate for Ogden Avenue in Illinois or Interstate 55, but there is a rule for both.

What has been most rewarding about being chairman?

The next expectation.

I would hope that commissions across the country would critically analyze their roles. If there is a reward, it is to make our regulation more relevant to today's customer and we are certainly not there yet.

Would the commission's role as a policymaker affect staff size?

It should change the whole viewpoint of commissioners from viewing discrete issues, one at a time, [vs.] viewing an entire scenario and seeing where the commission and the public interest dictates that the form of monopolistic entities go and how competition is best for the public interest. ¼ I don't think that is what we have now.

I was in the insurance business. In Illinois we have 1,400 insurance companies competing and there is a market-monitoring aspect to state government in the insurance area, and there should be in the utility area, as well. If not, then the legislature could abolish commissions because they won't be relevant.

You cannot have changes in the basic structure of utilities and not have changes in the regulatory bodies. [End of Mathias interview]

Alan R. Schriber, chairman of the Public Utilities Commission of Ohio. Electric restructuring legislation was passed in july in ohio.

Is the FERC intruding in Ohio's restructuring work through the RTO plans and Alliance RTO evaluation?

It will not affect our effort to restructure. It will affect how successful the end result is when we actually begin our transition, which will be Jan. 1, 2001.

How so?

To the extent that we don't have a significantly active, liquid market regionally, we are not going to have a successful local retail market within Ohio.

How will things fall between the Midwest ISO and the Alliance RTO?

You never know [how it will be] by Jan. 1, 2001. I hate to make forecasts, though I am an economist. It wouldn't surprise me if they were blended along the way because there are a lot of good reasons for them to be. It would not surprise me to see that happen. If the FERC can move that along more rapidly as an outcome, that would be great. If it seems to move under its own [momentum], that would be great. One way or another, I somehow believe that we will have a single entity, ultimately.

What about mergers?

AEP and Dominion and CNG went forward and we will see what happens with AEP. Those came before we had explicit authority over holding companies, so those don't count. But as of last week, technically we now have authority over electric mergers.

How will you use that new authority?

The public interest will be the top priority.

How does your restructuring differ from other states'?

We have at most a five-year market development period for any company and that could be truncated or reduced significantly if there is a finding by the commission that competition exists or some certain market penetration has been met. ¼ At the very outset, the transition period or market development period is five years for generation and then it is 10 years for regulatory assets.

How will you know if you have been effective?

In some cases, you will find the [investor-owned utility] generating electricity for less than the prevailing market, and who is going to penetrate that market? No one. The question really becomes, is there competition and is there potential competition.

In some cases, there won't be competition - not because there are barriers to entry but rather because no one can beat the price of the incumbent. Does that mean that there is no potential competition? No, it doesn't mean that. It means that currently there is no competition. So a market could be potentially competitive, but for the time being, there might be no one capable of competing.

Would you assign default customers as Georgia does with gas?

We will attempt to induce shopping. We are supposed to attempt to achieve a 20 percent load shift either midway through the transition period or at the end of 2003, at the latest, and we are going to do that by using shopping credits.

What is your role during and after restructuring?

We will still have jurisdiction over intra-state transmission and, of course, distribution. We will have jurisdiction there. There will be a lot of power marketers, a lot of brokers. I think our role at that point will be to ensure that there are no impediments to the competitive process.

Is your role diminishing?

Oh no, not at all. I think our role will be continuing to regulate distribution, and, I think, play a very significant market-oversight role.

What is the most important thing you have done for competition in Ohio?

The shortness of the length of the transition period has been significant. We have about the shortest as they come. The longest transition period is going to be five years. I would speculate in a couple of cases [it] will be significantly less than five years before those markets are competitive and before the generation is free of regulation.

How has your background helped you address restructuring?

First of all, I was a commissioner from 1983 to 1989. I was, at that time, involved with a lot of the debate with rate-basing and with a lot of the plants that are in place today. I do have, obviously, a regulatory background and I am an economist by training. Not that that's the answer to everybody's dreams, but it does help me.

Is customer switching the measure of success?

Not necessarily, because suppose the incumbent is already an extremely low-price incumbent. Why would you switch and perhaps even pay more to switch? It is entirely possible that no one switches because they are already the lowest price in town and, as a result, we are not going to expect any load shifting. Again, would I conclude that we have been a failure? I think that is absurd. I would conclude that we have had pretty good successes if our incumbents are beating the market.

Price will be the benchmark?

Price will drive the shopping, but if price is equal to or lower than the otherwise prevailing market price, how can you beat that? That is expected [with] Ohio Power and then I can also tell you that a couple of other companies are very low-cost. Northern Ohio is where it gets pricey. We would expect the most opportunities for competition to take place in Northern Ohio.

What is your definition of competition?

A certain level of load shifting. There is headroom, there is a margin and there is the ability for competitors to get in there.

How did you get all the parties to finally agree on competition?

I am not going to say that they did. They could not agree on a legislative solution because that went on for years, but they finally agreed on giving the critical stuff to the commission.

Do the natural gas incumbents offer the lowest prices?

That has happened here in Ohio. I live in Cincinnati and there is choice but the incumbent offers a pretty low price, so I don't switch and neither do most others. You have to realize a significant amount before a switch, at least a 10 percent reduction in your overall bill, I believe, before you switch. Those savings will not be realized in Cincinnati.

In Columbus, they have the most successful choice programs in the country. They have somewhere in the low 30 and high 40 percentile of people that have switched because the gas was fairly high in Ohio and could be marketed for less. [End of Schriber interview]

Pat Wood III, chairman of the Public Utility Commission of Texas. The state passed an electric restructuring law in June.

What have you learned from other states?

It is tough for a Texan to admit, but sometimes it is not necessarily good to be the first one. I think once we sucked up our pride, we thought if we are not going to be first, [then] we will be best.

Our legislature and the commission ¼ fortunately work pretty closely together. We went to California and we went to Pennsylvania. I did not go but a group went to the U.K. to talk about retail issues. ¼ We also cross-pollinated with folks from Oklahoma, who had started on it a little bit. New England had moved pretty aggressively in this direction as well. ¼

The main thing was that we weren't in a desperate crisis that required an immediate dramatic solution. We wanted to take a pretty good thing and make it work better and do it right. ¼

Some legislators and we at the commission agree that it is real important to have a genuine, vigorously competitive retail market on the other end of this thing. If we were just going to stop at wholesale competition, we could have stopped at what we had and gone the way of NEPOOL or something like that. But you know, what our folks wanted over here was a broadly open retail market, too, so that we are not just talking about cheaper prices but better service. Those wrinkles came out of Pennsylvania and New England. ¼

What benchmark will you use in five years to judge your success?

Do I generally have the choice? Do I have more than just theoretical choice of providers? The "yellow pages test" is what we call it in telecom. Whether you exercise the choice or not is a function of how well your current provider keeps you happy.

What about affiliates?

The affiliate will be set up on day one. The utility will no longer do any retail business at all, which is a little bit different from other states. We are not keeping any of the billing with the incumbent utility. [It] will be a wires company only. ¼

I think everybody here recognizes we really need [in order to prevent affiliate abuse problems] to get the wires company out of retail operations and force it all to a retail entity. That particular entity will be price-fixed for a three-year period of time. The price will be a fixed percent discount off of today's rates but they cannot further discount that rate to attempt to win back the customer.

Will they lose brand equity when they are allowed back in?

They will have it but it may be known as just the traditional, pedestrian high-cost option. It is assuming that everyone is offering a lower-cost product. This is a price-to-beat concept.

On day one, [TXU] customers that have not opted for Enron, Reliant or PG&E or somebody else, will automatically go to [TXU] retail. That price will be fixed at the plain old, pedestrian 7.5 cents per kilowatt rate. Plain old bill, plain old everything for three years.

Now if all these other companies want to come in and offer a 7-cent rate or 6-cent rate with bundling with telephone or bundling with natural gas, they will be able to come do all that and innovate without the fear that the incumbent is going to come in and undermine their efforts right away. We are going to hold the incumbent back for a couple of years so that the new guys can get in and plant some roots.

How did you come up with that concept?

We looked at Pennsylvania and liked what they had but realized that the biggest flaw that they had was that the biggest competitor to PECO was PECO's affiliate. That's not real competition. ¼ PECO, the wires company, keeps a lot of the customers ¼ which [raises] some vertical market power concerns in my mind.

Our utilities actually didn't have a problem with the fact that everybody would be migrating over because I think ¼ they actually hoped that would lead to a lighter code of conduct than we would otherwise have to have if those people stay on with the wires company. I think they were right. I think we were able to write a much more clearly delineated affiliate rules or affiliate code of conduct because we moved all the customers over to the retailing affiliate (the ones who choose not to choose). I firmly expect that we will have customers that will choose another company and they won't go with the affiliate at all.

Will utilities still own a share in the generation sector?

We have had to clean up of a lot of old power plants here that had a lot of pollution issues involved. They are included as stranded cost if they clean them up early. ¼

We did have a market power cap for ownership of generation of 20 percent, which addressed some concerns that we had in [the Electric Reliability Council of Texas, or ERCOT]. TXU and Reliant had a pretty dominant share of the market. What this bill did was kind of clip that back and cap them at a 20 percent share.

What about transmission planning?

We do have statewide comprehensive transmission planning instead of utility-by-utility planning because the wholesale market and retail market both have a very different world than the old markets that we lived in before 1995, where transmission was something that could be dealt with as a very local matter. Here it is a statewide highway and we have to make sure that it stays that way. We learned that from PJM.

Another thing that we learned from the Pennsylvania commissioners was how important it was to have a little ready market for new competitors on day one. In the Texas legislation, there is a capacity auction requirement that says the IOUs in Texas have to make available through an auction 15 percent of their total generation capacity for the first five years of competition, so that basically a small company can come in [and] at various lengths of contracts develop the right to buy power.

What remains the biggest issue?

Make damn sure you get the back-end computer systems ready so that it is a seamless transaction for customers, like switching [their] long-distance company. It will be that easy to switch your local electric company. ¼ That [back-end work] is really the bulk of my time and focus with the industry folk that have been working night and day.

What happens to your role and the PUC's?

We remain the market cop to make sure that everybody is behaving by the rules. We have roles in customer education. We also will be an arbiter of customer complaints. This is the role that we played for many years, but it will look different in a marketplace. ¼

Our three-part role is customer protection, market price cop and guarantor of the high-quality infrastructure. Then [there are] things like service and reliability standards to make sure that there is not any service degradation from competition. ¼

When do you see these changes happening?

Once we get all these rules implemented. When we open up on Jan. 1, 2002, we will have done a lot. But there will still be some stranded cost. The next two or three years will be pretty intense getting the transmission work done. And then hopefully if we do it right, we can start letting the market take over. Unfortunately, I have seen how slow it has [been] in telephone.

The struggle between FERC and states?

I would actually prefer that the FERC take an aggressive stance, particularly in forming these RTOs. ¼

As opposed to taking the states' rights arguments, which you would certainly expect a Texan or any state commissioner to take, there is a clear role for federal leadership there. I think the jurisdictional distraction benefits only those who don't want restructuring to happen. So there are a lot of people on the outside who have benefited from FERC being in this jurisdictional squabble. I just don't think that benefits the cause of competition one iota.

What about opening ERCOT to the rest of the nation?

We have a market the size of the United Kingdom right here inside of ERCOT. ¼ It is a big enough market to work on its own.

It would be nice to have the ability to move power in and out of the [Southwest Power Pool, or SPP], particularly because that is good, cheap power. Two, the bigger the market, the more ability you have to spread risk around.

We have actually considered, and you will probably see in the next five years, another DC interconnection to the outside from ERCOT. Now we have a couple of power plants building along the border straddling both ERCOT and SPP so that they can generate and sell in both power markets. That is not what I call an open-access gateway, but it does provide some flexibility between the markets, which I think is a good thing.

Being that Houston is considered the energy capital of the world, is there pressure to be successful?

Oh yeah, that was one of the big selling jobs I did on behalf of why we need legislation this year: Are we going to cede our title as energy center of the world to Atlanta or Los Angeles or, heaven forbid, some foreign country, by not moving forward into this new aggressive pro-competitive era?

This is the Wall Street of energy and [competition] needs to be in this state, absolutely. You asked the classic chauvinistic Texas question. [End of Wood interview]

Richard A. Bilas, president of the California Public Utilities Commission. Retail electric competition has been in place in California since March 1998.

How should PUCs rate themselves?

Forget the commissions rating themselves. The more fundamental question is, what is the commission to look like after restructuring.

[Recently] we had a four-hour stakeholder round table at the commission asking the question, how can we be more responsive? What is it that we are supposed to do and how can we best do it? We got all kinds of responses.

Clearly, one of the responses was, "you are making us change but you are not changing. "¼ We are seriously looking at this.

Do you rate restructuring by vibrancy in retail markets?

If we do not, over the course of a decade, achieve significant retail competition, then I personally would regard the California experiment as a failure. But I think, more importantly, the rest of the world would view it as a failure. ¼

Is customer switching the benchmark to judge if your plan was successful?

Well, that is certainly one benchmark. I go back to the breakup of AT&T and look at what has happened, even though a lot more has to be done in California. One of the things that came out of the breakup of AT&T is significant innovation. ¼ I would look for something similar to that in electricity.

You have to have the system functioning so that there is a desire on the part of suppliers to innovate, and the desire for them to innovate is a function of whether or not there are markets out there they can capture through their innovation. That means that everybody who is a consumer has to somehow be able to play in the game if we are going to bring about innovation in the generation, transmission and distribution of electricity. If everybody can't take part in that, I think, where possible innovation could take place it simply won't. ¼

All they want to do is cut their costs. That is where competition occurs. We can do that through a power exchange. They are not capturing significant markets. They are picking off a piece here and a piece there but a lot of the sales are bulk power being sold to the utility distribution company. I don't think that provides for a whole hell of a lot of innovation. ¼ Real progress can be made by people innovating in order to keep or gain markets.

Unless the whole system is opened up, I don't think there will be a lot of innovation. I think we will reach a plateau.

What will happen in 2002?

I can't predict that. I think it is very clear when you look at AB1890. AB1890 did not call for retail competition for at least four years. That is why the transition period was set up and that is why the residential consumers and small commercial users were given an immediate 10 percent rate reduction, because the transition was to get behind us all the stranded assets.

The optimist would say that once we get the stranded assets behind us, then we would have an opportunity to bring about retail competition. We don't expect to have retail competition during the transition period and we haven't had very much.

We have San Diego Gas & Electric out from under the [competition transition charge, or CTC] and so far as I can judge at this point, I don't think anything different has happened in San Diego than has happened in the last year-and-a-half. That doesn't say I give up. It says they have only come up from under in July and it has only been four months or so. It is much too early to tell. ¼

If a state has made a commitment to competition - and that means, in my view, that means not just wholesale but retail competition - then we have to get through the transition period, all the states that go into this game, and observe what happens and then be prepared to implement changes that may well be necessary in order to bring about the competition that I think most people are looking for. We have to investigate changes that we may want to make in order to bring about competition.

The Georgia plan is interesting. It is on the gas side and has nothing to do with electricity, but it is a concept. What was interesting, this past February, I was before the FERC and I was on a panel on gas restructuring and the chair of the Georgia commission was there. He was very proud to explain what the Georgia commission had done to the development of competition in the natural gas industry in Georgia. They literally were assigning customers to new competitors. I was asked to comment on that and said that is a totally inappropriate role for government to place itself in. What government ought to do is get rid of all the barriers to entry and let the game be played. That was my statement.

The fact of the matter is that it is very, very difficult to remove the barriers to entry and so I have now begun to reconsider my statement that I made last February. I have always tried to be open-minded on this. I am not saying that I am sold on the Georgia procedure but I think ¼ maybe one ought to examine what Georgia did in the gas side and see whether it can apply to the electric side. And if it can apply to the electric side, will it work to develop retail competition in the electric utility commission? I am not prejudging; I am just raising the question.

How long before we see retail competition in California?

Let's presume that on Jan. 1, 2002, the CTC is behind us. I think we have to see what develops over the next two-and-one-half years. If nothing develops and we have made a commitment to retail competition, I think we need to go back to the drawing board.

I think if nothing shows up in two-and-a-half years or if those people who are active or try to become active in California after the CTC disappears, if they say "I give up," we have to ask ourselves why they have given up. What could the state do if it is committed to retail competition?

What is the message of the focus statement you issued this fall as part of the PUC's budgetary process?

Twofold. Is there a commitment in the state of California to retail competition? If the answer is no, fine, stop, don't go any further. We have done everything we can do. We have been successful. I would say that is not success, but if there is [no] commitment [by] the state to retail competition the game is over. We can declare victory, as shallow in some minds as it may be.

However, if the answer is yes, we are committed to retail competition, then I am suggesting that we need today to start examining things that could be done in California that have been used elsewhere that seem to be successful in developing retail competition. We don't need to implement them. We need to look at them.

What prompted the statement?

I spent eight consecutive Wednesdays, literally, on the hot seat in Sacramento at budget hearings. Three hours every Wednesday. It became very clear to me that the key members of our state legislature weren't happy with the way the commission was doing business and they were asking how we can restructure the regulatory environment in the state of California. I said that we are going to take it upon ourselves to try to figure out what we are going to be. ¼ That is, a careful reexamination of what the Public Utilities Commission ought to be doing, what the Energy Commission ought to be doing and what the Electricity Oversight Board ought to be doing.

I wanted to get a leg up on this. If we are reactive, we are dead and maybe we should be dead. But if we are proactive, at least we can put some ideas on the table that we thought through.

Will this be an issue for the legislature?

I personally welcome it. I think it needs to be a matter for discussion. If states and the federal government are requiring industries to restructure, doesn't it make sense that the regulatory system has to be restructured, as well? You can't use 1911 regulation in the year 2000. It doesn't make sense. We were established in 1911. ¼ To some extent we are still using 1911 rules and regulations to administer in the year 2000. ¼ [T]he fact is we don't know what we are going to look like. ¼

Any regulatory commissioner in the country today that thinks that 10 years from now his job is going to be the same as it is today is just looking through a glass darkly. The fact of the matter is that his job or her job is going to be entirely different. He or she better get involved or somebody else is going to change their job and they might not like the outcome. [End of Bilas interview]

Richard Stavros is the senior editor at Public Utilities Fortnightly.

Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.