Guest Editorial: Why a Core-Noncore Market Structure Ought to Be Adopted

By Dan Douglass, attorney representing electric service providers and direct-access customers A clear, coherent, and achievable direct-access plan is paramount for California?s energy policy and is necessary for the economic health of the state. The past several years have been overly concerned with finger pointing and blame assessment, but now it is time to move forward with constructive plans for designing a better market. Undeniably, we need a market structure that will provide certainty to all market participants, attract needed capital and investment, and provide the necessary clarity regarding the utilities? obligation to serve and customers? cost responsibilities. In search of that Holy Grail of a stable market system, many have turned to the concept of adopting a core-noncore market structure, analogous to that which has existed so successfully in the California natural gas market for more than 15 years. The Energy Action Plan adopted last May by the California Public Utilities Commission, the California Energy Commission, and the California Power Authority called for the use of market forces and regulatory approaches that will attract private investment into California?s energy infrastructure to stretch and leverage public funds and consumer dollars. The CEC was more specific in its recent Integrated Energy Action Plan, advocating that California consumers and businesses could benefit from having more effective choices available to meet their unique electricity needs, including ?being able to choose an alternative energy provider through a well designed core/noncore retail market structure.? By way of contrast, the March 15 CPUC Division of Strategic Planning (DSP) staff report deals far less vigorously with the possible implementation of a core-noncore market. Unfortunately, despite its sponsor, the report is neither overly strategic nor very well planned. Instead, it is a timid response to the challenge before the market, which is how to facilitate customer choice while providing certainty to all market participants and avoiding inappropriate subsidies that flow in either direction. Even Southern California Edison, certainly no friend to retail competition, has included a rudimentary core-noncore approach in its proposed AB 2006. A revival of the core-noncore bill AB 428, which passed the Assembly unanimously last year, only to die in an act of Mutual Assured Destruction (for those who remember their nuclear war strategy classes from college poli-sci days) when it confronted the ill-fated SB 888, also appears likely. Both of those would implement a core-noncore system far earlier than the 2009 date proposed by DSP. The best response to the DSP?s report came from commission president Michael Peevey, when he wrote on March 15 to Assemblymembers Sarah Reyes (D-Fresno) and Keith Richman (R-Granada Hills) that he wished ?to emphasize several areas of disappointment as to the content and completeness of the DSP report.? He noted further that the report ?has limited value? and is ?seriously deficient in presenting a fleshed-out core-noncore proposal with sufficient detail for full evaluation by all interested parties.? Peevey suggests that there is a clear need for a constructive and public debate on the topic of what would be an appropriate outline of a core-noncore market structure. This author, at least, is willing to take on the challenge. For those parties who support the right of customer choice (apparently unlike the authors of the DSP study), a successful core-noncore market would look something like the following: The utilities would maintain the supply procurement and planning function for residential and small commercial customers, and existing utility assets and contracts would be used to serve core customers. Noncore customers would not have access to the core portfolio, and the utilities would not enter into supply commitments on behalf of large commercial and industrial customers. Instead, the utilities? obligation to serve large commercial and industrial customers would be limited to a default supply service obtained through short-term market purchases. Further, the utilities would not build generation to serve large commercial and industrial customers or offer pricing alternatives to those customers. To define the core-noncore structure, a 200 kW threshold (by customer, and not by a single meter) within a utility service territory would be implemented by January 1, 2005. Customers with multiple accounts within a utility service territory would be able to aggregate their load across those accounts to meet the 200 kW threshold. By January 1, 2008, the threshold might be reduced to 100 kW, with aggregation permitted for customers with multiple accounts within a utility service territory, should the CPUC determine that it would be appropriate to do so. Existing DA contracts would not be made void by implementing a core-noncore structure. Customers that would otherwise be classified as core would be permitted to remain on direct access if they have contracts in effect. And finally, any system adopted would need to be structured so as not to interfere with the implementation of AB 117 and community-choice aggregation programs. And what about resource adequacy, you ask? Supporters of competitive markets believe that in order to ensure that all customers contribute equitably to investments in resources needed to serve their electric load, all load-serving entities (LSEs) must be subject to the same general requirements for resource adequacy, resource diversity, renewables portfolio standards, and demand-response resources. However, it must be recognized that nonutility LSEs do not have monopoly customer bases that would permit entering into the same sort of long-term contract that might be appropriate for a utility. Moreover, utilities also have an advantage over nonutility LSEs regarding energy efficiency and demand response by virtue of their subsidized funding mechanisms that permit them to recover from all customers, while allowing only bundled customers to participate in these programs. These differences can be accounted for in whatever system is adopted, if parties act with a spirit of cooperation and understanding. Interestingly, the points made previously are remarkably consistent with those expressed by Peevey in his March 15 letter. In it, he makes four major points: Large customers with loads smaller than 500 kW should be allowed to depart the utility system under rules fair to the utility and core customers; The number of large customer participants should not be limited as the DSP study recommends; Aggregation of all size loads should be allowed, beyond that mandated in the recent community aggregation legislation; and The program should be put into effect much sooner than the 2009 start date recommended in the report. The foregoing offers a clear and simple approach to a core-noncore market structure, preserving the interests of core customers while reinstituting the right of customer choice for those with the sophistication and desire to manage their own energy futures. We are three years past the 2000-01 energy crisis. The Department of Water Resources contracts and the associated DA cost responsibility surcharge (exit fees) have been instituted. Procurement guidelines have been established, and the utilities have regained their financial footing. Peevey has indicated his intent to ?move this topic to consideration by our full Commission on an expedited basis.? In short, it?s time to stop just talking about competition and the reinstitution of customer choice. —Editors' note: The views expressed are those of the author and are not necessarily the views of Energy Circuit.

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Guest Editorial: Why a Core-Noncore Market Structure Ought to Be Adopted

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