BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF CALIFORNIA

Order Instituting Investigation into the Functioning of the Wholesale Electric Market and Associated Impact on Retail Rates
	
Investigation 00-08-002
(Filed August 3, 2000)	

COMMENTS OF THE INDEPENDENT ENERGY PRODUCERS ASSOCIATION
TO THE PROPOSED AND ALTERNATE DRAFT DECISIONS OF 
COMMISSIONERS WOOD AND DUQUE, RESPECTIVELY

Dated: August 16, 2000
Douglas K. Kerner, Of Counsel
Andrew B. Brown, Associate
Ellison, Schneider & Harris, LLP
2015 H Street
Sacramento, California 95814
Phone:  (916) 447-2166
Fax:  (916) 447-3512

Attorneys for Independent Energy Producers 
Association

COMMENTS OF THE INDEPENDENT ENERGY PRODUCERS ASSOCIATION
TO THE PROPOSED AND ALTERNATE DRAFT DECISIONS OF 
COMMISSIONERS WOOD AND DUQUE, RESPECTIVELY

Introduction

The Independent Energy Producers Association (“IEP”) respectfully submits these Comments in the captioned matter.  Although IEP is unconvinced that recent electricity market experience supports any finding of some fundamental flaw in such markets, it recognizes that many customers of San Diego Gas & Electric Company (“SDG&E”) are experiencing unexpected and startling electricity costs.  Accordingly, IEP generally supports the Alternate Draft Decision of Commissioner Duque to establish interim rate caps for SDG&E.
As noted, it is clear that many SDG&E customer have been unwillingly exposed to significant price increases (compared to prior years) in their June and July bills.  As more fully discussed below, these price increases are largely due to fundamental structural problems in California’s retail markets.  Fairness dictates that the Commission provide interim rate relief while correcting defects in the California retail market.  Such relief should not, however, undermine the market development which should provide the longer-term solution to California’s supply and demand responsiveness problems.

Fundamental Defects in California’s Retail Market Need to be Remedied to Provide Customers with Meaningful Choice or Responsible Default Service.  

The restructuring of the California market was premised upon meaningful customer choice. The retail market should be offering customers competitive products that compete on price, service or quality, and where customers may elect to balance among these three products as they see fit given their means and preferences.  Experience, to date, in the SDG&E service area, demonstrates that there is insufficient competition in the retail markets. This leaves customers with no choice other than purchasing energy products from their default provider—SDG&E.  Unfortunately, SDG&E, with full knowledge of the state of competition in its service territory, has elected to provide that default product without the exercise of any risk management judgment in the procurement of electricity on the behalf of its default customers. Consequently, most SDG&E customers have been effectively thrown into a volatile wholesale market with no choice other than to purchase a product untouched by human judgment.  
In fairness to SDG&E, the company has long articulated its position that it would no longer be in the procurement business.  Rather, as the default provider, and apparently consistent with the Commission’s preferences, it passes through to its customers the wholesale costs of purchases from the California Power Exchange (“CalPX”) and California Independent System Operator (“CAISO”).  This strategy works well in times of resource surplus when prices are low. At times of high demand and low supply, however, as have been the norm this summer, SDG&E’s strategy has exposed customers to extreme volatility without any protection.  IEP thinks, and the premises underlying electricity deregulation in the first place support the view, that customers should be in a position to manage price risk, but in the absence of those opportunities, it is necessarily the role of Energy Service Providers (including UDCs) to manage risk.
At present, SDG&E provides default service to 97% of the retail base in its service territory.  There is evidence that risk management tools can be provided to address market volatility.  For example, IEP is aware of a product purchased by the University of California at San Diego and California State University at San Diego which is based on a 5% discount off their 1997 wholesale electricity tariff.  It is our understanding that this product saved California taxpayers (who support the costs of running these institutions) almost $2 million dollars in electricity costs in June and July.  While some SDG&E residential customers appear also to have benefited from this product, due to retail design problems the benefits of such products were limited to a small number of customers.  
Fortunately, this Commission can do something about the lack of meaningful retail competition and defective default products without imposing changes that could completely undermine the development of a competitive retail market response.  The Commission should immediately undertake within this proceeding an investigation into the lack of meaningful retail choice in the SDG&E territory and take appropriate action to ensure that California customers benefit from products which compete on price, service and quality.  As an interim step to provide relief during this peak season, the proposal of Commissioner Duque should be adopted.  Besides providing a measured response period, it embraces rate design elements which will foster demand responsiveness and promote conservation.  The alternative—a multi-year rate freeze—will negate any price responsiveness by consumers at the very time this is needed.  In addition, default providers, such as SDG&E, should be required to provide a commodity product with some form of risk management to provide some interim, transitional buffer until those design flaws are corrected to allow for a functioning retail market.  

There is No Evidence that as a General Matter the Wholesale Market is Not Workably Competitive. 

Commissioner Wood’s Proposed Decision concludes as a Finding of Fact “… wholesale markets are not workably competitive” (Finding of Fact 3 at 6; cf. Commissioner Duque Alternate Draft Decision Finding of Fact 3 at 12.)  This finding is not based upon any evidentiary record, and it would be a mistake for the Commission to make such “factual” determinations without the benefit of such an evidentiary record.  
Prior to the June price “spike”, which as noted corresponded with a period of high demand and severely constrained supply of electricity, IEP was unaware of any market participant arguing that the “wholesale markets are not workably competitive”.  As a matter of fact, the data suggests otherwise.  The average wholesale price of power through the PX was 2.4 cents in 1998 and 2.8 cents in 1999.  It would appear that the conclusion of the Wood PD regarding workably competitive markets is driven by prices in certain hours in June and July which hit unprecedented highs throughout the Western grid.  The root cause of these prices appears to be regional high demand coupled with regional low supply.  Price response to supply and demand is not evidence of market failure.
There is an open debate as to whether wholesale electricity markets are workably competitive in all hours.  In a March 9, 2000 report the independent Market Surveillance Committee of the California Independent System Operator (“CAISO”) stated that it was “unable to conclude that California’s energy and ancillary services markets will be workably competitive during high-demand periods this summer.”  In other words, the market may not be perfect.  
However, even assuming the lack of perfect competition, the market appears to be workably competitive 98-99% of the time.  Therefore, in the absence of an evidentiary record, the Commission should not determine that, as a general matter, the market is not workably competitive.  

CONCLUSION

	IEP recognizes the need and propriety to provide SDG&E customers with the reasonable and interim rate relief during this period as provided in the Alternate Draft Decision of Commissioner Duque.  There exists no evidentiary record for the determination that California’s electricity markets are not workably competitive.
	Moreover, it is a fundamental structural defect in retail markets, and the poor procurement practices of SDG&E as the default provider which are the root of the current price scare.  IEP recommends that the Commission use this Investigation to discern what market design defects have caused the lack of meaningful retail choice to date, and ensure that California customers benefit from products which compete on price, service and quality.  In addition, the time is beyond ripe for the Commission to determine the role of a default provider, if any, in the restructured economy.
							Respectfully submitted,
							Douglas K. Kerner
							Andrew B. Brown

							By 					 
								Douglas K. Kerner

Ellison, Schneider & Harris, LLP
2015 H Street
Sacramento, California 95814
Phone:  (916) 447-2166
Fax:  (916) 447-3512

Attorneys for Independent Energy Producers 
Association
Dated: August 16, 2000