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Calif. PUC Releases Draft Review Of Choice Issues, As "Call To Action" On Retail Market Structure Warns Choice Being Implemented By Piecemeal Statutory Directives And Decisions, Could Lead To Another Crisis

May 4, 2018

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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The California PUC released a draft study of issues facing the retail sale of electricity in the state (known as the Green Book), observing that current policy is being driven by disparate actions undertaken to achieve various goals in the wake of the 2000-01 energy crisis, and cautioning that the lack of a coherent policy could lead the state into another energy crisis.

The draft does not contain any policy recommendations. However, it makes various observations about current California policy, and reviews retail electric market design in four markets: New York, Illinois, Texas and Great Britain

A presentation on the draft notes, "we are seeing disaggregation of the electricity market through dozens of different decisions and legislative actions, but we do not have a plan."

"If we are not careful, we can drift into another crisis," the presentation noted

Such competing policies have included utility building of generation and long-term contracting to ensure resource adequacy and avoid shortage pricing, with other various policies, such as municipal aggregation and an expanded cap for direct access, which have migrated load away from the utilities for generation service. There are also various incentive programs which support non-LSE choice in electricity service (distributed generation, etc.) which impact LSEs

The draft concludes that, "California needs a clear long-term vision for its regulatory framework to address the state’s system requirements and policy goals beyond short-term fixes to stabilize immediate issues."

"The purpose of the paper is to serve as a catalyst to acknowledge vulnerabilities and to address them thoughtfully and strategically. New rules will need to be formulated by the CPUC under current law and -- in certain instances-- legislative guidance may be necessary. This paper serves as a call to action for the Legislature, our agency partners, the CAISO, stakeholders and communities to join in the conversation and develop a plan to protect against another crisis," the draft states

A presentation listed California's core principles for its electric market as:

• Ensuring affordable electricity rates

• Achieving decarbonization goals

• Maintaining reliability

Concerning affordability, the draft observes, "Customer engagement and price transparency are critical to keep rates low in competitive markets. In New York and Great Britain, low customer engagement in switching retail suppliers has led to significant market inefficiencies and higher costs for inactive consumers."

The draft states, "Texas does not have a uniform subsidy for low-income customers. The other markets examined in this paper administer low-income programs either through retail suppliers (Great Britain), utility programs (New York), or discounted distribution rates (Illinois). It is critical that low-income programs continue with expanded customer choice offerings. California offers up to 35% discount on rates to residential customers through the CARE program, and other discounts such as the FERA program. California also offers unique programs for low-income customers such as the Energy Savings Assistance Program. Recently, California has included more efforts specifically toward 'disadvantaged communities', to ensure that the benefits of transportation electrification and distributed energy resources also reach those communities."

Concerning the interaction of renewable goals and affordability, the draft states, "New York, Texas, and Great Britain, like California, rely on a state-focused independent system operator. However, Illinois benefits from its participation in MISO, a multi-state power market. Illinois attributes the broader grid and being part of MISO to its ability to balance its goals to increase renewable penetration and keep rates affordable."

The draft states, "It is unclear if California could have similar wholesale price benefits like Illinois because it utilizes a state system operator rather than a regional transmission operator. As part of implementing SB 350, California is considering how its electric grid operations could be expanded on a regional basis across the western states. The benefits and implications of regionalization on California bill affordability are still under consideration."

Concerning the wholesale market, reliability, and resource adequacy, the draft notes, "Approaches to providing reliable service vary by state. New York, Texas and Great Britain rely on wholesale energy markets and bilateral contracts to meet demand. Independent system operators meet reliability requirements set by the state and regional transmission organizations. New York and Great Britain also run capacity markets, and Texas adds incentives on energy prices to meet target reserve margins. In each of these markets, retail service providers compete for individual or aggregated customers with regulatory oversight."

The draft states, "Statewide oversight can guarantee that reliability and safety requirements are rigorously met. Regardless of who serves as the primary LSE, the lights must stay on while adhering to high safety standards. As CCAs or other competitive providers become a larger portion of the electricity market, the quandary becomes who is responsible to ensure that these requirements are met for all of California’s citizens."

The draft states, "If a central buyer has the responsibility to maintain reserves for reliability and the liability for the safe delivery of electric service, there must be adequate compensation. This is not to suggest that the utilities are to be given unfettered ability to invest and recover costs. Rather, this precept is based on the state’s need to balance citizen interest in selecting alternate sources of electric service with its responsibility [sic] make sure the lights are kept on. If each LSE holds a fragmented responsibility, then sufficient enforcement tools must be in place to ensure everyone complies with the standards."

The draft states, "Illinois has centralized, state procurement and planning in a multi-state grid that facilitates meeting energy demand and reliability. California has historically had centralized state procurement planning for IOUs, but not on a statewide basis."

"As LSEs become more diverse, a centralized procurement process may help ensure that reliability requirements are met since all LSEs have the same legal obligations to comply with many of California’s energy policy mandates, including resource adequacy and the RPS," the draft states

"Over time California energy policy will require significant new investment in generation. The success of the California RPS program relied largely on the larger utilities to invest in projects by raising low-cost capital in financial markets, and then recovering costs through sales of electricity. This method of financing capital projects may be in jeopardy as more and more customers leave the IOUs. There is a question whether the necessary capital investment needed to decarbonize the electric sector to meet the state’s 2030 goals and beyond can be financed and, if so, delivered on time if the state transitions away from a few larger buyers to many small buyers," the draft states

"The uncertainties of today’s market will need to be ameliorated by establishing an approach that keeps ratepayers on IOU default service indifferent to load migration while avoiding unfairly imposed costs. What if the CCAs failed to meet their requirements and the IOUs had to quickly fill the gap as the provider of last resort? Are there adequate customers remaining on IOU retail service for fair and equitable allocation of costs? Other jurisdictions have implemented different plans and structures to address this issue, which California decision-makers may wish to explore as more LSEs enter the market and customers leave their incumbent utility," the draft states

Concerning transparency, the draft states, "As part of the implementation of AB 1890, the CPUC separated out the major aspects of the utility electric bill, including generation, transmission and distribution, and public purpose programs as major categories. These general categories are still in place today. It may be appropriate to re-examine if bill-related elements are in the correct category to ensure bill integrity and to promote the level of transparency achieved in other markets."

Link to draft report

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