April 15, 2008

Regulators should stop playing the greed card

By Steven F. Greenwald and Jeffrey P. Gray

Costs of “regulatory certainty”

In our February 2007 column in this magazine, we commented that, though the final and nonappealable condition promises the purchasing utility “regulatory certainty,” it exposes electricity consumers to the risk of losing PPA benefits if there is a regulatory delay. The lesson to be learned from the WGP case: Regulators and utilities must honor contractual commitments; if they don’t, consumers will enjoy less renewable power and pay higher prices.

Additionally, regulators must develop ways to provide regulatory certainty to utilities without exposing ratepayers to the risks of regulatory paralysis.

The diversionary blame game

Notwithstanding the CPUC’s attempt to divert attention from itself to the supposedly “greed-motivated” generator, the question remains: Why couldn’t the CPUC approve the PPA within 150 days (allowing the rehearing period to expire within 180 days)? Its failure is particularly perplexing because California places the highest priority on securing renewable power, and the CPUC has implemented numerous initiatives to “streamline” its approval process, including:

• Requiring the inclusion of mandatory PPA “standard terms” to reduce staff review of commercial terms to essentially a “checking the box” exercise.
• Preapproving a market price referent (MPR) through a separate and annual regulatory process; if the PPA price is under the MPR (as was the WGP price), no further price review is necessary.
• Requiring review of the PPA by the utility’s Procurement Review Group, which comprises representatives from consumer and community groups, whose mission is to ensure the PPA’s overall ratepayer benefits prior to the utility submitting the PPA.
• Requiring that the utility retain an independent evaluator to assess the completeness and fairness of the bid solicitation and the utility’s selection process.

These innovations should remove the common obstacles to timely regulatory review. So what delayed the CPUC from approving the WGP PPA within the self-imposed 150-day deadline? The article suggests that CPUC staff may have been diverted to review other “higher priority” renewable PPAs. If this is true, given the state’s absolute insistence on achieving the most aggressive renewable standards, California must adequately staff the CPUC.

Move beyond the greed rhetoric

Achieving the state’s renewable mandate also requires the CPUC to stop playing the “generator greed” card every time there’s a setback. A PPA is a commercial contract, and a party’s exercise of its rights in a contract connotes neither greed nor market power—particularly in this case, where a key PPA term allowing termination was mandated by the CPUC.

Accusing generators of employing Enron tactics is anachronistic political rhetoric, not positive energy policy. The CPUC and other regulatory agencies with responsibility to approve PPAs would better serve consumers by streamlining their approval process.

This quote attributed to the maligned WGP CEO perhaps says it best: “[There is] a major disconnect between the public policy statements of the California government [with respect to promoting renewable power] and the ability of the bureaucrats and the agencies to effectively carry out the mandate.”

—Steven F. Greenwald (stevegreenwald@dwt.com) leads Davis Wright Tremaine’s Energy Practice Group. Jeffrey P. Gray (jeffgray@dwt.com) is a partner in the firm’s Energy Practice Group.