In a surprising bit of candor, the chief political architect ofCalifornia’s 1996 electric industry restructuring law told a groupof industry participants at a statewide energy roundtablediscussion in San Diego that the state’s lawmakers intentionallyderegulated generation to draw out-of-state capital to pay off theenormous stranded costs of the state’s three major investor-ownedutilities.

Indicating merchant generators paid too much, state Sen. StevePeace said the plan worked better than expected. Representativesfrom Duke Energy and NRG at the energy forum disputed the fact thatthey overpaid, considering the long-term potential of the powerplants they now own and plan eventually to upgrade substantially.

The law, AB 1890, was “a bet that most of the industrynationwide would misperceive what we were doing and overbid on thepower plants,” said Peace. “And by overpaying for power plants,they would help get our consumers off the hook for stranded costs.”

Reliability of California’s grid, with a new emphasis on thesouthern end of the state, was the focus of the roundtablediscussions about “energy market and infrastructure issues.” Peaceand four of five California Public Utilities Commission membersconducted the discussions among stakeholders who offered variousoptions ranging between government-imposed and market-basedsolutions.

“When the California legislature entered the debate onelectricity competition, the assumption was that you had to acceptsome level of compromise on reliability,” Peace recalled. “Everyonejust assumed we would have to accept this. But what isfundamentally different in what we did, compared to the nationaldebate, is that we said absolutely, categorically you cannotcompromise reliability. We led with reliability.

“The market signals are clearly what we chose to move toward forthe generation component. We consciously chose to say that wedidn’t want to expose the small customer to competition, so wecreated a ‘Price Club’ through the [California Power Exchange] andgave the small customers the direct pass-through of wholesaleprices.”

Even though California’s independent system operator (ISO) iscurrently running into trouble at FERC because of its approach todealing with congestion that has been driving up the average pricesof power in the northern half of the state and the state’s lack ofzonal pricing, Peace candidly admits that he is trying to protectthe San Diego area consumers from paying higher prices until the”playing field can be leveled” statewide to address generation andtransmission shortages in certain pockets such as San Diego.

He is also not against applying more command-and-controlpolicymaking to future attempts to solve both air quality andenergy problems in making the infrastructure upgrades and buildingmore merchant power plants. The state ISO is designed to be thecenter of the centralized planning part of the state’s strategy asseen by Sen. Peace.

“As intellectually disturbing as it may be to some people, thepolicy of the legislature [in 1996] was definitive andunambiguous,” Sen. Peace told the roundtable. “It was designed tomove toward greater central planning, not away from it. We went todecentralized market signals when it comes to generation, but wewent to centralized, prescriptive, government-controlled, directivecentral planning through the ISO. It was a conscious decision.”

Sen. Peace indicated that more coordination among the state’senvironmental and energy policymakers is needed, along with a newpush from California’s major investor-owned utilities to spread theuse of real-time, “smart” meters to residential units and smallbusinesses as a means of spurring retail energy competition.

Sen. Peace repeatedly reminded the various energy industrystakeholders and utility representatives in the audience thatreliability — not lower prices or the advent of more competition— was the impetus behind AB 1890 being passed unanimously by thestate legislature at the very end of it legislative session inAugust 1996, less than a month after the Aug. 10 widespread poweroutage that affected the entire Pacific Coast region.

“The purpose of the act — not 80 or 90% of it — but THEpurpose was to improve California’s system reliability,” he said.

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