Distribution Competition

May 16, 2000
1:30 p.m.
State Capitol, Room 2040

I. Opening Comments

• Senator Debra Bowen, Chairwoman

II. Distribution Competition – Focus On The Wires Side

• Commissioner Carl Wood, California Public Utilities Commission
• V. John White, Sierra Club
• Wayne Sakarias, San Diego Gas & Electric Company
• Dan Richard, Pacific Gas & Electric Company
• Chris Mayer, Modesto Irrigation District
• Gareth Krause, Merced Irrigation District
• Mike Day, Enron

III. Distribution Competition – Focus On The Generation Side

• Commissioner Carl Wood, California Public Utilities Commission
• V. John White, Sierra Club
• Frank Baker, Utility Specialists, Inc.
• Gary Schoonyan, Southern California Edison
• Steve Greenberg, Intergy
• David Townley, New Energy
• Matt Friedman, The Utility Reform Network
• Jay Morse, Office of Ratepayer Advocates
• Dan Richard, Pacific Gas & Electric Company

Distribution Competition

Issue Overview

May 16, 2000

Background

AB 1890 (Brulte), Chapter 854, Statutes of 1996, was designed to deregulate the electricity industry and set up a competitive framework for electricity generation. That competition is designed in part to let electricity customers choose the source of their electricity, which allows them to select, for example, "green" energy or they can allow their local utility distribution company to select the type of power they receive.

Energy distribution is the part of the system that the customer actually "sees," because it’s the distribution system – and its accompanying lines, transformers, and substations – that brings the power from whichever generation source the customer chooses to his or her front door. Electricity distribution systems are, for the most part, owned and operated by local utility distribution companies (UDCs), such as Pacific Gas & Electric (PG&E), Southern California Edison (Edison), Sacramento Municipal Utility District (SMUD), and others.

It’s possible for a company to be both an electricity generator and an electricity distributor, but in the wake of deregulation, some of the state’s largest utilities have opted to get out of the generation business and focus instead solely on distribution. While AB 1890 clearly envisioned electricity competition at the generation level, there’s some question as to whether the intent language adopted at the time relative to distribution competition envisioned the types of competition that have developed since the bill became law.

The purpose of today’s hearing is to discuss the various forms of distribution competition and look at some of the direct and indirect impacts of permitting (or banning) such competition.

Types of Distribution Competition

During the committee’s May 9 hearing on SB 1939 (Alarcon), there was a great deal of discussion about the issue of "distribution competition." While the hearing focused on one type of distribution competition (the ability of irrigation districts to provide service to customers in the service territories of public and private utilities), there are at least five types or levels of distribution competition:

1. Direct Wires Competition. This was the subject of SB 1939 (Alarcon) and occurs when a UDC reaches outside of its service territory to provide service to an entity that’s already being served by a UDC in another territory.
2. Indirect Wires Competition. This is also known as "spot municipalization" and occurs when an undeveloped area inside of a UDC is "municipalized" by a city for the purpose of delivering electric power. While such competition doesn’t result in duplicate wires being laid to customers who are already being served by a UDC, it can lead to new wires being laid across the wires of an existing UDC in an effort to reach the customers who may eventually move into the undeveloped area.
3. Distributed Generation For Sale To Others. Distributed generation (DG) systems allow customers to generate their own power – either independent of or interconnected with the electricity grid. The systems vary in size and technology – from mini-turbines similar to a small jet engine, to fuel cells that burn hydrogen – typically generating less than 30 megawatts of power. One example of DG competition would be if an office park or a residential neighborhood installed a DG system and sold power to businesses located in the park or homes in the area. In that case, those customers would no longer have to buy power from the traditional UDC serving the area.
4. Distributed Generation For Sole Consumption. A solar system for providing electricity to an individual’s home is also a form of distribution competition. Any electricity generated from those solar panels decreases the person’s need to buy power from the UDC. However, in most cases, the home is still connected to the UDC so the end user can get "traditional" electricity service in the event the solar panels don’t produce enough electricity for the home to be self-sufficient.
5. Condemnation. A city has the option of taking over a utility distribution system from an investor-owned utility by condemning the system, which requires a vote of the people within the city boundaries. While not common, this process does allow a city to become a UDC if the local electorate votes to permit the local government to take over the service from the existing provider.

Issues Surrounding Distribution Competition

Permitting or banning distribution competition raises a number of issues and questions – some of which are noted below – that the committee may wish to consider when reviewing proposals dealing with distribution competition.

1. Utility Bill Costs. Some believe permitting competition at the distribution level may indeed drive down the electricity bills of the end users, just as permitting competition at the generation level can drive down the cost of those bills. In fact, during the debate over SB 1939 (Alarcon), some of the irrigation districts opposing the measure stated that their customers were paying 30% less than they were paying when they were being served by another UDC.
    
2. Environmental Costs. While the cost of a utility bill is easy to quantify, the cost of distribution competition on the environment can be difficult to quantify. In the case of wires competition, the costs can come in the form of land being dug up to install duplicate lines, which will have an impact on air quality, soil, ground water, and more. In the case of DG competition, the costs depend on whether the DG is more or less environmentally beneficial than the generation system used by the incumbent UDC to provide power.
    
3. Reliability Costs. Ensuring that Californians have access to a reliable source of electricity is one of the fundamental underpinnings of AB 1890. While providing reliability no doubt costs money, the failure to provide reliability will likely cost ratepayers even more money in lost productivity. Some would argue that permitting competition – especially DG competition – will make the system more reliable because taking large customers off the system will create more capacity. That in turn could make it less likely that the system will be overloaded during peak demand times. On the other hand, allowing DG systems to operate could decrease reliability. That’s because if the system is built out under the presumption that those using DG are "off the system," any move by a customer who otherwise relies on DG to tap a UDC for energy (if, for example, the customer’s DG system goes down or isn’t providing the amount of energy it had otherwise counted upon) could overtax the system in a manner that hadn’t been planned for.
    
4. Safety Costs. As wires competition and competition from DG grows, the question arises as to whether the construction and operation of these facilities will be as safe as the current system. Clearly, any growth in the use of DG will shift oversight for the safety (and reliability) of those systems from the current UDC – which has responsibility for overseeing the safety of the entire system – to the office park owner or home owner who installs the system. Furthermore, if there are more entities operating outside the traditional UDC system, it means the UDC has more interconnections to consider if, for example, it needs to shut down power lines for safety or service reasons.
    
5. Stranded Costs. Any move by customers away from their UDC will leave that UDC with the same equipment and facilities it had before, yet it will have less money to cover its operational costs. Those costs are, in effect, stranded, and may have to be shifted to the customers who are still being served by the UDC. On the other hand, some would argue that a UDC that loses customers to a competitor should simply have to internalize any stranded costs as the cost of doing (or, in this case, losing) business in an open market.
    
6. Public Purpose Program Costs. This was the issue addressed squarely by SB 1939 and is relevant in today’s discussion as well. When a UDC competitor, such as an irrigation district, moves into another utility’s territory to "cherry pick" a large customer and provide service, that customer no longer pays for the public purpose programs located in the district where the customer is located. Instead, that money is paid to the district where the new service provider is located. While that’s a benefit to the district (and its residents) that gets the increased funding, the shift clearly has a negative impact in the service territory (and on its residents) where the money had been going to pay for low-income assistance programs, energy efficiency programs, invest in renewable energy sources, and research alternative energy supplies.
    
7. Constitutional Question. Article XI, Section 9 of the California Constitution provides:
   
   A municipal corporation may establish, purchase, and operate public works to furnish its inhabitants with light, water, power, heat, transportation, or means of communication. It may furnish those services outside its boundaries, except within another municipal corporation which furnishes the same service and does not consent.
   
   Clearly, a municipal corporation – such as SMUD and the Los Angeles Department of Water Power (LADWP) – can preclude distribution competition from taking place inside its boundaries because it has the ability to deny consent to such service providers.
   
   A number of irrigation districts, which aren’t defined in law as municipal corporations but have been defined as such by various court cases, are currently providing electricity services to customers in the territory of investor-owned utilities.
   
   What isn’t as clear, given Article XI, Section 9 of the California Constitution, is whether a move to limit or preclude irrigation districts and other municipal corporations from providing electricity services outside of their assigned service territories is constitutionally permitted, regardless of the merits or detriments that such distribution competition may provide to ratepayers.

California Public Utilities Commission Study

The California Public Utilities Commission (CPUC) is in the midst of a rulemaking process that’s looking at the impacts of and a potential regulatory framework for DG systems. As part of a separate process, the CPUC is also looking at the larger issues surrounding distribution competition.