The gong has sounded for the start of a widening debate in California over how to structure its electricity markets in the future. Legislative and regulatory initiatives are proposing a move to a core/noncore structure, and the stakeholders are lining up on all sides of the debate. It is not clear whether the state will opt for a regulatory, political or economic solution, or like its infamous 1996 electric restructuring law, make it a hybrid of all three.

In issuing his own alternative last Tuesday as part of an all-day hearing, Michael Peevey, president of the California Public Utilities Commission, attempted to make the case that the core/noncore debate is over “purely economic policy.” In contrast, the utility Peevey once headed as a senior officer, Southern California Edison Co., appeared focused on a political solution through its sponsorship of state legislation (AB 2006) and creation of a grass roots citizens organization and a major advertising push to support the bill.

Meanwhile, lawmakers seem more inclined to want a return to stronger regulation to assure reliability and protect against a return of the wholesale market meltdown three years ago.

Peevey’s proposal advocates a core/noncore structure focused on the customer. He said the CPUC will need at least a year after the state legislature acts to prepare, making sure that “all the preconditions” are in place, primarily to avoid cost shifting from one group of customers to another.

Without some action, Peevey said the current uncertainty and “risk aversion” toward long-term investment in new infrastructure projects will plague California’s energy market.

Remembering the state’s problems with its 1996 electricity restructuring law, Edison’s President Robert Foster said California “will allow us only one more chance to get this right.” He expressed skepticism toward the idea that a massive retail customer choice program could ever work, calling the “merchant generation model” (of the late 1990s) the “electricity equivalent of the ‘’ bubble.” He warned stakeholders, “don’t believe the hype” about the success of retail competition in other states, such as Texas and New Jersey.

Foster and Edison are pushing AB 2006 as a means of establishing core/noncore, but with a very restricted direct access, or retail competition, program in which customers with choice could only switch back and forth every five years. He argued against proposals that in his opinion are embracing “competition for competition sake,” and ignoring what really benefits utility consumers.

While the utility does not favor opening direct access, if it is the regulators’ and legislators’ will to do so, Foster suggested the best way to do it would be with a tightly regulated core/noncore framework, such as AB 2006 proposes.

Overall, Edison’s attitude reflected the fact that California’s three major private-sector utilities displayed different views on the state’s key energy policy question. Utility representatives spoke last Tuesday as part of a panel at a CPUC hearing on core/noncore held in San Francisco.

As part of the individual presentations, Pacific Gas and Electric Co.’s Dan Richard, a senior vice president, said the utility will formally ask the CPUC to approve a “hybrid” approach to utility power-buying this year to allow “significant resource procurement” over the next 12 months, involving energy efficiency, renewables, nonutility long-term contracts and some cost-of-service utility-developed generation.

“The time to move is now,” Richard said. “And we are going to ask the CPUC to act by the end of this year on a long-term resource plan for PG&E.”

At the other extreme from Edison, San Diego-based Sempra Energy’s Bill Reed, a senior vice president, said Sempra’s two utilities have been “consistent supporters of direct access,” citing what he described as a favorable experience in natural gas, and acknowledging the difference in the energy sources and the ability to store gas, but not electricity. Reed said he sees “no conflict” between having so-called bundled and unbundled (core/noncore) sectors of the market side by side.

In moving to core/noncore, Reed said he would suggest policymakers also address the need to eliminate cross-subsidies from large business customers to small residential/business customers and the utility reserve margins be made more flexible, setting them in broad bands or ranges, such as 12% to 22%. If direct access gets expanded, taking more load away from the utilities and thus increasing their reserve margins, they could begin selling some of the excess supplies in the upper end of the range on the wholesale market.

“Direct access is a program for customers to control their costs better, but it can’t be cost-evasion,” Reed said. “Getting the costs right is an important aspect that needs to be addressed in all of this process.”

Among regulators, the prevailing majority and minority views at the badly fractured CPUC clashed again during the all-day hearing that included presentations from two-dozen industry stakeholders and academics. The public exchanges underscored the continuing sharp difference of opinion on what direction the state’s energy policy should take three years after the crisis of 2000-2001.

Many critics of proposals to move to the core/noncore structure and a return to increased retail competition repeatedly reminded CPUC commissioners that Tuesday was the 10th anniversary of the regulatory commission’s now infamous “Blue Book,” a staff analysis of electric industry restructuring that kicked off a two-year planning/analysis process by the CPUC that ultimately resulted in the state legislature unanimously passing the 1996 electric restructuring law (AB 1890).

That law is now widely criticized as a failure. The CPUC’s Peevey, who was then starting a successful energy services business as an entrepreneur, argued that today’s situation is different and California is not about to recreate another failed deregulation effort.

“Everybody got something out of AB 1890,” Peevey said at the conclusion of the hearing in San Francisco.”Think of our friends at Edison and PG&E. One got $5 billion in stranded costs and the other $4 billion. And they went out and invested very wisely all over America.” The latter reference drew laughter, being offered tongue-and-cheek to reflect the fact that PG&E’s nonutility business unit is now severed from the company and in Chapter 11 bankruptcy, and Edison International’s nonutility businesses are still struggling under a mountain of debt.

“[Regardless], everybody was going along just fine for two years under [electricity restructuring] until the late summer and early fall of 2000,” said Peevey, citing a paper by one of Tuesday’s panelists, James Bushnell, head of the Energy Institute at the University of California, Berkeley. Bushnell’s study of what went wrong with AB 1890 cited the utilities’ and regulators’ failure to get long-term power supply deals completed, and the regulators’ failure to grant timely rate increases to cover the utilities’ skyrocketing wholesale energy costs.

Commissioner Carl Wood, who is one of two remaining members of the CPUC who served during the crisis, took strong exception to Peevey’s remarks and proceeded to warn that the state is about to embark on another “disaster” tied to the failed notion that retail competition can work in the electricity industry.

Noting that Peevey’s remarks “certainly provoked” him, Wood said he didn’t want to talk about what the CPUC “did or did not do during the crisis,” but he disagreed with Peevey about the track record in other states and nations regarding retail customer choice.

“California is not the only place that experienced a disaster,” Wood said. “Montana comes to mind. It experienced a disaster worse than ours, and they are still trying to dig out of it. And I wouldn’t want to hold up Australia’s markets as anything we would like to see in our own wholesale markets. They have experienced wild fluctuations in prices.

“The experience around the world can generally be summed up as being that — they haven’t led to disasters like we had here in California, but in no case have customers, especially small customers, benefited.”

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