California update

DEREGULATION UPDATE

California

Overview

On January 1, 1998, California’s electricity market will open its doors to retail competition. While a landmark event for local residents, California’s newest gold rush has significance for Houston area businesses, as well.

At 214 billion kWh annually, California is one of the nation’s largest markets for electricity -- second only to Texas. The majority of consumers buy their electricity from the state’s largest utilities: Pacific Gas & Electric (PG&E), Southern California Edison (SCE) and San Diego Gas & Electric (SDG&E). Electricity is currently provided on a bundled basis at a regulated price.

However, times are changing in California. For the first time in the brief history of electric utility deregulation, a major energy market will transition directly to retail access for all customer classes without pilot programs or phase-in provisions. A framework for recovering stranded assets has been established. And, investor owned utilities (IOUs) PG&E and SCE face divestiture of a portion of their fossil generation assets while all IOUs will sell into and buy from a wholesale power pool.

While it will take time to assess the national implications of this grand experiment, commonalties in energy use, concentration of population, and diversity in electricity generation, make California an interesting case study for consumers in Texas to follow. Lessons learned in California will make for better business decisions when the market in Texas opens to retail competition.

A Look at the Restructured Market

With some of the nations highest electric rates, it's little wonder that California is ahead of the curve on deregulation. The state's restructured market is a result of the passage of California's Restructuring Bill AB 1890. AB 1890 provides all customers the opportunity to purchase electricity from either their current supplier of a variety of new, electric service providers (ESPs). Customers can begin selecting their service provider as early and November 1, 1997.

Key elements of California's plan for restructuring electricity service functions are as follows:

Utility-owned transmission facilities controlled by a newly created entity, the Independent System Operator (ISO) which functions much like an air traffic controller for energy;

Divestiture by SCE and PG&E of at least 50% of their fossil generation assets to mitigate market power following restructuring. The IOUs must sell into and buy from a common power exchange (PX) over a four-year transitional period. The PX will be implemented simultaneously with the start of the ISO;

Distribution functions (wires and poles) by the utility distribution company (UDC) to address reliability, but billing and metering will be open to competition; and

A pricing structure through 2001 that is comprised of three kinds of costs: power purchase or generation costs, competitive transition charge (CTC) costs, and fixed charges applicable to all offers. Fixed charges include distribution and transmission charges, a variety of public goods charges, and nuclear decommissioning charges. Tow pricing issues are paramount here: (1) utilities will be passing through the PX charge, with little or no markup; and (2) the ESP or its direct access customers will be responsible for paying a CTC that varies from month to month as the pool price changes. Also, bundled rates of utility distribution companies (UDCs) are capped at June 10, 1996 levels with a 10 percent rate cut for customers with a peak demand of less that 20 kilowatts.

Getting To Know the Key Players

The size and complexity of the California market has resulted in a number of key institutional players, as well as a long list of potential new energy service providers. Key institutional players include:

The Oversight Board, which appoints members of the ISO and the PX and mediates problems.

The ISO, which balances the physical system, contracts for auxiliary services and ensures system reliability, security and stability.

The PX, which conducts resource bidding, oversees settlements and acts a scheduling coordinator for pool loads.

Scheduling coordinators (SCs) who attempt to balance bilateral supply and demand and schedule transactions with the ISO for all load-serving entities.

UDCs, which provide distribution services and act as default providers of electricity.

Competitors for the commercial and industrial market include incumbents Southern California Edison, Pacific Gas & Electric, and San Diego Gas & Electric, plus a number of nationally recognized energy service companies including: NorAm Energy Management, Enron, NGC, Southern and Duke Energy.

Competitive Transition Charge (CTC)

The CTC is California's answer to the issue of "stranded investments". In California, CTCs are computed as the Capped Retail Rate minus Fixed Charges minus the Pool Price. The CTC will be determined as a monthly charge during the transition period of 1998-2001. As the PX price varies form month to month, the CTC will change accordingly. This will create some uncertainty for energy service providers.

UPDATE:

Nine days before a competitive electricity marketplace was scheduled to start, officials from the California PX and ISO announced it was encountering problems with the computer system. Officials from the PX and ISO were forced to delay the start of deregulation because the system was unable to properly track the transactions of electricity customers and suppliers in the competitive market.

Direct assess was postponed until March 31, 1998 to allow further personnel training and work on the software that links the new system operating the state's electricity transmission and distribution network.