Thursday, August 10, 2000
JOINT HEARING
SENATE ENERGY, UTILITIES AND COMMUNICATIONS
and ASSEMBLY UTILITIES AND COMMERCE
BOWEN AND WRIGHT, Chairs
10:00 a.m. -- California Room (4203)
On “California's Electricity Market:
Making Competition Work For Consumers”:
Comments of Paul Fenn
Local Power
4281 Piedmont Avenue
Oakland, California 94611
510 451 1727
paulfenn@local.org
local.org
These comments endorsed by
the following local officials:
Tom
Ammiano, President, San Francisco Board of Supervisors (Brad Benson 415 554
5145)
Ignacio
de la Fuente, President, Oakland City Council (Lewis Cohen 510 238 7052)
Hal
Brown, Marin County Board of Supervisors (Sandi Blauvelt 415 499 7331)
Albert
Vera, Executive Director, Southern California Cities Joint Powers Consortium
(310 391 1155)
California Community Choice
legislation has been requested in resolutions passed by the city and county of San
Francisco, Oakland, Berkeley, Marin County and Fairfax, as well as West
Hollywood, Lomita, Carson, El Segundo, Hawthorne, Culver City, Lawndale, and
the Southern California Cities Joint Powers Consortium.
Community Choice is
supported by
The Utility Reform Network (TURN, Nettie Hoge 415 929 8876), Public Citizen
(Wenonah Hauter 202 546 4996) Ratepayers for Affordable Green Electricity (RAGE
- same) and the Western Power Trading Forum (Gary Ackerman 650 324 3250).
California
August
10, 2000
To
the California Legislature:
When
California’s deregulation passed in the Fall of 1996, the law was heralded as a
national model, leading many of the 25 states that have subsequently passed
deregulation laws to imitate its basic structure. This law promised consumers
electricity choice and the end of the last great monopoly at the price of $30
billion.
These
promises have not been delivered. Today, only 5% of Californians are
participating in the deregulated market, and the whole idea that individual
consumers can constitute a competitive market has proven to be false. Indeed,
even large industrial customers are unable to find suppliers. Modeled on the
telecommunications deregulation, AB1890 made the mistake of ignoring the
massive capital costs that finance power plants. As a result, only the aggregation
of large industrial, commercial, and government customers have been able to
find suppliers.
If
you look at the rules for aggregation, however, you find that they are written
to prevent consumers from aggregating. A closer look reveals that AB1890 was in
fact not designed to create competition, nor to offer consumers access to the
market. Senator Peace has himself make public statements to this effect. Today
many of the supporters of AB1890 are now calling for “re-regulation” of the
retail market, implying an “undoing” of deregulation. A simple question must be
asked. If the idea of competition in the electric industry is to be revoked,
and if official or unofficial monopolies are to be reestablished, then we must
ask the deregulated and bailed out wires companies: are you paying us back the
$30 billion then?
It’s
a funny question because obviously the answer is “no.” Our former utilities don’t have the money we
gave them. It has gone into their new global investment portfolios. For Edison
International it is invested in new power plants in China and throughout Asia,
South America, Australia. For PG&E it is in Massachusetts.
If
we come to terms with the fact that the money will not be returned, then you
have no choice but to actually attempt, this time around, to create a
competitive industry.
Elected
officials, it will not do to pretend you are protecting consumers with new
“emergency” measures that actually restore monopolies free of charge and
unannounced. Will we have more hearings in another four years to discuss
today’s follies? Will Sacramento legislators pass another bill they have not
bothered to read? Will the same people who wrote AB1890 be allowed to control
the process of rewriting it?
The
move to restore monopolies is already evident in both legislative and
regulatory proposals. The California Public Utilities Commission’s recent
decision to allow SDG&E to participate in Forward Block Markets in response
to the doubling and tripling of electric bills in San Diego is the most disturbing
because it both violates the law and yet represents the policy of the Public
Utilities Commission. Presented as a
“pro-consumer” means of stabilizing the PX price, this decision amounts to
reauthorizing the bailed out, “market-neutral” wires companies to reassert
their retail monopolies by acting as electric supply aggregators of their
former power supply customers.
Under
AB1890, these companies are designated as “default suppliers” of Californians
who do not find their own power suppliers. As I mentioned before, 95% of
Californians have not found a supplier.
By allowing these deregulated former power supply companies to hedge the
state pool or California Power Exchange (PX) and offer hedged “service
packages” to their former power supply customers, they are in effect being
unofficially reinstated as default aggregators, which in effect amounts to
re-monopolization.
Considering
the $30 billion in disposable income paid by Californians since 1996 for the
privilege of getting rid of monopolies, this legislature should not repeat the
mistake of allowing these very former power supply monopolies to solve the
problem they themselves engineered in 1996.
There
are other ways for other (non-UDC) entities to manage this risk. Giving it to
wires companies who are alleged to be neutral to power supply markets is
another example of letting the fox guard the chicken coop.
The
public of this state has paid dearly for a competitive electricity market, and
it is the duty of this Legislature to make a genuine attempt to deliver it as
well it can. I will repeat that this has not yet been attempted. It will not do
to announce the failure of electric industry competition when it is not been
tried in earnest. Until then, any measure that expands the authority of the wires
companies should be regarded skeptically.
Indeed, delivering competition means reducing the role of the wires companies in power supply. Rather than authorizing wires companies to aggregate, we need to provide the remaining 95% of Californians with an opportunity to find suppliers and get off of the Power Exchange. Under AB1890 these non-participants are automatically sold power from the Power Exchange via the wires companies’ AB1890-annointed status as their “default providers.” The fact we face today is not merely that electricity rates have tripled in San Diego, but that San Diegans are being held captive to a market and that this market is vulnerable to speculation. The only reason that last week’s decision by the Independent System Operator (ISO) to cap Power Exchange rates was needed is that the failed market created by AB1890 puts nearly all Californians in this one, noncompetitive and dysfunctional “default service” marketplace.
The
Power Exchange is not – as some revisionists have recently argued - the
competitive market that Californians were promised for their $30 billion in
1996. It was created as a backup system for unprofitable consumers (hence the
term “default service.”), much as many states have created property insurance
redlining pools for poor people in “high risk neighborhoods” who often cannot
find an insurer who will offer them coverage The fact that this redlining pool
includes 95% of Californians does not make it a market.
Giving
the wires companies authority to hedge and offer consumers hedged retail
products begins to redefine this redlining pool as if it were the competitive
market itself, and redefines the would-be wires companies as virtual monopoly
aggregators in a statewide consumer ghetto.
Rather
than declaring “competition” a failure, we should declare AB1890 and the
revisionist concept of the Power Exchange as a surrogate market to be a failure
and get real about organizing demand to meet supply outside the Power Exchange
Those
of you who are genuinely concerned about protecting consumers should take a
lesson from the way AB1890 was written and passed, and avoid hasty, politically
convenient solutions to San Diego’s rate shock. AB1890 is based on mistaken
economic theory, the theory that individual consumers would create a
competitive market. What we have learned, above all, is that you need large
blocks of consumers if they are to be adequately profitable to serve. This has
come to be called “demand responsiveness.”
Creating
“demand responsiveness” is the key to delivering what was promised for the $30
billion. The only way to create demand responsiveness is to empower consumers
to organize their demand in blocks of sufficiently large volume to be
profitable to competing suppliers. This is called Community Choice.
Community
Choice authorizes local governments to aggregate all market non-participants in
their jurisdictions into city-negotiated contracts, much like cable television
or garbage services have been negotiated for decades, but with an opt-out
clause for consumers (such as McDonalds franchises and California
Manufacturers’ Association members) who are big enough to participate directly
in the market. It also allows contiguous municipalities to join together into a
commonly approved contract.
Key
to Community Choice’s effectiveness is its opt-out structure. If as a resident,
commercial or industrial consumer you do not choose your own provider,
Community Choice municipalities will include you in the community’s publicly
defined and competitively bid-out power supply contract. Like garbage service
and cable, the municipality does not act as a wholesaler or reseller and does
not assume financial and other risks of titleholder, but merely defines and
negotiates contracts on behalf of their communities.
Community
Choice was passed in Massachusetts in 1997 and went into effect last year. The
first group of municipalities to choose a power supplier, called the Cape Light
Compact, has the worst load profile in the state, but it was able to beat the
“Standard Offer,” their version of our Power Exchange. Recognizing California’s
problems as early as 1997, Ohio passed a Community Choice law in 1999 to go
into effect in 2001. Since then, fifteen California cities have passed
resolutions asking this legislature for a Community Choice amendment. San
Francisco, Oakland, Berkeley, Marin County and Fairfax, as well as West
Hollywood, Lomita, Carson, El Segundo, Hawthorne, Culver City, Lawndale, as
well as the Southern California Cities Joint Powers Consortium together
represent two million California residents whose local officials have asked to
do this before the San Diego crisis began. Community Choice legislation was
prepared in January and approved by the California Legislative Counsel, and
would have been filed in January 2001 had the San Diego crisis not occurred.
Community Choice is also supported by The Utility Reform Network (TURN), Public
Citizen, and the Western Power Trading Forum, as well as RAGE, a national
coalition of consumer and environmental groups headed by Ralph Nader and David
Brower. Federal Community Choice legislation has been introduced by Congressman
Dennis Kucinich (D-Ohio).
Community
Choice offers significant consumer security against fluctuations in wholesale
power prices by transferring the risk to the private sector rather than to the
consumer. In the Cape Light’s power supply contract the winning bidder was
required to provide performance bonds that are left in escrow in case the power
supply is in default of contract. Under the agreement, if the supplier pulls
out of a contract and the Compact must find a new supplier at a new price, the
bonded supplier must pay the difference. In this way, Community Choice offers a
method of assigning risk to the private sector where it belongs.
Community
Choice of public Energy Efficiency and Renewables funds is also critically
needed to mainstream existing summer spike-leveling technologies that will
continue to remain marginal to the power supply market as long as the state’s
wires companies continue to control the hotly contested energy efficiency and
renewables surcharge funds that are currently collected from every Californian.
The
city of San Jose has led the effort in recent years to be given even limited
access to energy efficiency funds, and has already done groundbreaking work,
but statewide the funds continue to be controlled by wires companies which have
a conflict of interest that prevents them from investing in energy efficiency
on an unprecedented scale. It is time that this legislature stop ignoring the
conflict of interest at hand in this issue. Wires companies they are guaranteed
a return on investment, so that the higher the capacity requirements of their
wires, the more they capitalize, and the more money they collect from
consumers.
The
Massachusetts Community Choice law includes Community Choice for energy
efficiency and renewables public benefits funds, meaning that each municipality
is entitled to administer the funds collected from its residents and businesses
once it has submitted an energy efficiency plan and won approval from the
Massachusetts Department of Telecommunications and Energy, the equivalent of
our Public Utilities Commission. Cape Light Compact leaders point out that they
have a huge direct interest in shaving off peak loads in the community in order
to improve its load profile and secure a better price for power supply.
Community Choice eliminates the conflict of interest at hand and puts these
funds in the hands of agencies who have a direct interest in making them work.
Conservation
can be most dramatically stimulated by Community Choice, with carries obvious
implications for rate shock management. To date, the companies attempting to
take over meter reading based on the penny subsidy have asked for “blocked
metering,” meaning reading a whole neighborhood’s meters rather than driving to
the dispersed homes of the odd consumer who personally chose an alternative
meter reading company.
Community
Choice can deliver contracts for thousands of meter reading blocks. By
organizing this and other “smart technology” services such as wireless
metering, solid state solar, etc., Community Choice will deliver demand to the
suppliers, based on local governments doing something they have done since the
beginning of the municipal franchise: defining short term (3-5 year) contracts
for essential services, announcing competitive bidding, debating the
desirability of different proposals, choosing a winner, and monitoring contract
compliance.
No
one on this commission can deny the potential of Community Choice to deliver
competition to San Diego and the municipalities surrounding it, the Bay Area,
or the cities of the Southern California Cities Joint Powers Consortium. Just
as it will deliver the needed margins to energy services and distributed generation,
Community Choice will deliver unprecedented high volume bilateral contracts to
power suppliers in unprecedented volume. As city governments discuss this
option and begin to define their communities’ energy needs and energy values –
environmental, labor, social justice-wise – contracts will be written and
companies like Enron, Calpine, Dynergy and Green Mountain will bid to win them.
“Demand responsiveness” will be created. Cities will be able to cooperate with
bidders to analyze their load profile, and can holistically apply distributed
generation and conservation measures, as well as enhance meter reading and
unprecedented community-wide spike-leveling measures over the next few
years.
I will repeat that the legislature has made Californians pay dearly for the privilege of putting an end to the electricity monopoly. We paid not just for lower rates, but for the progress that is inherent in eliminating the last major monopoly, with the corrupting tendencies that all monopolies introduce. To the extent that Community Choice offers the potential for introducing competition and giving Californians more control over this industry, the most polluting of all industries and constituting the largest industrial sector, it should be tried.
Rather than following hysterical proposals thrown into the ring in a moment of panic, this legislature should enter a second phase, called for by many since 1996, to make a genuine attempt to bring competition to this industry.
Rather than declare “competition” a failure, the Commission and the legislature should declare the “California model” a failure and give Community Choice a chance.
Signature: _____________________ Date: _______________