PAGE
EXHIBIT 20
News Release
California Public Utilities Commission
107 S. Broadway, Rm 5109
Los Angeles, California 90012-4402
CONTACT: Dianne Dienstein May 24, 1995 CPUC - 537
415-703-2423 (R.94-04-031/I94-04-032)
CPUC OFFERS ELECTRIC RESTRUCTURING PROPOSALS FOR COMMENT
California Public Utilities Commission (CPUC) President Daniel Wm.
Fessler and Commissioners P. Gregory Conlon and Henry M. Duque today
proposed to restructure California's electric industry by virtual direct
access through a voluntary wholesale pool with retail competition through
physical, bilateral contracts not sooner than two years after the pool
begins. Commissioner Jessie J. Knight, Jr. offered an alternative
proposing consumer choice through direct access whereby consumers can
enter directly into individual agreements with power producers. Fessler
and Knight are coassigned commissioners for this proceeding.
The Commission will work with the Legislature, Governor, other western
jurisdictions, and Federal Energy Regulatory Commission (FERC) to
facilitate restructuring.
The proposals cap an effort the Commission began in April 1992 to
assess the changing electric services industry, and in April 1994 with an
initial proposal to restructure the industry to give customers choice
among competing generation providers and replace cost-of-service
regulation with performance-based regulation.
Parties must file written comments by July 24 and reply comments by
August 23. The Commission will schedule Full Panel Hearings in a future
ruling. The Commission will issue, no sooner than 90 days from today, its
final policy decision with a schedule of steps for implementation.
Competition is shaping a dynamic electric industry where large buyers
can generate their own power, and/or negotiate price contracts for power
with utilities and non-utility suppliers. Californians pay an average of
10.28 cents/kWh of electricity, almost 50 percent higher than the national
average.
The Commission seeks to restructure the industry to take advantage of
and foster competition to lower electric rates for all customer classes,
and replace traditional cost-of-service utility regulation with
performance-based regulation.
The Commission reaffirms its regulatory commitment to continued safe,
reliable, environmentally sensitive electric service available to all
consumers in a restructured industry. It also intends implementing
restructuring in a manner that honors past commitments, provides utilities
with the opportunity to earn a fair profit, and does not compromise
utility financial integrity.
THE MAJORITY VIEW (Commissioners Fessler, Conlon, and Duque)
- - ------------------------------------------------------------
The majority prefers a policy that would use competition through a
wholesale power pool with virtual direct access to lower rates for all
consumers. The pool is expected to begin not later than 1/1/97. After two
years, if jurisdictional and market power issues are resolved and
transition cost recovery mechanisms are in place, retail consumers would
be able to buy electricity directly from specific generators. The CPUC
would use performance-based ratemaking for services not subject to
competition.
PAGE
CPUC ELECTRIC RESTRUCTURING PROPOSALS FOR COMMENT
While Commissioners favor a system like that operating in England and
Wales, that system has been criticized for an inherent flaw of market
domination by two large generation companies, limiting competition and
producing high prices in the "horizontal" market. One option for
addressing such market power leads the Commission to seek comment upon
corporate separation or divestiture of a portion or all of utility
generation assets into smaller generating firms, none of which can
dominate the market. The Commission also solicits additional suggestions
for addressing market power, including whether potential remedies need to
be in place before the pool begins to operate or whether they should be
developed after and if market dominance occurs.
In order to address vertical market power, pool participants would
transfer operation of their transmission assets to an independent system
operator subject to FERC jurisdiction. Commissioners commit the CPUC to
"cooperative federalism" with the FERC to resolve federal-state
jurisdictional issues, and suggest this proposed structure would be useful
in solving difficulties in valuing uneconomic assets/costs. Transmission
and distribution assets may be reorganized into separate wholly-owned
affiliates to better avoid self-dealing issues for transmission entities,
and jurisdictional issues for distribution entities.
Pacific Gas & Electric, Southern California Edison, and San Diego Gas
& Electric, with formal CPUC support, would seek FERC approval to
establish the wholesale pool to function as an independent system
operator. They would transfer operating control of their transmission
assets to that operator. All other power suppliers including municipal
utilities, power marketing agencies, independent power producers, and out-
of-state generators would be invited to participate through sales or
purchases and would be given nondiscriminatory access to transmission
services.
The independent system operator will ensure the most efficient mix of
power plants and network facilities are in use at any given time,
coordinate planning and operating activities among electric suppliers and
users, determine which bids best match supply and demand, maintain system
reliability, manage emergency responses, reserves and grid congestion, and
be responsible for providing backup services to avoid disruption of
service throughout the network. System reliability would be governed by
NERC and WSCC standards.
Under the wholesale pool with virtual direct access, the cost of
generation is determined by an economically efficient auction conducted
by the independent pool system operator in real time and revealed to the
market each day. In this way, it works much like the New York Stock
Exchange.
All successful bidders into the pool - those who bid to supply
electricity at the lowest price - would receive a uniform market clearing
price. A utility purchasing electricity from the pool would pay that
price, and will face minimal CPUC review of its procurement activities.
Utilities would have to purchase generation resources from this
competitive market and this will lower prices and give better price
signals in the near term to all market participants than retail, physical
contracts. Utilities would continue to distribute electricity to end
users under CPUC rate-setting jurisdiction.
Customers would be given a choice of a rate scheme which reflects real
time pricing or one which averages the cost of electricity multiplied by
the monthly consumption. This will require the phase-in of real-time
metering over the next six years. Virtual direct access allows consumers
PAGE
CPUC ELECTRIC RESTRUCTURING PROPOSALS FOR COMMENT
with real-time meters to better control their energy use and the price
they pay. Such meters allow them to track their energy use hour-by-hour.
Combined with the publicly available price information from the pool,
customers can tell what their hourly energy costs and usage are and adjust
accordingly. Virtual direct access also allows customers to lock in
energy prices through financial contracts (contracts for differences) with
energy producers, marketers, or brokers. Thus, customers are allowed to
control their overall energy costs by constructing a portfolio of short-
term energy purchases from the pool, long-term fixed price purchases
through financial contracts and appropriate energy conservation and load-
shifting.
As Commissioners see it, "Over time, the price conscious market will
exert downward pressure on prices as it rewards cost containment,
operating efficiencies and the adoption of enhanced technologies. A
customer of any class can follow this market by noting daily quotations
for each hour and half hour reported in news media as well as by finding
the electricity component clearly defined on the utility bill."
Because demand for electricity varies throughout a day, the pool
reveals the true cost of electricity as it is used, and customers can
better manage their use through shifting to a time of day when rates are
lower or improving their energy efficiency. The result, according to
Commissioners, is a fourfold benefit for any individual consumer who is
able to reduce costs by shifting load [demand], for the society at large
which defers the demand for new generation, for investors in existing
plant and equipment who see it put to more productive use, and for
individual customers who can arrange for financial contracts with
generators for long-term fixed prices if they desire.
Commissioners acknowledge that in the short term, virtual direct
access would be limited by access to real time meters to monitor
electricity use, and suggest a meter implementation schedule based on a
customer's maximum demand: 500 kW (already installed), 400 kW - one year
after the pool begins, 300 kW - two years after the pool begins, 200 kW -
three years after the pool begins, 100 kW - four years after the pool
begins, 50 kW - five years after the pool begins, below 50 kW - six years
after the pool begins. Customers can opt to install real time meters
sooner.
For utility assets subject to competition, compensation either to
shareholders, if negative, or ratepayers, if positive, would be based on
the difference between market value and book value. Transition cost
compensation - the cost of paying off utility assets which become
uneconomic in a competitive environment - would be separate on customer
bills from energy pricing through the pool mechanism. Positioning
utilities as the distribution provider for all customer classes ensures
that cost shifting between customer classes does not occur and that each
class will pay a fair share of the costs of transitioning to a more
competitive market. No transition cost compensation would occur until
the pool begins to operate. Nuclear power plants will receive enough
revenue through a transition charge to ensure a fair return. Contracts
with independent power producers will not be disrupted.
Commissioners will work with the Legislature to explore other ways to
improve, deliver and fund mandated low income, economic development,
environmental, and diverse energy source programs. In the interim, the
programs would continue as they are with the costs for each distinctly
identified on customer bills.
PAGE
CPUC ELECTRIC RESTRUCTURING PROPOSALS FOR COMMENT
AN ALTERNATIVE VIEW (Commissioner Knight)
- - -----------------------------------------
Commissioner Jessie J. Knight, Jr. offered an alternative proposal to
streamline regulation and grant consumer choice through direct access by
relying on direct, principal-to-principal arrangements between buyers and
sellers of electricity. Knight stands by his proposal, stating, "I remain
convinced that the views expressed in this proposal will be embraced by
a majority of Californians' who want lower cost electric service."
Commissioner Knight's proposal would grant California's electric
consumers the option of purchasing electric and other services from a
provider other than the utility, in much the same way that consumers of
telecommunications service select long distance telephone service, yet
calls are completed by the local utility. Under this alternative, all
consumers would have access to the benefits of a more competitive industry
in a manner that maintains reliability, service, and safety. This proposal
offers as well a reformed regulatory approach which rewards utility
management and employees for efficiency and performance, not dollars
spent.
This proposal adheres to two strict guidelines: first, there will be
no cost shifting among consumers, and second, rates will not rise in the
transition to a more competitive market. Knight states, "The forces of
competition are well underway in this industry. Those forces and consumer
through direct access cannot be quarantined. They must be tapped for the
benefit of California's consumers and its economy."
Beginning in two years, consumers would have access to the competitive
market for generation and other services. This proposal builds on
commercial arrangements and market mechanisms already in place to ensure
the reliable delivery of power over the transmission and distribution
network. It specifically rejects subjecting California to the substantial
risks of a centralized, government-mandated market structure in which all
buyers and sellers are forced to participate.
The direct access model allows consumers to choose to remain with the
utility, to tap the competitive market through direct access, to
participate voluntarily in power pools, or to elect any other market
mechanism to ensure delivery of power. Consumers electing to enter the
competitive market are termed direct access consumers. Consumers electing
to remain with the utility are termed utility service consumers.
To ensure a fair and competitive market for generation and other
services, and to accurately determine transition costs, the utilities
would separate power plants from transmission, distribution and other
assets, using approaches that promote shareholder indifference. This
could occur through an auction, a "spinoff" to shareholders, or some
combination, allowing the value for the utilities' power plants to be set
by the market, not by government forecasting and regulatory processes.
The remaining utility, or Electric Distribution Company (EDC), would
procure power for its consumers in the open market for electricity.
Utilities would have two years to complete their reorganizations. The EDC
would continue to honor existing contracts to purchase power from
independent generators and would be fully compensated for any above-market
cost of this power.
In addition, to ensure a safe and reliable network that treats all
buyers and sellers equally, the proposal establishes an independent system
coordinator or "OPCO" to provide the coordination and reliability services
necessary to sustain the flow of electrons, and do so in a way that
neither advantages not disadvantages any participant in the market.
PAGE
CPUC ELECTRIC RESTRUCTURING PROPOSALS FOR COMMENT
Many utility assets, including some contracts and power plants, are not
economic in today's market. This proposal would promote shareholder
indifference by allowing the utilities to recover costs associated with
these assets in the transition to a more competitive market. For utility-
owned power plants, utilities may recover 90 percent of the uneconomic
portion of their generating assets. The remaining 10 percent of the
uneconomic portion of utility generating assets would be returned to
ratepayers in lower rates. The costs associated with uneconomic contracts
for power purchased from independent power providers is fully recovered,
as are the costs associated with existing balances in regulatory accounts.
These uneconomic utility assets and obligations are included in rates
today, but in the future would be separately identified on all consumers'
bills as a Competition Transition Charge, or CTC.
This proposal would maintain a reasonable opportunity to earn for
utility shareholders and a fair opportunity to compete in a restructured
industry. The utility would enjoy, through performance ratemaking, an
opportunity to earn based on successful management; the utility would not
be at risk for the costs of the transition; and the utility would have the
opportunity to compete to serve consumers as an effective and successful
"portfolio manager."
The Electric Distribution Company retains the obligation to serve all
utility service consumers, and retains the obligation to transmit power
to direct access consumers. However, the obligation to serve is
substantially modified for direct access consumers. Direct access
consumers wishing to return to the EDC for service will no longer enjoy
the protection of regulated, tariffed rates.
This proposal's approach to continued funding for public purpose,
energy efficiency, and environmental programs is similar to that proposed
by the other Commissioners. In the near term, these programs continue at
their current funding levels through current funding mechanisms. However,
unlike the current practice, the cost of these public purpose programs
would be stated explicitly on each customer's bill.
For the longer term, the direct access proposal recognizes that in
order to sustain these programs in a more competitive market, their
funding mechanisms must be altered. This proposal offers for the
Legislature's consideration recommendations on how to ensure continued
funding for these programs. In addition, this alternative recommends for
consideration by the Governor and Legislature the formation of a broad-
based task force composed of interested stakeholders. The task force
would design ways to fund these programs in the future. The programs
under discussion include low income rate discounts, special economic
development rates, research and development programs, energy conservation
programs, special utility procurement programs to ensure a diverse energy
supply, and many others.
- - --------------
BACKGROUND
- - ----------
These proposals result from six days of Commission Full Panel Hearings
over the course of a year, comments by 140 parties and hundreds of
individuals participating in 16 Public Participation Hearings statewide
or responding to parties' comments and transcripts available to them via
the Internet and broadcasts of the hearings on the California Channel.
The proposals also reflect information obtained from evidentiary hearings
PAGE
CPUC ELECTRIC RESTRUCTURING PROPOSALS FOR COMMENT
on issues related to uneconomic assets, dialogue with other state and
federal agencies and legislators on cooperative solutions to
jurisdictional issues, dialogues with other nations which have
restructured their electric industry, and recommendations of the Working
Group Report on how to continue public purpose programs under various
market models.
HOW TO OBTAIN THE PROPOSALS
- - ---------------------------
1. Internet access either through gopher.cpuc.ca.gov or ftp.cpuc.ca.gov.
2. Call 415-703-2045. After the recording, state you want the proposals
on electric restructuring, docket R.94-04-031, issued on May 24. You
will receive the proposals and a bill for the cost of reproducing them
at 20 cents/page.