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Gov. Schwarzenegger Advocates Reforms to California’s Electricity Market, Including a Revised Market Structure that Promotes Healthy Wholesale and Retail Competition

In an effort to lower power prices, ensure transmission system reliability and improve the economic climate in California, Gov. Arnold Schwarzenegger recently outlined his priorities for California’s electricity market. In a letter to Michael R. Peevey, president of the California Public Utilities Commission, Schwarzenegger encouraged the commission to expeditiously implement Assembly Bill 57 to create competition and growth, and eliminate market uncertainties.

Schwarzenegger addressed one of the key issues underlying the California energy crisis: the bias against long-term contracting by utilities. “AB 57 corrected one of the key flaws in California’s electricity restructuring effort: the inability of investor-owned utilities to develop diversified resource portfolios and enter into long-term contracts without the risk of after-the-fact reasonableness reviews by the commission,” he said.

Under AB 57, the commission is required to set upfront standards that allow electric companies to know their eligibility for rate recovery of a proposed procurement transaction prior to completion of the transaction. “A transparent, competitive procurement process is necessary to ensure that utilities obtain the least cost alternatives to meet their demand,” Schwarzenegger said.

In his letter, Schwarzenegger urged that utilities be encouraged to develop diversified resource portfolios that include a competitive procurement process. “Upfront rate-recovery standards give utilities the assurance that they can recover the costs of prudent long-term contracts through rates, which did not exist during the electricity crisis,” he said.

Long-term contracts, procured by the utilities, are the means by which California will attract necessary private investment and build the resource portfolios needed to ensure reliability and keep prices low in the future, Schwarzenegger said. “Now is the time for utilities to lock in these low prices through long-term contracts,” he said.

Schwarzenegger also addressed another critical issue regarding retail customer choice, expressing support for President Peevey’s effort to create retail electricity markets that allow core customers to continue to receive regulated electricity service, while allowing large customers to shop for competitive wholesale power prices.

“Countless businesses have told me that one of the greatest barriers to doing business in California is high energy prices. By fostering competitive wholesale and retail electricity markets that are properly monitored by regulators, California can begin to lower electricity bills and once again become the job creation machine it once was,” Schwarzenegger said.