It has been said that large customers asked for the market structure which we currently have. That is simply not true. What we wanted at the outset of restructuring, and what we ended up with in September, 1996 are two entirely different things. Large customers would have been satisfied with a simple structure, similar to the one the Commission adopted for natural gas, whereby large customers could buy their electric power from any supplier. The very complicated structure of an ISO, PX and other features that ultimately was adopted resulted from a series of negotiations, compromises and collaborative efforts throughout the restructuring debate. We believe that a principal problem with the end result is the mandatory buy/sell requirement imposed on the utilities by the Commission in 1995. This was a feature which CMTA opposed and even sought rehearing on before the Commission. If the utilities had engaged in forward contracts from the outset, including taking back long-term contracts from the generation facilities they had divested, we believe that the extreme price volatility experienced since June would have been largely avoided.

Another comment frequently heard is that large customers are the ones who have benefited from restructuring. Again, this comment is not supported by facts. Although the restructured market worked reasonably well during its first two years, large customers saw no significant benefits. Even though some of them opted for direct access, they were only able to save a few percent off of the frozen rate. In contrast, residential and small commercial customers received a 10% rate reduction at the outset, a level of savings that CMTA members have not come close to realizing. Perhaps the primary beneficiaries of electric restructuring during its initial two years were the electric utilities who received billions of dollars from the "head room" available under the frozen rates for CTC recovery.

More recently, the events which began this summer have caused severe hardships for CMTA members served under interruptible contracts. We acknowledge that these customers have received substantial economic benefits under the interruptible contracts in exchange for providing the right for SCE to interrupt them. In turn, the ability of SCE to interrupt customers has provided substantial economic benefits to the entire system. Nevertheless, given the high frequency of interruptions, especially during this winter season, it has made it almost impossible for some members facilities to operate their facilities. The combination of daily electric interruptions and extremely high natural gas prices caused a number of companies to completely cease operations for the month of December. As a consequence, these companies are in a very vulnerable position, and it is possible that permanent plant closures and layoffs will eventually result. Companies with national operations may be forced to consider ways to shift production from California facilities to facilities in other states which can operate more reliably. It is also possible that the experience in California will mean that future capital investments by these companies will go to facilities in other states. In sum, even before any rate increases might be passed along to large industrial companies, many of these companies are already in a perilous situation and the prospect of a economic recession for California cannot be ruled out.

With regard to rate relief for the utilities, CMTA believes the utilities should be held responsible for all costs incurred through the end of the rate increase. AB1890 and the settlements that lead up to that legislation were intensely collaborative efforts in which the utilities were fully engaged. They clearly agreed to accept the risk of being able to recover all of their costs throughout the duration of the rate freeze in exchange for the ability to recover their CTC.

At this point in time, CMTA does not have sufficient information to estimate when the rate freeze should end. We leave that decision to the Commission. Once the rate freeze is deemed to be over, CMTA recognizes the need for allowing the utilities to increase their rates to recover wholesale power costs. However, these rate increases must be implemented in a manner that maintains an element of rate stability for all classes. We are very concerned that a disproportionate increase in industrial rates would end up trading the utilities' immediate economic problems for a much more widespread economic disaster for the State's economy.

Since the utilities should be responsible for all costs incurred prior to the end of the rate freeze, the rate increase would recover only prospective costs associated with wholesale power purchases. Thus, all customers who take bundled service from the utilities should be responsible for these rate increases. Conversely, those customers who elect to procure their energy supplies from non-utility suppliers should not be responsible for the utilities’ wholesale power costs and related procurement costs. CMTA recognizes that a reasonable set of rules needs to be developed which would govern the ability of customers to “come and go” from utility procurement service.

As far as the disposition of remaining utility generation assets, CMTA believes that the utilities should retain these assets and use them to serve bundled service customers on a cost of service basis. Most of the retained generation assets have relatively low rate bases and therefore generation costs associated with these facilities are well below current market values. Allowing the utilities to use these facilities to serve bundled service customers on a cost of service basis should provide a substantial offset against current wholesale power costs in the spot market. The utilities’ generation portfolio should continue to be available to all customers who elect to take bundled service from the utility under reasonable terms and conditions. We urge the Commission to resist proposals whereby the utilities’ remaining generation facilities would be used to preferentially serve residential and small commercial customers. It makes little sense to create the situation where a residential customer is provided with relatively low cost power, but no longer has a job because his employer cannot afford to operate. Clearly, a reasonable balance must be struck between the interest of both small and large customers.