FTC Staff Comment Before the California Public Utilities Commission Concerning Electric Power Deregulation

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
901 Market Street, Suite 570
San Francisco, CA 94103-1768
Voice: (415) 356-5270
Fax: (415) 356-5284
Jeffrey A. Klurfeld
Regional Director
August 23, 1995
Docket Clerk
California Public Utilities Commission
505 Van Ness Avenue, Room 2001
San Francisco, California 94201
Re: Docket Nos. R.94-04-03 and 1. 94-04-032
Enclosed for filing are the original and twelve copies of the Reply Comment of the Staff of the Bureau of Economics
of the Federal Trade Commission in this proceeding.
Sincerely,
Jeffrey A. Klurfeld
Regional Director
cc: Commissioners
Administrative Law Judge Kim Malcolm (with disc)
Parties on service list
BEFORE THE PUBLIC UTILITIES COMMISSION
OF THE STATE OF CALIFORNIA
Order Instituting Rulemaking on the
Commission’s Proposed Policies
Governing Restructuring California’s
Electric Services Industry and
Reforming Regulation
)
)
) 	R.94-04-031
)
)

Order Instituting Investigation on the
Commission’s Proposed Policies
Governing Restructuring California’s
Electric Services Industry and
Reforming Regulation
)
)
) 	I.94-04-032
)
)
Reply Comment of the Staff of the
Bureau of Economics of the
Federal Trade Commission
The staff of the Bureau of Economics of the Federal Trade Commission is pleased to submit this reply comment in
the CPUC’s consideration of proposals to reform the electric utility industry.(1) The issues raised by the CPUC
proposals are similar to those we recently addressed in comments to the Federal Energy Regulatory Commission in
connection with its proposals on open access and recovery of stranded costs for the wholesale level.(2) We therefore
submit for your information and consideration a copy of our comments to FERC on those issues. The full text is
Attachment A; below is a summary of the comments’ points.
We fully support the goals that the CPUC and FERC have announced, to promote greater competition in this industry
so that the benefits of greater efficiency can promote lower electricity rates for consumers. Our comments address
aspects of the particular methods FERC has proposed and assess how variations on those proposals might
accomplish the goals more effectively.
Concerning the organization of the industry, the comments state that “operational unbundling,” as envisioned by the
CPUC proposal and by Commissioner Knight’s alternative proposal, would likely be more effective than FERC’s
proposed “functional unbundling” and less costly than industry-wide divestiture. FERC’s proposal, to require vertically
integrated utilities to grant open access and equal treatment to their competitors, would leave in place the incentive
and the opportunity for some utilities to exercise market power in the regulated system. Preventing them from doing
so by enforcing regulations to control their behavior may prove difficult. “Operational unbundling,” in which the
dispatch of generating capacity and/or the operation of transmission grid would be controlled by an independent
entity, could prevent discrimination and achieve the competitive benefits of open access more effectively and
efficiently than would an attempt to mandate and regulate access.
The comments also discuss how to assess competitive conditions in generation markets, an issue that is also
highlighted in the CPUC’s request for comments. The comments find that competition problems in concentrated
generation markets must still be addressed under open access. The DOJ/FTC Horizontal Merger Guidelines show
how to evaluate likely competitive effects of concentration among suppliers and changes in market contours.
Expanding the number of suppliers potentially available is likely to make the electric power system more efficient and
more competitive, but there may be circumstances, even under open access conditions, in which dominant suppliers
might be able to exercise market power. Competitive conditions among mid- costs plants could be particularly
significant.

The comments emphasize that efficient transmission pricing must accompany open access. Pro-competitive reforms
in California will not achieve their objectives, and might even prove counterproductive, unless prices and terms for
transmission services also provide economically efficient signals about investment and output. Achieving the
economic benefits of unbundling will therefore depend strongly upon FERC’s concurrent reform of transmission
pricing. Transmission pricing based on the market factors should assist in discouraging local transmitting utilities from
favoring their own potentially unmarketable generation capacity and reduce their incentives to delay expansion of
wholesale transmission capacity.
Finally, the comments discuss issues raised by proposals to recover “stranded costs.” We express no view about the
net costs and benefits of recovering stranded costs from future, present, or past customers. The comments offer
some views about some of the economic effects of methods that might be used if FERC commits to recovery of
stranded costs. This discussion may be particularly pertinent to the CPUC’s proceeding, because of the magnitude of
the costs at the retail level.
We appreciate this opportunity to submit these comments in this proceeding and we hope that you find our comments
useful.
Respectfully submitted,
Jonathan B. Baker
Director
John C. Hilke
Economist
Michael O. Wise
Attorney
Bureau of Economics
Federal Trade Commission
August 23, 1995
Attachment A
Comment of the Staff of the Bureau of Economics
of the Federal Trade Commission
submitted to the
Federal Energy Regulatory Commission
in Dkts. RM95-8-000 and RM94-7-001
(1) These comments are the views of the staff of the Bureau of Economics of the Federal Trade Commission and are
not necessarily the views of the Commission or of any individual Commissioner. Inquiries regarding this comment
should be directed to John Hilke (202-326- 3483) or Michael Wise (202-326-3344).
(2) Federal Energy Regulatory Commission, Docket Nos. RM95-8-000 and RM94-7-001.