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ERG Masters Project Mark Stout 1

Energy and Resources Group Mark StoutMasters Project 5/25/1997

Comparative Power Analysis of the California Electric

Utility Industry Deregulation Process

The Electric utility is changing. But unlike the evolution of species, consciouscollective choice can influence the evolutionary drift of the industry.

Rodney E. Stevenson and David W. Penn (1995)

Table of Contents

INTRODUCTION................................................................................................................................................4

OBJECTIVES...................................................................................................................................................... 5

METHODOLOGY .............................................................................................................................................. 5

HISTORY OF ELECTRIC UTILITY INDUSTRY REGULATION............ ............. ............. ............. ............. . 8

THE BIRTH OF STATE PUBLIC UTILITY COMMISSIONS................................................................................................ 8FEDERAL POWER ACT OF 1935................................................................................................................................. 9

PUBLIC UTILITY HOLDING COMPANY ACT OF 1935................................................................................................... 9PUBLIC UTILITY REGULATORY POLICIES ACT OF 1978 ............................................................................................ 10ENERGY POLICY ACT OF 1992 ............................................................................................................................... 10

CPUC BLUE BOOK PROPOSAL............................................................................................................................ 12

FERC MEGANOPR .............................................................................................................................................. 13CPUC MAY 1995 DRAFT PROPOSALS AND STAKEHOLDER RESPONSES .................................................................... 14CPUC DECEMBER 1995 DECISION AND CALIFORNIA ASSEMBLY BILL 1890............................................................. 17

RECENT STATE AND FEDERAL ACTIVITY ................................................................................................................ 20

FACTORS BEHIND THE DRIVE FOR DEREGULATION............. ............. ............. ............. ............. .......... 21

LARGE CONSUMER PRESSURE ................................................................................................................................ 21TECHNOLOGY ....................................................................................................................................................... 23

ECONOMIC RENT................................................................................................................................................... 23ACADEMICS & IDEOLOGUES .................................................................................................................................. 23

EXISTING COMPETITIVE FORCES ............................................................................................................................ 24OTHER INDUSTRIES AND COUNTRIES ...................................................................................................................... 24FEDERAL REGULATORY POLICY ............................................................................................................................. 24

STATE REGULATORY POLICY ................................................................................................................................. 26

ANALYSIS......................................................................................................................................................... 27

SELECTION OF STAKEHOLDER GROUPS ................................................................................................................... 29

OVERVIEW OF WHAT THE STAKEHOLDERS WANTED AND WHAT THEY GOT ............................................................. 29STAKEHOLDER INTERVIEWS CLUSTER ANALYSIS .................................................................................................... 36OFFICEHOLDER STAFF INTERVIEWS ........................................................................................................................ 40

Officeholder Staff Comments on Who Got What They Wanted and Why:.............. ............. ............. ............. ..... 41

Synthesis of Stakeholder & Staff Comments on Who Prevailed, and Why:.............. ............. ............. ............. ... 43


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Officeholder Staff Comments on Who Got Rolled Over, and Why: ............ ............. ............. ............. ............. ... 44

Synthesis of Stakeholder & Staff Comments on Who Got Rolled, and Why:................. ............. ............ ............ 46

RESTRUCTURING STAKEHOLDER CAMPAIGN CONTRIBUTION/GIFT ANALYSIS........................................................... 52

CONCLUSION............. ............. ............. ............. ............. ............. ............. ............. ............. ............... ............. .. 60

BIBLIOGRAPHY.............................................................................................................................................. 61

APPENDIX A: SEMI-STRUCTURED INTERVIEW QUESTIONS...... ............. ............. ............. ............. ..... 66

STAKEHOLDER INTERVIEWS ................................................................................................................................... 66OFFICEHOLDER STAFF INTERVIEWS ........................................................................................................................ 66

APPENDIX B: STAKEHOLDER INTERVIEWS.... ............. ............. ............. ............. ............. ............. .......... 67

INVESTOR-OWNED ELECTRIC UTILITIES ................................................................................................................. 67Pacific Gas & Electric.... ............. ............. ............. ............. ............. ............. ............. ....................... ............. .. 67

San Diego Gas and Electric ............................................................................................................................ 70

Southern California Edison............................................................................................................................. 74

MUNICIPAL ELECTRIC UTILITIES ............................................................................................................................ 76California Municipal Utilities Association - Interview #1 ............ ............. ............. ............. ............. ............. ... 76

California Municipal Utilities Association - Interview #2 ............ ............. ............. ............. ............. ............. ... 79Sacramento Municipal Utility District............................................................................................................. 80

UTILITY LABOR UNIONS ........................................................................................................................................ 85Coalition of California Utility Employees - Interview #1 ............ ............. ............. ............. ............. ................. 85

Coalition of California Utility Employees - Interview #2 ............ ............. ............. ............. ............. ................. 86

INDEPENDENT PRODUCERS .................................................................................................................................... 88 American Wind Energy Association............ ............. ............. ............. ............. ............. ............. ....................... 88

Independent Energy Producers........................................................................................................................ 92

LARGE ELECTRICITY CONSUMERS.......................................................................................................................... 96 Agricultural Energy Consumers Association............ ............. ............. ............. ............. ............. ............. .......... 96

California Industrial Users............ ............. ............. ............. ............. ............. ............. ............. ............. .......... 98

California Large Energy Consumers Association - Interview #1 ............. ............. ............. ............. ............. ... 102

California Large Energy Consumers Association - Interview #2 ............. ............. ............. ............. ............. ... 104

California Manufacturers Association........................................................................................................... 107

SMALL ELECTRICITY CONSUMERS........................................................................................................................ 111Latino Issues Forum ...................................................................................................................................... 111

The Utility Reform Network........................................................................................................................... 114

ENVIRONMENTAL ADVOCATES ............................................................................................................................ 119Environmental Defense Fund ........................................................................................................................ 119

Natural Resources Defense Council - Interview #1 ............. ............. ............. ............. ............. ............. .......... 122

Natural Resources Defense Council - Interview #2 ............. ............. ............. ............. ............. ............. .......... 125

Sierra Club/Center for Energy Efficiency and Renewable Technologies........................................................ 127

Union of Concerned Scientists....................................................................................................................... 133

STATE INSTITUTIONS........................................................................................................................................... 137California Energy Commission.......... ............. ............. ............. ............. ............. ............. ................... ........... 137

University of California, California Institute for Energy Efficiency ................... ................... ................... ...... 141ANONYMOUS STAKEHOLDER COMMENTS ............................................................................................................. 144Anonymous Comments #1: Parties who could have improved their performance ............ ............. ............. ..... 144

Anonymous Comments #2: AB 1890 funding levels for Public Interest RD&D............ ............. ............. ......... 144

APPENDIX C: OFFICEHOLDER STAFF INTERVIEWS ............. ............. ............. ............. ............. .......... 146

California Public Utilities Commission ......................................................................................................... 146

Legislative Conference Committee, Office of Senator Steve Peace ................................................................ 148

Legislative Conference Committee, Office of Senator Byron Sher......... ............. ............. ............. ............. ..... 152

Legislative Conference Committee, Office of Senator Bill Leonard ............................................................... 153


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Anonymous Officeholder Staff Interview #1 ................................................................................................... 155

Anonymous Officeholder Staff Interview #2 ................................................................................................... 156

APPENDIX D: CLUSTER ANALYSIS OF STAKEHOLDER INTERVIEW DATA............. ............. ......... 159

APPENDIX E: RESTRUCTURING STAKEHOLDER CAMPAIGN CONTRIBUTION/GIFT ANALYSIS

DETAIL............................................................................................................................................................ 162

Table 1: Assemblymember Jim Brulte, 1995 Campaign Contributions ............. ............. ............. ............. ....... 162

Table 2: Assemblymember Jim Brulte, 1996 Campaign Contributions ............. ............. ............. ............. ....... 163

1995/1996 Stakeholder Gift Information for Assemblymember Jim Brulte ..................................................... 164

Table 3: Senator Steve Peace, 1995 Campaign Contributions ....................................................................... 164

Table 4: Senator Steve Peace, 1996 Campaign Contributions ....................................................................... 165

1995/1996 Stakeholder Gift Information for Senator Steve Peace......... ............. ............. ............. ............. ..... 166

Table 5: Senator Byron Sher, 1995 Campaign Contributions......... ............. ............. ............. ............. ............ 166

Table 6: Senator Byron Sher, 1996 Campaign Contributions......... ............. ............. ............. ............. ............ 166

1995/1996 Stakeholder Gift Information for Senator Byron Sher ............ ............. ............. ............. ............. ... 170

Table 7: Senator Bill Leonard, 1995 Campaign Contributions ...................................................................... 170

Table 8: Senator Bill Leonard, 1996 Campaign Contributions ...................................................................... 171

1995/1996 Stakeholder Gift Information for Senator Bill Leonard.............. ............. ............. ............. ............ 171

Table 9: Assemblymember Mickey Conroy, 1995 Campaign Contributions.......... ............. ............. ............. ... 172Table 10: Assemblymember Mickey Conroy, 1996 Campaign Contributions........ ............. ............. ............. ... 173

1995/1996 Stakeholder Gift Information for Assemblymember Mickey Conroy........... ............. ............. ......... 173

Table 11: Assemblymember Diane Martinez, 1995 Campaign Contributions ........... ............. ............. ............ 175

Table 12: Assemblymember Diane Martinez, 1996 Campaign Contributions ........... ............. ............. ............ 176

Table 13: Assemblymember Steve Kuykendall, 1995 Campaign Contributions......... ............. ............. ............ 177

1995/1996 Stakeholder Gift Information for Assemblymember Diane Martinez ............ ............. ............. ....... 177

Table 14: Assemblymember Steve Kuykendall, 1996 Campaign Contributions......... ............. ............. ............ 178

1995/1996 Stakeholder Gift Information for Assemblymember Steve Kuykendall........ ............. ............. ......... 178

1994/1995 Stakeholder Gift Information for CPUC President Daniel Fessler...... ............. ............. ............. ... 179

1994/1995 Stakeholder Gift Information for Commissioner Gregory Conlon ........... ............. ............. ............ 181

1994/1995 Stakeholder Gift Information for Commissioner Jesse Knight, Jr. ............. ............. ............. ......... 181

1994/1995 Stakeholder Gift Information for Commissioner Norm Shumway............ ............. ............. ............ 181

1994/1995 Stakeholder Gift Information for Commissioner Josiah Neeper ............ ............. ............. ............. . 1811994/1995 Stakeholder Gift Information for Commissioner Henry Duque ............. ............. ............. ............. . 181


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Introduction

On September 23, 1996, Governor Pete Wilson signed into law California Assembly Bill

1890 (AB 1890), which sets in motion a process of electric utility deregulation beginning in 1998.

This bill is an important milestone in an ongoing process towards electric utility deregulation in

California. California electric utilities have a combined annual revenue of roughly $23 billion

dollars1, selling 250 billion kWh of electricity per year2, a product with well documented

environmental impacts including local air pollution, acid rain and climate change.3 According to

the Environmental Defense Fund, fossil fuel-based electricity generation is currently the largest

source of greenhouse gas emissions and the largest source of air pollution in the U.S.4 Given the

stakes involved with this industry, there will probably be significant winners and losers as a result

of this legislation. The vision of electric utility deregulation legislated in AB 1890 is significantly

different from that contained in the California Public Utility Commissions (CPUC) December,

1995 Electric Restructuring Decision, which will be superseded to a great extent by the details of

AB 1890. Various stakeholder groups, representing a spectrum of private and public interests

attempted to influence both the CPUC and legislative processes, with varying success. This paper

develops a comparison of which stakeholder groups got what they wanted, and why, contrasting

the results of CPUC process resulting in their December, 1995 Decision with the California

legislative process resulting in AB 1890.

1 CPUC RD&D Working Group, 19962 California Energy Commission, 19953 Flavin and Lenssen, 19944 WWW page: http://www.edf.org/programs/Energy/green_power/a_better.html


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Objectives

Evaluate which stakeholder groups got what they wanted:Each stakeholder group influencing the process pursued policy outcomes that they felt were in

their self-interest. This paper determines which groups had their requests granted, and whichhad their requests ignored, looking at both the language of AB 1890, as well as the CPUCDecember, 1995 decision. Groups that fared better in one arena than the other arehighlighted.

Determine why or why not a stakeholder group was successful in getting what theywanted out of each policy process:

In many cases, interest groups were able to influence outcomes in the legislative and/or CPUC

forums through well reasoned comment filings, direct lobbying, campaign contributions, aswell as other avenues. This paper explores what mechanisms the different interest groupsused to influence these policy outcomes, contrasting differences in techniques applied between

the Legislature and CPUC, focusing on whether each decision making body or individual hadparticular avenues that were most effective.

Methodology

In order to answer the questions of which stakeholder groups got what they wanted and

why, I based my research on an analysis of three categories of data: 1) background utility

regulation literature, 2) semi-structured interviews with stakeholders as well as CPUC and

legislative staff, and 3) archival analysis of CPUC filings, legislative language and videos, and

state officeholder filings. Rather than approaching the data with a hypothesis to verify, I compare

and cluster the data to allow patterns to flow out that can then generate theories. I compare the

CPUC and legislative policy processes, determining similarities and differences in how each party

fared in each forum, as well as why each party fared as they did. This data-driven approach to the

generation of theory is based on the work of Glaser and Strauss, who contrast the use of data to


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generate grounded theory with the use of data to verify logico-deductive theory.5

Below I

describe the use of each of these data types.

Background literature on electric utility regulation is used to provide a historical context

for Californias electric utility deregulation, which is presented in the next two sections of this

report, History of Electric Utility Industry Regulation and Factors Behind the Drive for

Deregulation.

Semi-structured interviews were conducted with 26 representatives of different

stakeholder organizations. The semi-structured format allows flexibility in altering the flow of the

interview, following up on interesting points as they arise. I selected an initial set of organizations

to contact, trying to cover as wide a spectrum of stakeholder groups as possible, based on my

experience representing a stakeholder organization on the issue of electric utility deregulation in

the CPUC and legislative arenas. Most interviews were conducted in person, while several where

over the phone. As I conducted interviews, subjects referred me to additional representatives to

contact, both in their organizations as well as in others. An interview guide was used for

recording notes, which were typed up later. Questions were developed for the interview guide to

determine for each organization what outcomes were sought, what outcomes were obtained in

each of the policy decisions, and what methods and strategies were used to influence each policy

decision. A list of questions for the semi-structured stakeholder interviews is included in

Appendix A. A full transcript of these interviews is included in Appendix B. These interview

subjects are clustered into the following categories for analysis: investor-owned electric utilities,

municipal electric utilities, utility labor unions, independent producers, large electricity consumers,

5 Glaser and Strauss, 1967, Glaser, 1978.


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small electricity consumers, environmental advocates, and state institutions. The organizations

represented by each interview subject are listed, by category, in the Table of Contents for

Appendix B.

Semi-structured interviews were conducted with two staff of the CPUC and three staff of

members of the legislative Conference Committee on Electric Industry Restructuring. An

interview guide was used, with questions developed to determine which stakeholder organizations

were perceived by the staff as being most effective in influencing the respective policy outcome,

and why; which stakeholder organizations were perceived as being able to set the terms of the

debate, and why; as well as which stakeholder organizations were perceived as least effective in

influencing that policy outcome, and why. A list of questions for the semi-structured officeholder

staff interviews is included in Appendix A. A full transcript of these interviews is included in

Appendix C.

Finally, an archival analysis was performed on the CPUC formal filings, Fair Political

Practices Commission records, Secretary of State Political Reform Division records, proposed

and final legislative language, as well as legislative conference committee videos. The CPUC

filings can be used to cross-check what each major interested party had originally requested from

the process, tracking how that may change over time, as well as to determine policy outcomes

from the CPUC. The California Fair Political Practices Commission archives an annual Statement

of Economic Interest for each state office holder. The EIS forms for the CPUC Commissioners

and Conference Committee members were examined to determine which organizations used trips,

events, meals, and other gifts to gain access to decision makers. The California Secretary of State

Political Reform Division keeps Officeholder, Candidate, and Controlled Committee Campaign

Statements on file for each elected state officeholder and candidate. These Statements were


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examined to track campaign contributions to the legislative Conference Committee members. The

Divisions March, 1997 report onLobbying Expenditures and the Top 100 Lobbying Firms6 also

gives a big-picture view of overall lobbying expenditures by stakeholders. Proposed AB 1890

language was examined to get a flavor for who was making proposals, and how much of it was

getting incorporated into the final AB 1890 language. The legislative Conference Committee

videos were used to gain insights into the dynamics of this public hearing process, cross-check

interview impressions, and experience the witty banter between Senators Steve Peace and Bill

Leonard.

History of Electric Utility Industry Regulation

Before examining which stakeholder groups were able to influence the California electric

utility deregulation process, a historical look at Federal and state electric utility regulation is in

order.

The Birth of State Public Utility Commissions

Electric utilities have been considered natural monopolies over most of this century, due

to decreasing marginal costs and the savings gained by avoiding redundant distribution networks.

However, they were not always viewed this way, as Davis explains: Prior to World War I, most

cities believed regulation was superfluous. Competition could keep prices down. Cities would

grant multiple franchises to electricity companies... The result was not healthy competition

keeping down the consumers bill, but many weak companies that were soon bought out by a

strong one, thus leading to a monopoly. In the face of this trend local governments began to view

6 California Secretary of State, March, 1997.


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utilities as natural monopolies and hence inevitable. This being the case the best solution seemed

to be regulation by public commission.

The early 1900s were marked by the rapid increase in electric utility regulation by state

public utility commissions (PUCs) to address this natural monopoly character. Beginning in 1907

with New York and Wisconsin, by 1922 47 states and the District of Columbia were regulating

electric utilities.7

Federal Power Act of 1935

The growing interconnection of local utilities in interstate grids, with at least 20% of

electricity crossing state lines in 1935, led to the passage of the Federal Power Act. Based on the

Interstate Commerce Clause, this act expanded the role of the Federal Power Commission to

regulate wholesale electric transfers.8

Public Utility Holding Company Act of 1935

In order to establish market power which would otherwise have been illegal under anti-

trust law, electric utilities developed a pyramid scheme based on holding companies that was

effective at obscuring market dominance. Hempling explains, Before passage of the Public

Utility Holding Company Act of 1935 (PUHCA), a small number of holding companies owned

most utilities in the United States. A number of these holding companies owned, or were owned

by, large nonutility companies such as electric equipment contractors. State and Federal

regulation of rates and securities failed to keep up with sophisticated holding company attempts to

evade regulation. This legislation sought to avoid market abuses by limiting the size and

7 Davis, 166-167.


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investment options of utilities so that each was confined in scope to an integrated public-utility

system.910

Public Utility Regulatory Policies Act of 1978

Passed by Congress as part of President Carters National Energy Plan, PURPA aimed to

set standards for state PUC ratemaking that would promote energy savings and be partial to

residential consumers over industrial consumers. It also opened the door for more widespread

wholesale competition by requiring that regulated utilities purchase power from Independent

Power Producers (IPPs) classified as Qualifying Facilities (QFs) at avoided cost. In capacity

constrained systems, this was the marginal cost associated with procuring new generation

capacity. Qualifying Facilities were primarily cogeneration and small renewable energy electricity

producers. PURPA was very significant in creating a market for non-traditional generators. The

Federal Energy Regulatory Commission (FERC), recent successor to the FPC, was charged with

writing the rules required to implement this legislation.11

Energy Policy Act of 1992

EPAct continued the Federal trend, started by PURPA, towards more competition in

electricity generation. This legislation allowed FERC to order utilities to provide transmission

access at non-discriminatory rates, which is critical for wholesale competition. It also created new

8 Pechman, 17.9 Hempling, 343.10 Davis, 166-167.11 Pechman, 16.


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classes of IPPs including Exempt Wholesale Generators, allowing larger generation plants to be

exempt from traditional regulation.12

While encouraging wholesale competition, EPAct also aimed to level the playing field for

supply-side and demand-side (energy efficiency) resource options. Energy efficiency is often

underinvested in due to the high transaction costs of decentralized customer decisions, inadequate

information available to customers,13 and the transient nature of short term building owners and

renters. These lead to what the National Association of Regulatory Commissioners calls the

payback gap: substantially higher rate of return expectations for energy efficiency measures

compared to supply-side investments.14 Also, regulated utilities were discouraged from pursuing

demand-side resources because of a profit structure that was directly linked to the amount of

energy sold. One prominent utility regulator remarked on the situation that had developed in the

1980s:

In the current scheme of regulation, utilities make money in only one way--selling[units of energy]. Utilities lose money when customers engage in conservation.

They likewise lose money when the encourage customers to engage in

conservation. This money-losing proposition is not significantly improved by anyof the conservation cost recovery or incentive mechanisms now in use.15

EPAct attempts to correct this supply-side/demand-side imbalance by encouraging state

Public Utility Commissions to consider, 1) implementing Integrated Resource Planning (IRP),

which compares supply- and demand-side options systematically when seeking least-cost energy

12 Stevenson, Discretionary Evolution..., 356.13 Stevenson, Social Goals... 407.14 Cavanagh, Energy Efficiency Solutions... 521.15 Cavanagh, Global Warming and Least-Cost... 356-357.


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supplies, 2) providing cost recovery for energy efficiency programs that are at least as profitable

as supply side measures, and 3) rate changes to encourage efficiency and distribution of power.16

CPUC Blue Book Proposal

Californias Public Utility Commission is widely viewed as a trend-setter for state PUC

electric utility regulation. In April of 1994, the CPUC issued a staff proposal regarding electric

utility deregulation known as the Blue Book, sending a shockwave through the electric

industry.17 A security analyst noted that the release of the Blue Book will:

speed up the deregulation of the industry, especially since the California regulators

have been considered in the past to be one of the leading regulatory commissionsand many states have followed their recommendations.

18

The proposed deregulated electricity market would allow individual customers to choose

their electricity generation supplier using bilateral contracts in a system known as retail wheeling

or direct access. This utility restructuring involves the divestiture of utility electricity generation

facilities into separate companies from the original utility which would still be responsible for

transmission and perhaps distribution. These generation companies would then compete with

Independent Power Producers (IPPs) to provide power to a central electricity grid operator based

on a combination of pool-based wholesale competition as well as direct contracts with individual

customers. The Blue Book laid out an aggressive, customer class-staged schedule for direct

access implementation, with large, industrial customers taking power at the transmission level

eligible on January 1, 1996, all commercial customers eligible January 1, 1999, and if successful,

all residential consumers eligible on January 1, 2002. A more definitive policy statement was

16 Haddad, 6.

17 Hoffman, 55.18 Mydans.


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scheduled to be issued by the CPUC in August of 1994.19

Since the release of the Blue Book

proposal, numerous other states have also proposed electric utility deregulation.20

Many stakeholders, including private and public-interest organizations, were concerned

about the content and timetable of this proposal. For instance, environmental organizations were

frightened by the Commissions decision to move away from the current IRP process and

mechanism for decoupling utility profits from sales volumes. In their place, the CPUC proposed,

alternative frameworks based on let the market decide, such as green pricing, where

customers voluntarily pay more to promote renewables, and asserted that, a vibrant market exists

for energy efficiency services.21 This stakeholder response, coupled with a lack of prior

coordination with the state Legislature, prompted the Assembly Committee on Utilities and

Commerce and the Assembly Committee on Natural Resources to hold a joint oversight hearing

on May 23, 1994, where CPUC President Fessler and Commissioner Knight testified on their

proposal. This led to the passage of Assembly Concurrent Resolution 143, which requires the

CPUC to engage in a series of public hearings, evidentiary hearings, and documentation resulting

in a report back to the Governor and Legislature by January 31, 1995. This process tempered the

CPUCs frenetic timetable, pushing back their goal for a policy decision until September of

1995.22

FERC MegaNOPR

In March of 1995, FERC released a dual-issue Notice of Proposed Rulemaking, which had

been dubbed the MegaNOPR. The first issue addressed open access to the transmission system

19 CPUC, 1994, Blue Book.

20 Wagner, 1.21 CPUC, 1994, Blue Book, 1995, Status Report.


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for wholesale transactions, forcing utilities to allow non-utility generators to use their transmission

systems on a comparable basis at standard tariffs, meaning the utilities could not discriminate

against other electricity suppliers. The MegaNOPR also granted utilities the ability to collect

100% of their stranded costs due to wholesale transactions. Stranded costs are past investments

rendered uneconomic (market value less than book value) by the competition brought about

through deregulation. Although stranded costs due to wholesale competition would be much

smaller then those posed by retail competition, some thought the MegaNOPR ruling may set a

precedent for 100% stranded cost recovery at the retail level, which is usually considered state

jurisdiction.23

CPUC May 1995 Draft Proposals and Stakeholder Responses

As a result of the Blue Book CPUC staff proposal, in May of 1995, the California

Commissioners released two draft proposals for pursuing rate deregulation in California. The

majority proposal known as PoolCo, favored by CPUC President Fessler and two other

Commissioners, is based on a common wholesale power pool, scheduled and dispatched by an

independent system operator (ISO). Generators are scheduled into the pool based on time-based

bids submitted to the ISO. A common price for all electricity in the state would then be set by the

market clearing price based on the bids. All power purchases would be made through the pool.

Retail contracts with a particular generator could be handled with separate contracts for

differences.24

22 CPUC, 1995, Status Report.

23 Asmus and Smeloff, 1997.24 CPUC PoolCo Proposal


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Commissioner Knights alternate proposal is based on direct access contracts between

generators and customers. No central entity would schedule power generation, although

generators would submit projections to an independent system operator (OPCO), who is

responsible for maintaining transmission system reliability. Prices would be determined either

through bilateral contracts between direct access customers and generators, or through the

creation of optional pools which could manage bids in a manner similar to the PoolCo proposal. 25

In response to the Commissioner proposals, a group of seemingly influential special

interests, Southern California Edison Company (one of three regulated, investor owned utilities in

California), California Manufacturers Association, California Large Energy Consumers

Association, and Independent Energy Producers, at the prompting of California Governor Pete

Wilson, met to iron out differences between them and draft their own industry restructuring

proposal, know as the Memorandum of Understanding (MOU). In structure, it is a hybrid of

the two proposals, including bilateral contracts for direct access customers, as well as a central,

wholesale pool. Bids for generation into the pool would be processed by a Power Exchange

(PX), and the actual generation scheduling and dispatch decisions would be made by a separate

Independent System Operator based on transactions mediated by the PX as well as direct access

contracts. Full stranded cost recovery is agreed to for Edison, the only IOU signing the MOU.

The MOU also proposed a nonbypassable charge to fund public policy programs. Out of this

surcharge, funding levels for energy efficiency, renewables, and R&D were not to exceed 3.3% of

total utility revenue requirements as of January 1, 1995, low-income ratepayer assistance would

be funded at an uncapped, as-needed basis, and low-income weatherization would be funded at

25 CPUC Direct Access Proposal


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1995 levels.26

The CPUC held a full-panel hearing to focus on the details of the MOU in

September of 1995.27

Outraged that they had been left out of the MOU negotiating process, and at the level of

attention given to the MOU, a coalition of public interest groups and renewable energy advocates,

including NRDC, EDF, UCS, Utilities Consumer Action Network, and Towards Utility Rate

Normalization (TURN) submitted a Framework for Restructuring in the Public Interest to the

CPUC. The Framework, as a response to the MOU, does not actually propose a specific electric

utility industry structure, but spells out a set of public interest concerns that should be addressed

by any industry restructuring including mitigation of market power; small customer equity;

continuation of low income programs; and continued progress for energy efficiency and renewable

resources. The Framework calls for less than 100% stranded cost recovery, with utility

shareholders accepting some of the burden for past, uneconomic investments. By combining this

with effective Performance Based Ratemaking, (PBR), the Framework demands that each

individual utility customer, including residential and small commercial consumers, should see short

and long term rate reductions. The Framework calls for equitable opportunities for small

consumer participation in any move to allow direct access. To enhance energy efficiency efforts,

a new mechanism is to be developed, in the spirit of the existing Electric Revenue Adjustment

Mechanism (ERAM), to decouple utility profits from sales volume. A minimum level of

renewables is proposed for each IOU supply portfolio to return the states resource diversity to

1993 levels. As in the MOU, a non-bypassable systems benefits charge is proposed, but with

increased funding levels to restore energy efficiency and R&D spending at pre-Blue Book levels,

26 MOU Parties, 1995.

27 Framework Parties, 1995.


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expand renewables development above 1993 levels while commercializing new renewable energy

technologies, and allow for uncapped low-income programs.28

CPUC December 1995 Decision and California Assembly Bill 1890

Building on their previous proposals and stakeholder input, the CPUC released a policy

decision on December 20, 1995 which laid out a more defined vision of a deregulated utility

environment, with several key implementation areas to be hammered out by stakeholder working

groups. The December Decision mirrored the market structure defined in the MOU, based on a

wholesale Power Exchange, bilateral, direct access contracts, and an Independent System

Operator centrally controlling Californias transmission system. The Decision called for 100%

stranded cost recovery by IOUs over a five year period, through a Competitive Transition Charge

(CTC), coupled with an IOU rate cap at January 1, 1996 levels. The Decision also called for the

voluntary divestiture of 50% of fossil fuel generation plant owned by the two largest IOUs,

PG&E (Pacific Gas and Electric) and SCE, with financial incentives tied to the level of divestiture.

For public purpose programs, the Decision proposed a nonbypassable public goods charge

(PGC), as well as a minimum renewables purchase requirement. Aside from funding levels for

low-income rate discounts, which should, be based on need, the Decision does not define any

public program funding levels, nor a renewables purchase requirement level, requesting input from

stakeholder working groups, so that input can be made to the Legislature.29

The spring and summer of 1996 saw a flurry of deregulation activity as PUC working

groups fleshed out options for moving towards the PUC vision, while the state Legislature took

up the issue of electric utility deregulation on their own terms. A legislative conference

28 Framework Parties, 1995.


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committee on deregulation worked at breakneck speed, cutting deals with the stakeholders that

would be required to deliver the votes within the committee. Even given the large economic

and environmental stakes, the final product of this bipartisan conference committee handily passed

on the Senate and Assembly floors with minimal debate, since it was perceived as a best effort

compromise between the two main political parties. As the PUC stakeholder working group

process drew to an end, Pete Wilson signed AB 1890 on September 2330, omnibus legislation

which preempts much of the PUC vision31

. While the pace of the PUC process was tempered so

that their final policy decision could better reflect stakeholder interests, compared to the reckless

pace of the legislative wrangling, neither process involved substantial public education or

participation. Several public interest organizations served as advocates for small consumer and

environmental protection, but some have argued that the environmental organizations are not

effectively representing the interests of their constituencies32.

California Public Utilities Commission President Conlon praised members of the legislative

conference committee: "It is through their tireless efforts that this legislation was crafted to

provide balance of interests between utilities, other market participants, and especially residential

and small commercial California ratepayers."33 However, TURN, a prominent, small consumer

group, has criticized AB 1890, arguing that it should not be used as a national model for

protection of residential and small commercial consumer interests.34 There is concern that

29 CPUC, December, 1995 Decision, 1996 Roadmap30 CPUC press release, 199631 Rader, 199632 Weisman, 1997, and confidential correspondence with stakeholder representative.33 CPUC press release, 199634 TURN press release, 1996


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substantial market power exists among California electric utilities35

, which may lead to higher

electricity rates for small consumers purchasing out of a centralized Power Exchange envisioned

by both the CPUC Decision and AB 1890 . AB 1890s questionable protection against utility

market power, along with a guaranteed 100% cost recovery for uneconomic utility assets, indicate

that electric utility shareholders faired better in the negotiations than small consumers 36. Large

industrial customers are also likely to benefit disproportionately because of their ability to take

advantage of contracts made directly with low cost electricity generators.

An argument can be made that the final legislation will result in lower funding for public

purpose programs, including renewable energy and energy efficiency, than would have occurred

under the CPUCs December 1995 vision, but due to the Decisions lack of clarity about support

levels, this is difficult to say. From some perspectives, renewable energy concerns faired poorly in

AB 1890, with uncertain funding allocations that may not be able to support the existing base of

California renewable energy generators, as well as the loss of a strong policy mechanism,

endorsed in the CPUC Decision, to ensure the maintenance and growth of this renewables base37

.

Such an outcome was not unforseeable. Weeks before the passage of AB 1890, in a speech

before the California Manufacturers Association, AB 1890 author Jim Brulte, said that the

Legislature was going to, roll over renewables and roll over enviros.38

Some public interest advocates would argue that moving ahead with the deregulation

process, with a mix of shortcomings and unexpected benefits in the legislation, is in the public

interest since it moves California utilities away from the paralysis and backsliding on our

35 Borenstein, 199536 Rader, 199637 Rader, 199638 Asmus, 1996.


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environment/equity agenda which had gripped the industry since the release of the Blue Book in

1994. As Carter and Cavanagh have noted, If the bill had failed, the California PUC was on a

clear course to abandon all [funding for public purpose programs] on grounds of lack of statutory

authority.39

Recent State and Federal Activity

Since the signing of AB 1890 into law, the CPUC and California Energy Commission

(CEC) have been working towards the implementation of this legislation. In March of 1997, the

CEC released a report to the legislature with policy recommendations for the allocation of up to

$540 million renewables funding codified in AB 1890. It divides up this amount into four

accounts that vary over four years of funding. The overall levels are: 45 % existing technologies,

30% new technologies, 10% emerging technologies, and 15% consumer-side incentives.40

On

May 6, 1997, the CPUC released its latest restructuring decision which surprised stakeholders by

announcing that all customers, including residential and small commercial consumers, would be

eligible for direct access January 1, 1998.41

There are currently several electric utility restructuring bills in Congress, including a

prominent one authored by Representative Dan Schaefer (R-CO), chair of the House Energy and

Power Subcommittee.42 This bill includes a "minimum renewable energy generation

39 Carter and Cavanagh, 1996

40 CEC, 199741 Marshall, 199742 Weisman, 1997, Primed for Congressional Battle


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requirement".43

The Department of Energy (DOE) has also been circulating a draft bill that

includes a Renewables Portfolio Standard.44

Factors Behind the Drive for Deregulation

Now that I have reviewed the history of Federal and state electric utility regulation, it is

time to gain a fuller understanding of why California has proceeded down the path towards

deregulation. Many forces have come together to create the push for electric utility deregulation

in California.45

Large Consumer Pressure

Large industrial energy consumers have the most to gain from the lower electricity prices

that may accompany greater industry competition. Davis explains their reasoning: the electric

companies are inefficient, too conservative, and overcapitalized due to state regulation. Because

the PUCs determine the rates, services, and future expansion, the companies have no incentive to

be efficient. There is literally no profit in it for them. The state commissions typically calculate a

companys profits as a return on investment. Therefore, if a company wants more revenue it must

invest more capital. It has an incentive to build a new plant even if it is not really needed.46

In California, these concerns are represented by the California Large Energy Consumers

Association (CLECA), 12 companies--most foreign-owned--that really soak up the juice. Retail

wheeling sits at the top of the agenda of this coalition of steel, cement, and one of the largest gold

mining firms in the world. Barbara Barkovich, a consultant representing CLECA explains their

43 Levison, 1997, Restructuring Hearings on the Road

44 Levison, 1997, DOE Restructuring Bill45 Stevenson, Discretionary Evolution..., 355.


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viewpoint, We do not advocate a slash and burn approach, to existing public interest programs.

We just want to use competition to get the best price for power.

CLECAs national counterpart is the Electricity Consumers Resource Council (ELCON),

24 companies that account of over 4% of the nations electricity use. There are some who are

concerned about ELCONs environmental ethics in pursuing electric utility restructuring. V. John

White, executive director of the Center for Energy Efficiency and Renewable Technologies

remarks, At least you can talk to CLECA, and they say they know renewables, such as wind

power, are now competitive. Thats one reason why they want to cut their own deals... ELCON,

on the other hand, has no respect for the environment. A consultant who shares Whites

perception of ELCON notes that they want to push California to adopt a policy as,

uncompromised as possible because they fear the California plan will become a model for the

country. If there are provisions for renewables and conservation here, they will have to gulp and

swallow elsewhere.47

The Clean Air Act amendments of 1990 set a precedent for Federal

legislation following Californias leadership on environmental programs. As Davis notes,

Balancing the demand for federal standards with the urgent need to reduce emissions in

California was one of the primary challenges confronting Congress and the executive branch...

The California Air Resources Boards old tailpipe emissions standards for new cars and light-duty

trucks sold in that state were adopted by Congress in 1990 as the standard to be met by all new

vehicles.48

Davis describes the transition that has occurred in the influence of state PUCs, In the past

the commissions had found their main constituents to be residential customers. Now they found

46 Davis, 192.

47 Asmus, 1995, Retail wheeling..., 24-25.


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intense pressure from large industrial customers, who in the past had enjoyed privileged status

with cheap rates, but now had to pay higher rates. 49

Technology

The development of gas turbine generation technology has greatly reduced the scale

requirements for efficient electricity generation. This reduction in scale has brought down the

capital requirements of entering the electricity generation industry, enabling increased

competition. Advancements in transmission line technology now allow the efficient transmission

of electricity for distances of hundreds of miles, greatly increasing opportunities for bulk power

sales.50

Economic Rent

The potential to capture higher profits offers a significant incentive for well-positioned

electric utilities to pursue an end to price controls and enhanced opportunities to sell excess

power outside of their service area.51

Academics & Ideologues

Neo-classical economists have argued since the 1970s for the deregulation of the electric

utility industry, basing their arguments on welfare economics as applied to the changing electric

utility landscape.52 The new industrial organization espoused by these economists has served as

48 Davis, 1993, 150.

49 Davis, 1993, 195.50 Flavin and Lenssen, 1994.51 Stevenson, Discretionary Evolution..., 356-357.52 Gilbert, 84-108, Gordon, 447-475, Hoffman 55-62.


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the academic rationale for the recent flurry of deregulation activity being pushed by free-market

ideology,53 allowing a policy trend that emphasizes markets rather than social welfare.

Existing Competitive Forces

Although electric utilities are often viewed as pure monopolies, competition takes on

several forms in this market. Many electrical applications have substitutable fuels, such as natural

gas for space heating. Utilities compete for industrial customers who are relocating, as well as

those on the border of service districts. There is significant competition in the wholesale electric

generation market.54

Since 1992, over half of new U.S. generating capacity has been supplied by

alternative, non-utility providers.55

Other Industries and Countries

The deregulation of the telecommunications and natural gas industries serves as an

analogy to the potential for electric utility deregulation. Examples of national electric utility

deregulation have already been provided by the United Kingdom and Norway, allowing frequent

comparisons between the California Blue Books proposed wholesale pool and a similar pool

already implemented in the UK.56

Federal Regulatory Policy

By requiring utilities to pay avoided costs to the new class of qualifying facilities, the 1978

Public Utility Regulatory Policies Act greatly invigorated the wholesale market for electric power.

With this act, the camel of competition forced its nose under the monopoly tent, and it was only

53 Stevenson, Discretionary Evolution..., 357.

54 Stevenson, Discretionary Evolution..., 355-356.55 Flavin and Lenssen, 1994.


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a matter of time before it worked its way inside.57

The qualifying facility clause of PURPA was

originally intended to encourage generation resource diversity. Davis notes that it became used as

a tool to inject competition into a regulated system, Ironically, the ascension of Reagan

administration advocates of competition amplified the effect of PURPA, the product of President

Carter and the Democratic Congress. Under Chairman Martha Hesse in the late 1980s, FERC

vigorously supported competition for electricity, a policy it had already implemented in its natural

gas decisions.58

The Energy Policy Act of 1992 built on this competitive momentum, by requiring that

utilities provide non-discriminatory transmission access for wholesale transactions, creating new

classes of larger non-utility generators, including the Exempt Wholesale Generator, and deleting

portions of the Public Utility Holding Company act to facilitate establishment of EWG/IPP-

affiliates by regulated utilities.

The recent restructuring bills in Congress have given incentives to state governments to

act, in order that they maintain control of the regulatory process at the state level. Federal

legislation could force states into retail competition on a set timetable. A recent announcement

from Representative Schaefers office reads, During the 105th Congress, Schaefer held nine

legislative hearings and heard from dozens of witnesses on the issue of breaking up the electricity

monopoly. The resulting testimony convinced Schaefer that the current monopoly system is

harming consumers. He has since introduced legislation (HR 655) that will give all consumers

choice of their electric provider by December 15, 2000.59 As one environmental representative

56 POWER Working Group, 1.57 Cook, 78.58 Davis, 195.59 Levison, 1997, Restructuring Goes on the Road


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has noted, the DOE bill does not mandate retail markets by any date certain, though it urges

states to consider retail competition.60

State Regulatory Policy

Bidding programs for wholesale electric generation have been established in California,

Colorado, Connecticut, Maine, Massachusetts, New York, and Wisconsin. Calls for bids have

often been oversubscribed by a wide margin. In 1994, Michigan initiated a five year retail

wheeling experiment involving two utilities, the same year that Californias Blue Book proposal

was released.61

California Public Utility Commissioners Jesse Knight and Norm Shumway, both

appointees of Governor Pete Wilson, were the key retail wheeling champions within the CPUC,

according to Jeff Dassovich, an analyst with CPUCs Division of Strategic Planning. Dassovich

explained that they were frustrated with the myriad of complex and controversial balancing

accounts and rate adjustment mechanisms they had to contend with every 12 months as part of

the rate-making process. They became increasingly perplexed about the arcaneness and gridlock

that seemed to pervade the utility resource planning process,62

a form of integrated resource

planning know as the BRPU. One of the stated proposals of the Blue Book is to eliminate the

Biennial Resource Planning Update (BRPU), a proceeding in which the Commission attempts to

determine how much capacity will be needed and structures the acquisition process in great

detail.63

This move towards greater reliance on the marketplace to make supply decisions is

clearly in line with the free-market ideologies of the Republican Governor. Commissioner Knight,

60 Levison, 1997, DOE Restructuring Bill

61 Stevenson, Discretionary Evolution..., 355-356.62 Asmus, 1995, Retail wheeling..., 24.


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in a fit of political posturing, writes, Freeing Californians from the monopoly grip of the utilities

and granting consumers direct access to competitive power suppliers will greatly benefit the

states economy and enhance the quality of life in my state.64

As of October, 1995, nineteen state legislatures have reviewed bills in response to the

potential for greater competition in the electric utility industry, including authorizations for

legislative and regulatory study committees as well as direct access for certain customers to

alternative generators.65

Analysis

The California electric utility deregulation experience has often been described as a

stakeholder-driven process. Many of the outcomes of the deregulation policy formulation were a

result of negotiations between organizations representing different stakeholder groups. Based on

my experience as a representative for an environmental organization, as well as interviews for this

analysis, it was clear that the general public was not very involved in the process. As a

staffperson for a prominent officeholder noted during our interview, There was not enough

education or public involvement. As it was too esoteric a topic, so there was not enough press

coverage. [see Anonymous Officeholder Staff Interview #1]

Because of this stakeholder-representative orientation, I decided it would be insightful to

interview people who represented stakeholder organizations that were active in the process, as

well as the staff of the officeholders they were trying to influence. There are limits to this

approach, in that not all interest groups who might be impacted by the process participated in the

63 CPUC Blue Book, 32.64 Knight, Jesse J., letter to the editor, Wall Street Journal, October 9, 1995, A15(Western).


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negotiations. Lukes has argued that there are three views or dimensions of power. His one-

dimensional view of power is based around observable actions by stakeholders. As Polsby has

written, power may be analyzed by looking at, who participates, who gains and loses, and who

prevails in decision-making... presumably people participate in those areas they care about the

most. Their values, eloquently expressed by their participation, cannot, it seems to me, be more

effectively objectified. Lukes second, two-dimensional view of power accounts for the

development of a mobilization of bias explaining how a political institution can systemicly be

biased towards a particular outcome, even without observable actions or non-actions by that

institutions agents. As Goventa comments, on Lukes second face of power, by which power

is exercised not just upon participants within the decision making process but also towards the

exclusion of certain participants and issues altogether. In Lukes third, most radical view of

power, he argues, A may exercise power over B by getting him to do what he does not want to

do, but he also exercises power by influencing, shaping, or determining his very wants... in a

contradiction between the interests of those exercising power and the real interests of those they

exclude.66

By talking with active stakeholder representatives and officeholder staff, I primarily

focused on Lukes first dimension of power, observable actions between participants. The

officeholder staff were also able to add insight on who was able to set the terms of the debate

(who decided which issues were excluded), opening up the analysis to the second view of power,

but only at a superficial level. Unfortunately, these interviews do not shed much light on the

65 Sikkema, 2.

66 Lukes, 1974, Goventa, 1980, p. 3-32


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exercise of power from Lukes most radical view, since such a broad analysis would be outside

of the scope of this project.

Selection of Stakeholder Groups

In selecting stakeholder groups to focus on, I tried to cover as wide a range of participants

as possible, talking with at least one prominent representative from a number of categories:

investor-owned electric utilities, municipal electric utilities, utility labor unions, independent

producers, large electricity consumers, small electricity consumers, environmental advocates, and

a state institutions. I chose these categories based on personal experience representing a

stakeholder organization in the process, as well as considering those used in a status report from

the CPUC to the Legislature.67 As I extended my analysis with a summary of campaign

contributions from stakeholders to the conference committee members, one important sub-

category emerged because of its dominance: Oil and natural gas companies are often both large

energy consumers, as well as independent producers.68 I have broken oil and natural gas

companies out as a separate category in the tabulations of campaign contributions.

Overview of What the Stakeholders Wanted and What They Got

Before analyzing who got what they wanted, I first review what the different stakeholder

groups wanted and got in both policy outcomes, based on 26 stakeholder interviews [see

Appendix B], their comments on restructuring filed with the CPUC69, the December, 1995 CPUC

Decision, and the final AB 1890 language.

67 CPUC, 1995, Status Report...

68 CPUC, 1995, Status Report...69 CPUC, 1995, Status Report...


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Investor Owned Utilities: The IOUs want to protect shareholders by maintaining their stock

price and maximizing profits. Most resist retail competition, and pursue 100% stranded cost

recovery from ratepayers.

December Decision outcome: The IOUs did get the ability to recover 100% of

stranded costs, including billions of dollars in rate settlements for PG&Es Diablo

Canyon and SCEs SONGS nuclear plants. A five year phase-in to direct access may

have been a little too fast for Edison, which was the strongest proponent of starting

with a wholesale-only PoolCo proposal.

AB 1890 outcome: The legislation codified the utilities opportunity to recover 100%

of stranded costs. While recovery period is limited to four years may limit their ability

to achieve the full 100% cost recovery, they are comforted by a negotiated settlement

that was reached to avoid future litigation.

Municipal Utilities: The munis want to retain their autonomy in making their own policy

decisions, while ensuring their financial solvency. Most resist retail competition and pursue the

ability to recover 100% of stranded costs from ratepayers, who are also their shareholders.

December Decision outcome: The CPUC Decision did not address municipal utilities,

except for on the subject of reciprocity for allowing direct access, where there was

considerable support for staying clear of muni autonomy: We have previously

acknowledged that we do not have the authority to impose our vision on municipal or

public power entities. Under legal mandates which we scrupulously respect the

governance of these entities and their relation to their customers are committed to

their duly constituted governing authorities. The inclusion of direct access was not

embraced by munis.


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AB 1890 outcome: The municipal utilities lost autonomy in making decisions about

direct access as a tradeoff to ensure their ability to collect stranded costs. An

unexpected positive outcome was the improved leverage munis gained over IOUs,

since AB 1890 required the munis and IOUs to work together on joint filings to FERC

for the Power Exchange and ISO. As the lobbyist for the Sacramento Municipal

Utility District points out, If the IOUs do not respect the munis, we can point to the

legislation, enhancing our stature at the federal level. [see interview, Appendix B]

The inclusion of direct access was not embraced by munis.

Utility Labor Unions: Unions would like to protect the income of their members while faced

by a down-sizing industry. They are strong proponents of maintaining system reliability as this

requires adequate staffing, leading to an overlap of their interests with public interests. They

resist retail competition, and pursue ratepayer support for worker severance payments and

retraining.

December Decision outcome: Although the Decision does allow for the collection of

IOU employee severance and retraining costs in the CTC, it does not focus on

maintaining system reliability.

AB 1890 outcome: The legislation allows for the collection of IOU employee

severance and retraining costs in the CTC, while going further to directly support the

goals of system reliability through adequate inspection and maintenance. AB 1890

also requires that IOU-divested generation plants come with two-year contracts for

operation and maintenance by the existing staff.


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Independent Producers: Independent generators want to protect the sanctity of their existing

contracts, ensuring their continued financial well-being, while having access to new customers

made available to them. Most are proponents of direct access.

December Decision outcome: Although the CPUC supports the renegotiation (buy-

out) of Standard Offer contracts with qualifying facilities, it leaves these negotiations

as voluntary, protecting the sanctity of the QF contracts. Short-run avoided cost

(SRAC) payments to QFs are to be set to the market-clearing price in the Power

Exchange, resulting in generally higher prices paid to generators. Independent

producers gain access to new customers through the adoption of direct access.

AB 1890 outcome: The legislation nearly mirrors the CPUC Decision in terms of

impacts on independent producers.

Renewable Technology Independent Producers: As a subset of independent generators, the

renewables industry would like to rebound from difficult financial times many of them are

facing due to the sunset or failure of previous policy support mechanisms. They would like

continued funding to reflect the public goods benefits offered by their technologies (such

decreased air pollution), while having access to new customers willing to pay more for

green power.

December Decision outcome: The CPUCs endorsement of the Renewables Portfolio

Standard was applauded by existing renewable energy generators, although a lack of

specificity in the policy language with regard to percentage levels for the minimum

renewables purchase requirement was a cause for concern. Direct access with

community-based aggregation of load would help facilitate the development of

bilateral green pricing contracts with residential customers. As with non-renewable


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independent producers, SRAC set according to the Power Exchange market clearing

price should result in higher payments to QFs under contract.

AB 1890 outcome: Many renewables generators were disappointed with the

replacement of a policy mechanism that had known outcomes, the RPS, with one that

had known costs, renewables funding through a systems benefits charge. Some argue

that the level of funding is too low to maintain the current state renewables base and

will end in 2002, resulting in an industry shakeout. However, this industries financial

woes are not solely because of deregulation, and AB 1890 does provide a significant

amount of money to existing renewables developers to help mitigate any downsizing in

the industry. As with non-renewable independent producers, SRAC set according to

the Power Exchange market clearing price should result in higher payments to QFs

under contract.

Large Industrial & Agricultural Customers: The large consumers want the most efficient,

competitive market possible to drive down rates. They support granting the IOUs less than

100% stranded cost recovery, and want a choice of their electricity supplier, making them the

strongest proponents of direct access.

December Decision outcome: Large customers did get the market structure they

desired, allowing bilateral, direct access contracts. They lost out on rather generous

terms for collection of stranded costs by the IOUs, which could extend until 2005.

AB 1890 outcome: Again, large customers won on the inclusion of direct access. As

in the December Decision, IOUs still have the opportunity to collect 100% of their

stranded costs, but limiting the competitive transition charge (CTC) cost recovery to

4.25 years greatly increased large electricity consumers satisfaction with the deal.


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Small Consumers: Small consumer advocates want any restructuring that occurs to have net

benefits for even the least well off individual. They resist retail competition, want an equitable

user class phase-in schedule for direct access, and support community aggregation for

residential ratepayers to take advantage of bilateral contracts with low cost generators. Low

income consumer advocates want IOUs to continue their low income assistance programs

(baseline rate, low-income weatherization) on an as-needed basis, and have adequate customer

education programs and protection from fraud put into place.

December Decision outcome: Small consumer and low income advocates lost in their

opposition to a market structure allowing direct access, as well as in their opposition

to 100% stranded cost recovery by the IOUs. Small consumers benefited from the

inclusion of language on community aggregation to allow residential customers some

benefits from direct access. Funding for low income programs was good, with no cap

on low income rate assistance. In principle, the consumer education and protection

language was well received, although more specific details were required.

AB 1890 outcome: As in the CPUC Decision, small consumer and low income

advocates lost in their opposition to a market structure allowing direct access, as well

as in their opposition to 100% stranded cost recovery by the IOUs. Small consumers

benefited from the inclusion of language on community aggregation to allow

residential customers some benefits from direct access, although the anti-slamming

language in the bill may make this unworkable if it is not fixed in this sessions clean-

up legislation. Funding for low income programs was good, with no cap on low

income rate assistance. Language on consumer education and protection did not go

far enough in addressing the needs of a deregulated market.


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Environmental Organizations: Environmental organizations want the electric utility industry to

evolve into a form which is environmentally and socially sustainable. These groups want to

accelerate the removal of coal and nuclear plants from operation. They want the idea of least-

cost planning through IRP to be protected. Mechanisms that continue to decouple utility

profits from volume sales are pursued because of the positive impact they have on demand

side management efforts (DSM). Direct access threatens to undermine both IRP and sales

volume/profit decoupling. Environmentalists would like to see an end to the backsliding that

has occurred in utility energy efficiency and R&D budgets. Most groups resist retail

competition and support continued funding for new renewables, DSM, and public interest

RD&D. There is a significant rift that has developed over whether existing renewables

generators should continue to receive subsidies.

December Decision outcome: Environmental advocates lost in their opposition to a

market structure allowing direct access, as well as in their opposition to the tying of

stranded cost recovery to continued operation of nuclear plants. The inclusion of the

Renewables Portfolio Standard was heralded as strong renewables policy by some

environmentalists, while others perceived it as continued charity for poorly-run

businesses that had already received more than adequate support. The application of a

public goods charge to pay for energy efficiency and public interest RD&D was good

in principle, although a lack of specific funding levels was troubling.

AB 1890 outcome: Environmental advocates lost in their opposition to a market

structure allowing direct access, as well as in their opposition to the tying of stranded

cost recovery to continued operation of nuclear plants. The rift in the community that

had developed regarding renewables policy was only torn wider by renewables funding


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levels that may not support the existing base of generators while allowing some new

development to be placed on line. The application of a public goods charge with

statutory spending level floors for energy efficiency, renewable energy, public interest

RD&D, and low income programs was well received, but there is ongoing debate as to

whether the adopted levels represented too much of a compromise with more

powerful players.

Stakeholder Interviews Cluster Analysis

Given the large amount of interview data to absorb from 26 stakeholder interviews,

grouping the stakeholder interviews into categories allowed some overall patterns to emerge from

this set of data. This clustering also allowed for a better correlation with a review of the

officeholder staff comments. I used my original categories for this cluster analysis: investor-

owned electric utilities, municipal electric utilities, utility labor unions, independent producers,

large electricity consumers, small electricity consumers, environmental advocates, and a state

institutions. Appendix B has a full transcript of each interview. The organizations represented by

each interview is listed, by category, in the table of contents for Appendix B. Because of the

time-intensive nature of this research, combined with limited time and resources available, each

clustered category has a small number of organizations. Because of the subjective interpretations

required to code qualitative interview responses, and the small number of organizations per

category, the following cluster analysis should only be used to point out rough trends. The raw

coded data for this analysis is included in Appendix D.


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The stakeholder representatives were asked what outcomes their organizations wanted to

obtain from the California electric utility restructuring process as it was just unfolding. When

combined with comments filed by that organization early in the restructuring process at the

CPUC, this provides a baseline to determine if they got what they wanted.

The stakeholder representatives

were then asked how much of what their

organization wanted was included in the

CPUC December, 1995 Decision. As

Figure 1 indicates, nearly half of the representatives say that their organization got most of what it

wanted from the December Decision, a slightly smaller number of representatives report a mixed

or unclear outcome, and the remaining minority claim that their organization got rather little.

Figure 2 shows that all of the investor-owned utilities and independent producers, as well as the

majority of large electricity consumers, say that their organizations got most of what they wanted

Figure 1: How much of what your organization

wanted was in the CPUC December Decision?

Rather Little

Mixed/Unclear

Most

Figure 2: How much of what your organization wanted was in the

December Decision?

0 1 2 3 4 5

INVESTOR-OWNED

ELECTRIC UTILITIES

MUNICIPAL

ELECTRIC UTILITIES

UTILITY LABOR

UNIONS

INDEPENDENT

PRODUCERS

LARGE

ELECTRICITY

CONSUMERS

SMALL

ELECTRICITY

CONSUMERS

ENVIRONMENTAL

ADVOCATES

STATE

INSTITUTIONS

Rather Li

Mixed/Un

Most


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from the December Decision. The utility labor unions and municipal utilities representatives

reported receiving relatively little from this policy outcome.

The stakeholder representatives were also asked how much of what their organization

wanted was included in AB 1890. As

Figures 3 indicates, nearly half of the

representatives say that their

organization got most of what it

wanted from AB 1890, a similar

number of representatives report a

mixed or unclear outcome, and the

remaining minority claim that their

organization got rather little. Figure 4

shows that all of the investor-owned

utilities and utility labor union

representatives, as well as the majority

of large electricity consumers, say that their organizations got most of what they wanted from AB

1890. The small consumer and environmental organization representatives appear to have taken a

step backwards in terms of getting what they wanted compared to the CPUC December Decision

policy outcome.

Rather Little

Mixed/Unclear

Most

Figure 3: How much of what your

organization wanted was in AB 1890?


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One of the interview questions

asked which policy outcome was

preferred by the subjects organization,

either the CPUC December Decision

or AB 1890. As Figures 5 indicates,

most organizations preferred the

language of AB 1890. Figure 6 shows

that the only organizations interviewed

that prefer the December Decision are

among the environmental and

independent power communities. It is

clear from the interview transcripts

that those few organizations that

stated a preference for the

December Decision did so based

on their support for the

Renewables Portfolio Standard

that was selected by the

Commissioners as a renewables

policy, as opposed to the

nonbypassable surcharge funding

mechanism adopted in AB 1890

Figure 4: How much of what your organization

wanted was in AB 1890?

0 1 2 3 4 5

INVESTOR-OWNED

ELECTRIC UTILITIES

MUNICIPALELECTRIC UTILITIES

UTILITY LABOR

UNIONS

INDEPENDENT

PRODUCERS

LARGE

ELECTRICITY

CONSUMERS

SMALLELECTRICITY

CONSUMERS

ENVIRONMENTAL

ADVOCATES

STATE

INSTITUTIONS

Rather Little

Mixed/Unclear

Most

Figure 5: What Policy Outcome Does Your

Organization Prefer?

AB 1890

No preference /

Unclear

CPUCDecember

Decision


40/181


[see American Wind Energy Association, Natural Resources Defense Council #1, and Union of

Concerned Scientists interviews]. PG&E and SDG&E indicated that part of their preference for

AB 1890 was to avoid future

litigation. As excerpted from the

PG&E stakeholder interview,

Although the CPUC Decision

was financially easier on PG&E,

restructuring as envisioned in the

CPUC Decision would have been

less likely to take place in an

orderly manner due to legal

wrangling and ongoing filings at

the CPUC. Many of the other

stakeholders consider AB 1890 an

incremental, evolutionary step

forward from the December

Decision.

Officeholder Staff Interviews

Officeholder staff interviews are another data source that I now use to cross-check the

previous cluster analysis on who did and did not get what they wanted out of the restructuring

process, and to begin to build theories for why. I interviewed two subjects who were on the

CPUC staff during the two years leading up to the December Decision, as well as three subjects

Figure 6: What Policy Outcome Does Your Organization Prefer?

0 1 2 3 4 5

INVESTOR-

OWNED ELECTRIC

UTILITIES

MUNICIPAL

ELECTRIC

UTILITIES

UTILITY LABOR

UNIONS

INDEPENDENT

PRODUCERS

LARGE

ELECTRICITY

CONSUMERS

SMALL

ELECTRICITY

CONSUMERS

ENVIRONMENTAL

ADVOCATES

STATE

INSTITUTIONS

CPUC December Decision

AB 1890

No preference / Unclear


41/181


who were staff for members of the legislative Conference Committee during the 1996 legislative

session. The following are excerpts from the full interview transcripts in Appendix C.

mark stout erg masters project

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