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DRIFT
AND DISARRAY: THE CALIFORNIA
ENERGY CRISIS CONTINUES
By
William Ahern, Consumers Union of U.S.,
Inc.
San Francisco,
California
March 28, 2002
This paper is made
possible through the generous support of
the Energy Foundation, the Wallace Alexander Gerbode Foundation,
and the California Consumer Protection Foundation
FINDINGS
April 1, 2002: Retail electricity rates are 40% higher, not 20% lower as promised under deregulation.
When the 1996 California electricity market restructuring legislation was enacted, the ratepayers of the utilities Pacific Gas and Electric, Southern California Edison, and San Diego Gas and Electric were supposed to see a 20% reduction in rates by April 1, 2002. Instead, rates are 40 percent higher than in 1996, with no reductions in sight. California's rates will be far above the national average because ratepayers are being asked to pay for nearly $20 billion of utility debts, for more than $10 billion for state power purchases incurred during the energy crisis, for state energy bonds, and for about $43 billion in long-term state power purchase contracts.
April 15, 2002: No protection from unreasonable utility costs.
The federal judge in the PG&E bankruptcy proceeding has allowed the California Public Utilities Commission (CPUC) to submit on April 15, 2002 a plan for PG&E to emerge from bankruptcy. The responsibility of the CPUC is to determine what utility costs are reasonable for reliable service and place those costs into rates. Unreasonable costs are to be paid by shareholders. Instead of carrying out that responsibility in its own public proceedings with respect to PG&E, the CPUC has asked the federal court to allow PG&E to recover about $13 billion in past debts. The CPUC is using federal court proceedings on PG&E (and previously Edison) to evade its own responsibility and public processes which are supposed to protect ratepayers from unreasonable costs.
2002, continuing: No protection from unreasonable power costs.
The California Department of Water Resources (DWR) is continuing to contract for and purchase needed power for utility ratepayers until the end of this year. They have been issuing new contracts for hundreds of megawatts of power, in addition to the high cost long-term contracts for about $43 billion negotiated last year. Under the legislation granting DWR this authority, the DWR itself determines, in secret, whether such power costs are reasonable. The CPUC must then place the costs into rates.
Summer 2002: Tight summer power supplies, unsafe level of reserves.
Utility ratepayers face too high a chance of power emergencies and blackouts this summer. While about 5,000 megawatts of new power plants have been built, most of the demand reduction programs that reduced use more than 7,000 megawatts last summer are no longer in place. The California Energy Commission forecasts that if this summer has heat expected in one of every ten years and voluntary conservation is much less than last summer, electricity supply will exceed demand. The California Independent System Operator (CalISO) draft summer outlook report shows power reserves above the seven percent of monthly peak demand needed to avoid declaring emergencies, but below the fifteen percent reserves considered prudent.
September 2002: A sudden power surplus and DWR Power Contracts smother the market for renewable resources.
As new power plants come on line in September, the California Independent System Operator (CalISO) forecasts there will be a large surplus of electricity. That surplus, and the high-cost power contracts negotiated by the California Department of Water Resources (DWR) for the three utilities, minimize for years the market for desirable new renewable resource power projects using wind, solar, and biomass. The renewable resource projects planned for funding by the new California Power Authority cannot be pursued without contracts with users.
September 30, 2002: No more wholesale market protections.
The Federal Energy Regulatory Commission (FERC) regulates the rules and rates in the wholesale electricity market. The FERC order issued during the California energy crisis placing price caps on wholesale market sales in the western states expires on September 30, 2002. FERC has issued a decision that the deadline will not be extended. The CalISO is trying to develop and then obtain FERC approval for wholesale market design elements that could protect California buyers. But power generators can evade CalISO rules by laundering electricity, selling it to brokers in other states who could sell back into California at unchecked prices, called "megawatt laundering," in the absence of FERC protections that apply to all western states.
January 1, 2003: Nobody to purchase power.
The authority of the Department of Water Resources to purchase the rest of the electricity needed for the customers of the non-creditworthy utilities expires at the end of the year. It is not clear who will buy electricity for utility ratepayers in 2003. The utilities need three conditions to be able to purchase power for their customers on the wholesale markets. First, each utility must be creditworthy. Second, the California Public Utilities Commission must determine the rules for the utilities to recover their power costs when they resume purchasing power. Third, the utilities will need to know who their retail customers will be. The CPUC has suspended the ability of utility customers to choose non-utility energy service providers effective September 20, 2001. These events are uncertain. California has no integrated design for the retail electricity market: who will be buying energy for whom, under what rules.
Ongoing: Nobody to provide power reserves for reliability and price control.
The California Independent System Operator wants the electricity retailers, such as the utilities, to be responsible for arranging enough reserve power for reliability, for backups in case power plants go down or demand suddenly increases. The CalISO also needs power reserves so it does not have to scramble for enough power, at last minute high prices, to keep the transmission grid balanced, with no brownouts or blackouts. But the CalISO will not finish designing such a reserves requirement until 2003. And the CalISO needs the CPUC to approve such costs for the IOUs, and will need the approval of the Federal Energy Regulatory Commission in Washington, D.C.
RECOMMENDATIONS
California needs leadership to restructure the retail electricity markets to protect consumers.
The Governor played a major role last year in expediting power plant construction, funding power use reduction programs, reconciling air pollution control needs with needed power plant availability, and educating consumers on the need for conservation. His attention and energy are needed again this year.
He has the authority to impose order on the disarray in the California electricity market. He has appointed a majority of all the California energy agencies' boards, including the CPUC, Energy Commission, and Power Authority, as well as the FERC-regulated CalISO. He directly supervises the Department of Water Resources. The Governor needs to use his authority and influence to hold these agencies accountable to develop a future electricity retail market that protects consumers. The Governor and his appointees need to assure the required infrastructure, the power generation, demand reduction programs, and transmission line capacity, that will provide reliable service, prevent market power in the wholesale markets, and reduce rates over the long-run.
In particular, Governor Davis assert his leadership by:
California needs to protect consumers from the deregulated wholesale markets.
We cannot rely on FERC to solve electricity market problems in California. FERC is on the path of creating a standard national design and rules for wholesale electricity markets in all states, with competition and open access to regional transmission systems. California needs to adopt the retail market rules that protect ratepayers from market power, price volatility, and reliability risks of a competitive wholesale market.
The present drift and uncertainty on retail market policy, lack of timely and effective action by the CPUC, and the disconnect between the actions of DWR and the Power Authority and between the CalISO and CPUC present unacceptable risks to electricity consumers in California. Only the Governor can provide the leadership to set the direction, hold the agencies accountable, and make the agencies work together. Consumers need clear answers to these questions:
1. Who will be purchasing electrical energy for utility ratepayers next year?
2. Who is responsible for making sure we have reliable service?
3. When does the freeze on our retail rates end? What happens then?
4. Who will protect us from price volatility and price manipulation in the wholesale electricity markets?
5. Who is responsible for making sure that cost-effective energy efficiency and demand side management programs are implemented?
6. Who is responsible for meeting the Governor's goal that more of our electrical energy come from renewable resources?
7. Who is responsible for building the transmission lines needed for reliability and for preventing wholesale market power?
DRIFT AND DISARRAY: THE CALIFORNIA ENERGY CRISIS CONTINUES
"The current
market structure is an 'ad hoc' arrangement, pieced together to respond to numerous
short-term crises."
California Energy Commission Electricity Outlook Report, p.III-1-1)
The April 1, 2002 Milestone.
California's landmark 1996 legislation which restructured the electricity market designed a limited transition period to full retail and wholesale competition that would end March 31, 2002 and would provide a "cumulative rate reduction for residential and small commercial customers of no less than 20 percent by April 1, 2002." (AB1890 of 1996, Section 1(b)(4)). This milestone marks an appropriate time to take a close look at the current structure of the California electricity market.
Introduction, Upcoming Risks
The California electricity market is on life support, stable thanks to high-cost intensive care in the form of long-term power contracts arranged in early 2001 during the height of the energy crisis. But the patient is deteriorating. The doctors point at each other, administering different nostrums in a piecemeal fashion. The patient keeps being moved between federal and state operating rooms. Only medications that cost three times market prices keep the patient alive. The patient has even suffered identity crises while in intensive care, one day feeling like a more deregulated market, other days like a re-regulated market. The prognosis is cloudy.
In 1996, California's electricity market restructuring legislation AB1890 separated the investor owned utilities (IOUs) PG&E, Southern California Edison, and SDG&E, into three parts: the local electricity distribution and service functions, the high-voltage transmission lines, and power generation. Before deregulation, rates, costs, and investments for all these functions had been regulated by the California Public Utilities Commission (CPUC). After AB1890 was enacted, the utilities sold more than one-half of their power plants to five non-utility merchant generators, Dynegy, Mirant, Reliant, AES, and Duke Power. These merchant generators sell power in the wholesale market to retail energy service providers, including the distribution utilities.
When the utility industry structure was broken up, the system lost integrated planning, operation, regulation, and investment in infrastructure. Jurisdiction over electricity transmission and the newly competitive wholesale electricity markets was lodged with the Federal Energy Regulatory Commission (FERC) in Washington, D.C. Responsibility for operating the transmission lines and balancing supply and demand to prevent blackouts moved to the California Independent System Operator (CalISO), an AB1890-created public benefit nonprofit corporation regulated by FERC. Responsibility for retail rates and practices continued with the CPUC. Responsibility and accountability were scattered among all the actors in the power markets and a variety of State and federal energy agencies.
While California's energy situation may appear to have settled down, the State's energy crisis is far from over. During the next year, ratepayers of the three investor owned utilities, about 80 percent of Californians, face the following risks:
This Year, 2002:
Tight supplies, imprudent reserves. The possibility of emergencies and blackouts is too high. The California Energy Commission forecasts that if the weather is hot, a one-in-ten year for heat, and if only one-quarter of the use reductions from last summer continue this summer, then electricity demand will exceed supply. Only if more than one-half of last year's summer demand cuts continue will there be a reasonable cushion of energy reserves. Unfortunately, funded programs are in place for only about one-seventh of the demand reductions from last summer, 1200 Megawatts instead of more than 7,000Mw. This is due to state budget shortfalls and uncertainty among state agencies about recovering the costs of demand reduction programs.
Even though about 5,000Mw of new power plants have come on line, demand is increasing. The loss of demand reduction programs may exceed the new generating capacity. With the energy crisis a year old now, consumers are unlikely to continue voluntary use reductions at the same level unless aggressively urged to do so.
The Cal ISO staff draft "2002 Summer Assessment" shows supplies in June, July and August about 5 percent above those needed to prevent emergencies, with a large need for imports from other states. Under average conditions, electricity supplies should be adequate. But supplies are below the 15 percent margin of reserves above expected peak monthly demand considered prudent. California still has very old power plants, congested transmission, a lack of demand response and demand reduction programs, and a fragmented market. The staff of the Federal Energy Regulatory Commission noted in a briefing on March 13, 2002 that little seems to have changed since last year to prevent brownouts (Fresno Bee, March 14, 2002, "Energy Outlook for California is Dim, FERC Says").
Inadequate local generating capacity and transmission congestion can also increase the risk of blackouts in specific regions of the State. The California Energy Commission reports that the highest risk areas this year are San Francisco and San Diego (Electricity Report, p.ES-7).
Too Much Electricity. Later in the year, California will go from "bust" to "boom" in electricity supplies. Starting in September, the CalISO staff assessment shows a large increase in electricity generation capacity within California as more new power plants start operation. The CalISO service area will not only be self-sufficient, not needing imports, but will have a surplus 10 percent above operating needs. This surplus will grow, with the Energy Commission expecting more than 10,000Mw of new generation coming on line in 2002-2004 (Electricity Report, p.I-12).
This surplus plants the seed of a longer term problem. The Energy Commission states, "…the addition of expected new capacity during 2002-2005 is apt to drive spot market prices to levels that will render many existing power plants unprofitable and discourage further construction."(Electricity Outlook Report 2002-2010, p.ES-5). This prospect, plus tighter capital constraints following the Enron bankruptcy, have already caused the cancellation of planned power plants. Private financial markets do not invest unless there is a reasonable expectation of recovering costs plus a profit. So, this year we will see a summer "bust" followed by a "boom" that may cause another "bust" later in the decade.
Nobody to buy electricity for ratepayers. The California Department of Water and Power's authority to buy electricity to meet the needs of IOU ratepayers expires on December 31, 2002. PG&E, Edison, and SDG&E must be financially creditworthy to buy electricity, and they are not. These utilities also need the California Public Utilities Commission to issue the rules so they can recover in rates their future costs of purchasing electricity. There are no such rules, and the CPUC's proceeding is months behind schedule.
Nobody to protect California from wholesale market manipulation. The Federal Energy Regulatory Commission's June 2001 order that imposed price caps on wholesale electricity prices and that required power generators to sell their power instead of withholding it to drive up prices, expires on September 30, 2002. This order covered the 11 states of the western region. FERC has refused the CalISO's petition asking for an extension of the order.
The CalISO is developing market design elements to control market power. But the CalISO will submit only a few of the needed market design improvements in May to FERC for approval, and this process could take many months to finalize. The key market design element, the "Available Capacity Obligation on Load Serving Entities", is needed both to keep our lights on and to prevent price manipulation. It will take a long time to develop and will require approval of the CPUC and the utilities and FERC. The CPUC has not started to address the cost recovery issue in its delayed Procurement Proceeding. This process will stretch well into 2003. This summer, if the CalISO needs to declare emergencies and if supplies are tight, the spot market price for electricity will reach the high FERC price caps, which are based on the costs of the least efficient power plant operating at the time.
An unclear end to the rate freeze and rate surcharges. Under California's 1996 electricity market restructuring, IOU ratepayer rates were frozen with a 10 percent rate reduction until no later than March 31, 2002. Now the ratepayers must repay the bonds used to fund that reduction. The 1996 law anticipated a further 10 percent reduction this March. Instead, the CPUC approved "surcharges" in early 2001 which total a record-breaking 40 percent rate increase.
The CPUC stated the surcharge was to pay for current increased power costs. But the CPUC and the utilities are counting on the higher rates to pay for billions of dollars of past debts the utilities accumulated during the energy crisis, for the $11 billion in energy bonds needed to repay the State Treasury, and for the $43 billion for the costs of the power contracts negotiated by the California Department of Water Resources (DWR).
Under AB1890, the rate freeze for a utility could also end before March 31, 2002 if the IOU had accumulated enough extra funds under the freeze to pay for past uneconomic stranded costs. SDG&E's rate freeze ended in 2000. The CPUC has not determined whether the freeze actually ended last year for PG&E and Edison. The Legislature and CPUC changed the groundrules during the energy crisis. The increased rates seem to be in effect indefinitely, although 25 PG&E ratepayers have petitioned the CPUC to reduce the rates because they are $200 million a month higher than the utility's power costs.
Few needed demand
reduction programs this summer.
Utility ratepayers cut their usage about 7 percent last summer. Some of that
was caused by reaction to the 40 percent rate increase approved by the CPUC,
and some by publicity about the energy crisis. The Energy Commission does not
know how much of last year's reductions will occur this summer. They estimate
that state-sponsored demand reduction programs will cut only about 1700 Mw of
peak demand this summer, while reductions were more than 7000 Mw last year from
all causes (Electricity Report, p.I-13).
The State Treasury spent hundreds of millions of dollars for rebates and for education and efficiency programs to reduce electricity demand. The Governor and State agencies implemented the 20/20 rebate program and the Flex Your Power Program. Most of these critical programs are not funded for this year, which puts California at risk of suffering more blackouts.
The CalISO and DWR, power purchasers for utility ratepayers, purchased thousands of megawatts of demand reduction last year to avert emergencies and blackouts. But the CalISO is not continuing its Demand Relief Program this year. The CalISO must obtain the costs of such programs from the DWR, which in turn must recover its funds directly from utility ratepayers under CPUC approved rates. Uncertainties about future roles, and lack of urgent and effective coordination among the CPUC, CalISO, and DWR, have caused these programs to lapse.
Nobody minimizing air pollution from power plants. The demand reduction programs also reduce the need for gas-fired power plants to operate during hot times in summer when air pollution is at its worst. There will be extra pollution due to the absence of such programs.
The Rest of the Decade:
Nobody to assure reliability. The CalISO Market Design report states that "Under the original California design there was no entity with explicit responsibility to ensure adequate capacity." (MD02, p.2) In the deregulated, competitive wholesale electricity market, companies will build new power plants when the market prices are high enough to justify the investment and make a profit. Prices were extremely high in 2000-2001, so many new plants were planned and some are coming into operation. Starting in September, prospects are for a surplus of generating capacity for at least the next three or more years.
Currently prices are low, so plants are being cancelled until prices go up again. This is called the "boom and bust" cycle and is a very serious problem of deregulated electricity markets. In busts, there is not enough power, which could occur again later in the decade. The Power Authority has loan funds and a mandate to prevent such problems. But the Authority has no equity and needs ironclad power purchase contracts to fund any construction. And the Authority is scheduled to expire in 2006.
The CalISO, FERC, CPUC, DWR, the new California Power Authority, the Energy Commission, the utilities, municipally-owned utilities, industry coordinating organizations, and federal energy agencies all share responsibilities for providing adequate generation and transmission capacity infrastructure to promote reliability, and to make wholesale competitive markets work. This year it is not clear who should be making such infrastructure investments, who should pay for them, and how their costs should be recovered in rates. The FERC is clearly headed toward open access regional transmission systems and standardized wholesale market design. California agencies, especially the CPUC, have not determined the roles of the utilities, the future form of the retail market, and the cost recovery mechanisms for infrastructure investments.
Nobody to assure renewable resource technologies are built. The Governor issued a goal in the fall of 2001 of increasing the proportion of renewable energy in the utilities' electricity supply mix from 12 percent to 17 percent by 2006 and to 20 percent by 2010. In early 200l, DWR contracted for more than 10,000 MW of power, enough power to fulfill most of the net needs of utility ratepayers until 2010. These DWR power contracts have nearly eliminated the possible utility market for renewable resources such as wind and biomass. The DWR power is 98 percent from gas-fired power plants.
The lack of market for renewables was made worse when the CPUC allowed large customers with about 10-15 percent of utility demand to leave utility and DWR service during the summer of 2001 for direct access to other energy service providers purchasing gas-fired generation. Without renegotiation of the DWR contracts, the CPUC, the Energy Commission, and the California Power Authority cannot meet the Governor's goal.
Consumers cannot choose an alternative energy provider that uses renewable resources because the Legislature and CPUC have suspended direct access as of September 20, 2001. Ratepayers are now required to stay with utility service, so the high costs of past power purchases, the energy bonds, and the current costs of DWR contracts will be paid by captive utility ratepayers.
Nobody to assure electric transmission line capacity is increased to avoid congestion, promote reliability, and make wholesale markets effective. FERC, the CPUC, the ISO, the Energy Commission, Power Authority, local governments and utilities, in addition to municipal utilities and federal power marketing agencies, are all involved in working to address the needs for transmission line capacity. PG&E even needs federal bankruptcy judge approval to invest in lines, in addition to the CPUC and FERC. Federal and State interactions are rocky. The state's transmission lines are still congested, allowing a high risk of blackouts, reduced reliability, raised power prices, and market manipulations to continue.
California is not an electricity island. Transmission lines connect the CalISO grid to 11 western states and parts of Canada and Mexico. California is about half the electricity load in this area. Planning and building interstate transmission capacity is as fractured as intrastate planning. FERC expects a regional transmission organization, which does not yet exist, to plan needed additions and forward the needs to builders.
Accountability Dilemma
These are only the major risks facing utility ratepayers in the wake of California's electricity market restructuring and the energy crisis that followed. Utility ratepayers do not know who is responsible and accountable for providing and assuring reasonable and stable prices, reliable service, renewable resources and minimum environmental harm.
The 1996 electricity market restructuring and the State actions during the energy crisis of 2000-2001 complicated and multiplied electricity market participants, shifted much oversight to the Federal Energy Regulatory Commission in Washington, D.C., and created more state energy agencies. Compared to restructured states in the east, California has the most fragmented market. The CalISO oversees 1,140 power plants supplying up to 45,000 Mw of capacity at peak to about 34 million Californians. The power comes from many merchant generators and more than 10,000 Mw from many independent qualifying facilities, as well as from power plants retained by the utilities. And California has more energy agencies than any other state. The Energy Commission's Electricity Report concludes, "The current market structure is an "ad hoc" arrangement, pieced together to respond to numerous short-term crises." (p. III-l-l)
It is clear electricity consumers need comprehensive and integrated planning and leadership to prevent future crises and problems. These risks are too important to be ignored and to allow such a fragmented regulatory response. California can still take actions to design a retail market that protects ratepayers, prevents problems in the wholesale market, builds needed infrastructure for reliability and stable prices, promotes renewable resources, and minimizes pollution.
Recommendations
The Governor is clearly responsible for addressing the risks and costs that California's utility ratepayers are facing and for developing a concept of the retail market. Governor Davis' energy emergency powers are still in place. He has appointed majorities on all the state energy boards. He has appointed key advisers who helped him during the energy crisis to chair the Power Authority and the CalISO and as the newest commissioner on the CPUC. The DWR works for the Governor directly.
The Governor can set policy direction, challenge the energy agencies to work together, and hold the agencies accountable. And he must take the initiative if legislation is needed. Because the 1996 restructuring legislation fractured integrated planning and infrastructure investments, only the Governor can pull the agencies, utilities, and market participants together to build needed infrastructure, provide reliability and mitigate market power in the wholesale market.
California's problems cannot be solved solely by FERC. FERC has a national constituency and its goal is "to complete the establishment of robust, seamless competitive markets" with standardized wholesale market design and open access to all transmission lines. (FERC News Release, March 13, 2002, on Standardized Market Design) FERC issued a major policy paper on March 15, 2002. The FERC proceeding to design wholesale markets will continue well into 2003. FERC is unlikely to design and issue short-term, California-specific rules that could prejudice its national effort.
FERC leaders have the
same challenges in designing the wholesale electricity market that California
leaders have in designing the retail market. FERC Chairman Pat Wood III has
stated, "As always, our purpose is simple: reliable electricity at lower
prices for all Americans. The most effective way to achieve this goal is to
standardize market design and transmission service
around the country." (March 13, 2002 press release) But MIT professor Paul
Joskow has noted that, "We have a regulatory agency in Washington (FERC)
that doesn't know how to regulate market power and is using a refund approach
from the 1930s." (University of California Energy Institute
7th Annual Research Conference, March 22, 2002)
Meanwhile, FERC has already stated it will not extend the price caps and other market protections in the western states beyond September 30, 2002. So, California's retail market must look after itself. FERC Commissioner William Massey has noted, "Reasonable prices require good infrastructure and good market design, and we don't have that yet in California." (March 13, 2002 Interview) The Governor should work for good infrastructure investments and good retail market design in California.
Here are suggestions on what the Governor can promote, with all the power and influence of his office:
1. Identify the problems associated with the state's disjointed approach to energy issues and hold the responsible agencies publicly accountable for addressing them effectively, with deadlines. While the five-member commissions are independent, and the CalISO is FERC-regulated, the Governor's appointees should know what he expects and what his policy direction is. Terry Winter, President of the CalISO, has told Congress the dilemma of one energy agency, a year after the California energy crisis:
"The ISO can address
many deficiencies through market design changes, but these are only part of
the solution. The resolution of the structural, operational and financial issues
that contributed to the California crisis will require a much broader, highly
coordinated effort among many parties. Transmission lines will need to be upgraded,
new and diversified generation added, demand responsiveness programs implemented,
and portfolio standards of the Utility Distribution Companies put into place.
Creditworthiness must be addressed. These challenges, and others, are largely
outside the scope of the ISO's responsibility, and each of them is crucial to
our goals. In addition, planning, reliability and security must be managed on
a regional basis. We look forward to working with FERC, representatives of state
and local governments, stakeholders and regional entities toward the success
of this important endeavor."
House Subcommittee on Energy Policy, Sacramento, Feb. 22, 2002
2. To provide prudent reserves and decrease the chance of blackouts this summer, order DWR to implement with CalISO all the cost-effective large-user demand reduction and price responsive programs needed for summer 2002 and to fund consumer education efforts by the Energy Commission and Department of Consumer Affairs. Californians need to know that the crisis will not be over this summer.
3. To assure no lapse in the authority to procure energy for utility ratepayers, announce that he will use his emergency powers, if needed, to extend the period the DWR purchases energy for any utility that is not creditworthy and cannot purchase energy for its customers starting in January 2003. It would be preferable to ask the Legislature to extend the authority, but the extension needs to be certain. Also, push the CPUC to move its delayed Procurement Proceeding quickly to adopt the year 2003 groundrules for the utilities to purchase power as soon as they are creditworthy.
4. Order DWR to procure power and demand reduction contracts for the reserves the CalISO has identified as needed to prevent emergencies and to avoid wholesale price spikes affecting utility ratepayers. It would be preferable for the CPUC to adopt these reserve requirements and authorize how the utilities would recover their costs, but the CPUC's Procurement Proceeding, which will set the rules for utility energy cost recovery, may not be completed in time for the utilities to take on such responsibilities.
5. Encourage the CPUC to determine itself what past creditor costs of PG&E are reasonable while protecting ratepayers, and put the costs into rates so PG&E can be creditworthy again and resume energy procurement. Instead of carrying out its own responsibility to determine reasonable costs, set rates, and maintain creditworthy utilities, the CPUC has deferred to federal bankruptcy court for a plan to return PG&E to financial health. With respect to Edison, the CPUC avoided its own responsibility and public proceedings by reaching settlement with Edison in federal court. Hold the CPUC accountable to use its own authority to solve utility cost issues and protect ratepayers, not rely on federal courts.
6. Under the emergency powers, order the CPUC, consulting with the CalISO, to expedite approval of utility-funded construction of transmission infrastructure needed for reliability and to prevent wholesale market power during the next few years, statewide and especially in the San Francisco and San Diego areas.
7. The Governor should effectively push DWR to renegotiate at least the 12 worst power contracts. Targeted negotiations should reduce off-peak deliveries, substitute renewable resources for some power, cut the use of the worst air polluting plants, and limit overall costs to utility ratepayers. This strategy is presented in the report "A Blueprint for Renegotiating California's Worst Electricity Contracts."(William Marcus, JBS Energy, prepared for UCAN, Environmental Defense, TURN, Consumers Union and the Sierra Club, February 2002) DWR can offer the contract holders longer contracts, contracts for needed peak power and reserves, and low cost financing from the Power Authority. The Governor should order the Power Authority to work with DWR in offering ways to use the low-cost loans of the Power Authority to reduce costs of the contract-holders and to help them substitute renewable resources for gas-fired power plant power.
8. Maintain, under emergency powers, the ability to reconcile the needs of air pollution control districts for cleaner refurbished power plants and for limiting air pollution in urban areas during the summer, with the needs of the CalISO for local area generation to maintain reliability. After August there should not be a need for this role as there should be enough generation to enable the APCDs to apply their requirements, except in power-constrained local areas.
9. The Governor should propose the electricity policy direction for the State to guide the agencies in their coordinated actions and to their participation at FERC. Consumers Union proposes the long term retail market direction of keeping residential and small business customers with the utilities to procure their energy and assure reliable power with stable prices under CPUC consumer protections. The CPUC would provide small users with a set of other energy options, including options with more renewable and less polluting resources. The large customers would have direct access to other energy providers in competitive retail markets, as long as they pay surcharges to prevent unfair cost-shifting to the remaining utility customers. (Ahern, William and Janee Briesemeister, "Protecting California's Residential and Small Business Electricity Consumers," January 22, 2002). www.consumersunion.org) The Governor, Legislature and energy agencies, especially the CPUC, can determine the design of the retail power market and can give the utilities the rules, reserve requirements, and cost recovery mechanisms to help them protect small customers from market power and compete effectively in the wholesale market.
The Governor's policy should include such protection of small consumers with actions to help make wholesale markets under FERC regulation at least as effectively competitive as possible, with California retail and wholesale market design rules that provide stability and reasonable prices and prevent market power and price manipulation. This would mean the Governor would hold the CalISO and the CPUC accountable for construction or contracting for generation reserves and transmission capacity infrastructure needed to make the market work. This is mostly under California's control.
Last, as a policy direction, the Governor should push all the agencies to clarify the roles of the utilities to protect small ratepayers and return to their traditional obligation to serve all small ratepayers. The last two years have seen a dysfunctional relationship between the utilities and the CPUC. It is not clear that the utilities, which are CPUC-regulated distribution utilities embedded in complicated holding companies operating in other markets, want the obligations of providing energy to the least desirable small ratepayers. The utilities can earn profits in rates from the return on capital investments, but not from procurement of energy. The holding companies have continued to be profitable while the utilities have been insolvent. It would clarify roles and incentives if the Governor were to urge the holding companies to divest themselves of the CPUC-regulated utilities into separate companies so the conflicts of interest and mixed motives do not continue.
The Governor played a positive role last year in expediting power plant construction, funding power use reduction programs, reconciling air pollution control needs with needed power plant availability, and educating consumers on the need for conservation. His attention and focus are needed again this year.
Glossary and Bibliography
This report refers to many agencies and market participants. The major participants, their web pages and recent reports, are:
FERC: The Federal
Energy Regulatory Commission, under federal law, is responsible for regulating
the structure, prices, and practices of participants in the bulk power wholesale
electricity markets and transmission lines nationwide. The five commissioners
are appointed by the President, three from the President's party and two from
the other party.
Web page: www.ferc.gov
"Federal Energy Regulatory Commission Working Paper on Standardized Transmission
Service and Wholesale Electric Market Design," Docket No. RM01-12-000,
March 13, 2002.
Western Energy Infrastructure Docket AD01-3.
Governor: The Governor is the chief executive of California's State government. The Governor appoints nearly all the members of the State's energy commissions and departments, as listed below. He also possesses emergency powers. Governor Gray Davis proclaimed a State of Emergency due to energy shortages on January 17, 2001, which is still in effect as of March 2002. Under his emergency powers he can issue executive orders that suspend State laws and regulations and can require State agencies to take any needed actions to deal with the emergency. Either the Governor or the Legislature can terminate the state of emergency. (Government Code 8550 et. seq.)
CPUC: Created
in its present form in the 1930s, the California Public Utilities Commission,
under the State Constitution and specific laws, is responsible for regulating
the rates and practices of investor-owned utilities (IOUs). It determines what
level of IOU costs are just and reasonable and authorizes those costs to be
recovered in retail customers' rates. It has more limited authority with respect
to the costs of IOU power bought in the FERC regulated wholesale market. The
Governor appoints the five commissioners for fixed staggered six-year terms.
Web page: www.cpuc.caa.gov
"Order Instituting Rulemaking to Establish Policies and Cost Recovery Mechanisms
for Generation Procurement and Renewable Resources Development," Rulemaking
01-10-024, filed October 25, 2001.
Energy Commission:
Created in 1976, the California Energy Commission is responsible for approving
the siting of large new power plants and for analyzing energy issues and markets.
The Energy Commission also implements grant and loan programs for renewable
resources and energy efficiency projects. The Governor appoints the five commissioners.
Web page: www.energy.ca.gov
"2002-2012 Electricity Outlook Report," February 2002
Power Authority:
Created in 2001, the California Consumer Power and Conservation Financing Authority
is authorized to use $5 billion in bond financing for electricity supply and
energy conservation projects. One director is the State Treasurer and the Governor
appoints the other four directors. The Authority expires in 2006.
Web page: www.CAPowerAuthority.ca.gov
"Clean Growth: Clean Energy for California's Economic Future", February
14, 2002.
CalISO: Created
by Assembly Bill 1890 in 1996, the California Independent System Operator is
a nonprofit public benefit corporation responsible for the safe and reliable
operation of the transmission line grid and for balancing real time electricity
supply and demand to prevent blackouts. To balance loads, the CalISO operates
a market for electricity an hour ahead and in real time. The ISO is regulated
by FERC, which must approve its practices and rates. The Governor appoints the
five governors. Users of the transmission lines fund the CalISO.
Web page: www.caiso.com
"Market Design 2002 Project,, Preliminary Draft Comprehensive Design Proposal,"
January 8, 2002.
Summer Assessment 2002, scheduled for release in April 2002
The CalISO funds a Department of Market Analysis which reports directly to FERC to help FERC identify wholesale market problems.
DWR: The California
Department of Water and Power is temporarily responsible for purchasing needed
electricity for customers of the IOUs while the IOUs are not creditworthy and
able to purchase electricity themselves. The California Energy Resources Scheduling
(CERS) function created during the energy crisis carries out the purchasing.
DWR's core role is to manage the State Water Project.
Web page: www.cers.water.ca.gov
"Update of California Department of Water Resources Power Purchase Contract
Efforts," May 31, 2001
Electricity Oversight
Board: Created by AB1890, the small EOB was supposed to provide impartial
oversight of the new markets, particularly the CalISO and Power Exchange. The
Governor has not appointed board members and the board is not functioning.
Web page: www.eob.ca.gov
Attorney General:
The California Attorney General has broad powers to investigate potentially
illegal acts to enforce state laws, and to bring lawsuits and file petitions
affecting the electricity market.
Web page: www.ag.ca.gov
IOUs: The three major investor-owned electric utilities are: Pacific Gas and Electric Company(PG&E), part of the holding company PG&E Corporation; Southern California Edison (SCE), part of the holding company Edison International; and San Diego Gas and Electric Company (SDG&E), part of the Sempra holding company.
Merchant Generators and Brokers: Also known as independent (non-utility) power producers (IPPs), these are the owners of power plants who sell electricity in wholesale markets either to energy service providers. Companies include Dynegy, Calpine, Mirant, AES, and Duke Power. They may sell to electricity brokers, such as Sempra Energy Services or Williams, who then sell the electricity to retail energy service providers.
Energy Service Providers: Also known as load serving entities (LSEs), ESPs provide electricity to end-use retail customers. They buy the electricity from merchant generators and brokers in the FERC regulated wholesale market. Some ESPs produce some or all of the electricity themselves.
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