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
August
10, 2000
Sacramento,
California
To
the California Legislature:
San
Diego’s rate shock has opened the public eye to the failure of California’s
electric deregulation law, yet the nature of this failure is still poorly
understood. As the Governor, state lawmakers, regulators, as well as
environmentalists and consumer advocates seek to “fix the problem,” there is a
great and imminent danger that more harm will be done, again all in the name of
“protecting” consumers.
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 a
$30 billion industry bailout, the former monopolies were removed from the retail
market and demoted to “market neutral” wires companies which would merely
connect consumers to suppliers much as local telephone operators now connect
consumers to long distance companies.
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 the surrogate “competitive market”
to be a failure and get real about organizing demand to meet supply outside the
Power Exchange. It is not that the Power Exchange as an organization is at
fault for what has happened, rather that as AB1890’s individual consumer choice
model of a competitive system failed, the Power Exchange was reinvented as “the
market” and the natural economic result of this political action was
speculation. I am not saying the Power Exchange should be abolished, but rather
that it should be redefined as a backup system, one of the options available to
Californians: not a forced, meaningless “market.”
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 there is a group of Cape Cod municipalities organized by
Barnstable County to combine their buying power in that state’s (also) ailing
electricity market. With huge fluctuations in population from summer tourism
and little heavy industry, the towns of the Cape Light Compact have the worst
load profile in the state, but nevertheless proved able to beat the “Standard
Offer,” their version of our Power Exchange, last year.
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 (Ratepayers for Affordable
Green Electricity), a national coalition of 180 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 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, meaning that
conservation is integral to tailoring the power supply rather than a subsidized
afterthought. Most importantly, Community Choice eliminates the conflict of
interest at hand in wires company control 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, which 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
integrating this and other “smart technology” services such as wireless
metering, solid state solar, etc. as load managing technologies, Community
Choice will deliver demand responsiveness to supply competitors, 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 contracts to power suppliers, in
unprecedented volume. By internalizing currently post facto, marginal
conservation and renewables technologies into power supply contracts, it will
introduce a depth and integrity to electric service that it currently lacks.
As
city governments discuss this option and begin to define their communities’
energy needs and energy values – for the environment, labor, and the poor –
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.
Other key measures to consider in these discussions:
1. a permanent agency at the state attorney general’s office to monitor collusion among suppliers;
2. a proposal from the Davis Coalition for Local Power to ease prohibitively difficult voting requirements for communities seeking to purchase their wires to form Municipal Utility Districts (MUDs);
3. assemblyman Fred Keeley’s proposal for state takeover of PG&E’s hydro facilities, whose massive capacity could be used to offset speculation in the power exchange;
4. other state precedents to ensure adequate transmission capacity;
5. uniform pricing standards and uniform “green” energy product standards to reduce consumer fraud and abuse that characterizes the telephone industry;
6. certification of all businesses who sell energy or energy services;
Rather than declare “competition” a failure, the Commission and the legislature should declare the “California model” of telecom-style individual consumer choice a failure and give Community Choice a chance.
Respectfully,
______________________________
Paul Fenn
Local Power
4281 Piedmont Avenue
Oakland, California 94611
510 451 1727
paulfenn@local.org