In the 1994 Electricity Report (ER 94) the California Energy Commission
(Energy Commission) strongly supported the restructuring of the state's
electricity industry from a system of regulated monopolies to a
competitive market. We argued that only by unleashing the forces of
competition would the state enjoy "societal economic efficiency" -- the
greatest value for consumers at the lowest possible price. We encouraged
efforts to transform monopoly electricity generation into a free market,
and to transfer control of monopoly transmission lines to a central
coordinating entity that would grant nondiscriminatory access to all
sellers and buyers. We urged that other areas of the electricity
business be opened to competition, and that even those aspects that
remain under monopoly control be injected with elements of choice. We
said that restructuring should not cause environmental damage and we
proposed new market-based mechanisms of environmental regulation.
Finally, we discussed actions necessary to preserve California's
important policies of energy efficiency, renewable power development,
and research, development, and demonstration (RD&D) of advanced
electricity technologies.
In a matter of months, major steps toward the vision we described in ER
94 will become a reality. Debates about the basic outlines of a
competitive system are generally over, and thus in the 1996 Electricity
Report (ER 96) we turn to an examination of implementation details, to
new issues raised in the past two years, and to issues that remain
unresolved. Our fundamental goals remain the same: to ensure that
California's electricity system is as economically efficient as
possible, and that the state's public policies are achieved. This report
examines the extent to which the restructured system achieves those
goals, and it offers suggestions for improvements where they are needed.
Chapter 1, An Overview of the Restructured Electricity System, describes
the key building blocks of the restructured system, established
primarily by the recent state legislation known as Assembly Bill 1890
(AB 1890):
- An Independent System Operator (ISO) to operate the transmission
system and provide access to all buyers and sellers (The Glossary of
Abbreviations and the Glossary of Restructuring Definitions list and
define key terms such as ISO.)
- A Power Exchange (PX) to provide a bid-based spot market for power
- Consumers choosing who provides their power and who provides metering
and billing services
- The continuation of the current monopoly utility ownership of the
transmission and distribution wires, subject to ISO control of the
transmission system
- Bringing competition to some customer service activities (such as
metering and billing)
- Collection of the "competition transition charge" (CTC) for past
utility investments that turn out to be uneconomic in a competitive
market, and for other costs such as utility contracts with independent
power producers
Chapter 1 also outlines the ways in which AB 1890 provides for energy
efficiency, RD&D, and renewable power programs to be continued during
the first four years of restructuring. (Most of AB 1890's changes are to
be implemented during the period from January 1, 1998 to December 31,
2001. That four-year period, which for some matters is extended to March
31, 2002, is often referred to as the "transition period.")
Bringing competition into electricity generation is necessary for
economic efficiency, but it is not sufficient. In order for the state to
fully enjoy the potential benefits of restructuring, there must be
"meaningful consumer choice" at all levels of the electricity system.
Chapter 2, Meaningful Consumer Choice for Retail Electricity Services,
describes the concept of meaningful consumer choice and sets forth five
key principles to implement it.
Chapters 3 through 8 discuss in detail the major effects of
restructuring.
Chapter 3, Economic Effects of Restructuring, begins by examining the
likely impacts of restructuring on several different aspects of
consumers' electricity bills. It then addresses a key equity issue --
will small consumers see substantial benefits from restructuring -- and
suggests ways to ensure that they will. Next, in order to make
transmission pricing more economically efficient it recommends changes
in charges for transmission services. Finally, it discusses how undue
market power could result in unfair pricing and describes steps to
support a truly competitive playing field.
Under AB 1890 the responsibility for the reliability of California's
electricity system will change dramatically. Chapter 4, Effects of
Restructuring on Reliability, explains the changes. It also concludes
that protections in the legislation make it unlikely that reliability of
the generation, transmission, or distribution systems will suffer.
Chapter 4 also examines whether the economic incentives of a competitive
market will be sufficient to cause enough new power plants to be built
in the future. It concludes that the incentives will be adequate if
short-term prices rise to high levels; however, because the price rises
need to be only for short periods of time in order to create adequate
incentives, consumer bills should not go up substantially.
Chapter 5, Environmental Effects of Restructuring, discusses the
uncertainties that make reliable assessment of environmental impacts
difficult at this time. Focusing on air quality, the chapter states that
to date there is no evidence of any circumstances that will result in
either significant unavoidable adverse impacts or significant
environmental benefits. The Energy Commission will continue to monitor
the environmental impacts associated with restructuring and to work
closely with stakeholders and other governmental agencies. The chapter
also explains why continuing the recent trend towards more market-based
environmental regulation is both good economics and good for the
environment, and it states that progress should continue to be made here
regardless of the course of restructuring.
In recent years the state's efforts to encourage energy efficiency have
also begun to rely more on market-based strategies. Chapter 6, Energy
Efficiency, explains why the state should turn away from subsidy-based
programs and towards "market transformation" programs designed to
produce sustainable changes in available products and services and in
consumer behavior.
For the past two decades, California has led the nation in RD&D for
advanced energy technologies. In the transition to a more competitive
electricity system, RD&D efforts are likely to fade without government
support through collaboration involving utilities, the public, and the
private sector. In anticipation of competition, utility RD&D budgets
have declined. While the decline may be temporary, the long term impact
of restructuring on overall RD&D energy efforts should be monitored
closely. Chapter 7, Research, Development and demonstration, sets forth
key RD&D principles that will ensure the state's electricity consumers
will benefit from a cost-effective, environmentally-sound, safe, and
reliable energy system.
One of California's key energy policies is that the electricity system
consumer should have a diversity of generation types and fuels from
which to choose, in order to provide security against supply disruptions
and economic dislocation. Chapter 8, Risk Management and Diversity,
explains the components of a diversity policy and recommends state
actions to ensure that appropriate levels of diversity are obtainable,
consistent with principles of economic efficiency.
Because of recent technological advances, small-scale, widely-dispersed
generators are becoming economically competitive with their large,
central-station power plant cousins; they may offer environmental
advantages as well. Chapter 9, Distributed Energy Resources, discusses
the potential for those generators to provide a significant portion of
the state's electricity in the future.
With new and shifting roles in the electricity system, many market
participants will need new types of information. Chapter 10, Information
Needs in a Competitive Energy Services Marketplace, outlines what
information will be needed by whom and offers some suggestions about how
information should be obtained and provided. It also discusses the
delicate balance among market participants' legitimate needs for
information, appropriate proprietary rights to information, and
confidentiality concerns.
Although restructuring will affect all utilities in the state, it will
affect publicly-owned utilities (POUs) in some ways differently than it
will affect investor-owned utilities. Chapter 11, Publicly-Owned
Utilities, discusses the similarities and differences, and the unique
opportunities for POUs in a competitive market. Chapter 12, The Need for
New Power Plants, contains assessments of supply and demand trends in
electricity. It also establishes the criteria that the Energy Commission
will use in determining whether new power plants are "needed." State law
provides that the Commission cannot license a new power plant unless the
Commission determines it is needed; the rule protects electricity
consumers from having to pay for plants that are unnecessary. In a
competitive market, however, consumers will not provide the financial
guarantees they did in the old regulated monopoly system; instead,
private investors will bear the risk that a plant will turn out to be
not needed. Therefore, the chapter concludes, there is no need for
stringent need conformance criteria and that demonstrating conformance
with the Integrated Assessment of Need (IAN) should be a simple matter.
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