CA Governor, CPUC Attack Dysfunctional Power Market
State officials have launched an all-out effort to cure or at
least contain California's runaway electric power market, sending
$100 million in rate relief to customers of San Diego Gas &
Electric, putting construction of new power plants on a fast track
and loosening the grip of the California Power Exchange (Cal-PX).
The California independent system operator (Cal-ISO) also
installed a $250 price cap on emergency power purchases and FERC
has been asked to match that with a cap on purchases in the forward
market. Critics were labeling the market "dysfunctional and blaming
the situation on the state's transition to deregulation.
At the end of the week the California governor and the U.S.
president ordered cuts in power use in federal and state facilities
in the region. Clinton said federal facilities would cut power use
by 5% and federal agencies that produce or market electricity must
do what they could to increase power availability in California.
Emergency actions by the California Public Utilities Commission
(CPUC) and the governor came as the nation's most populous state
suffered through another week of blistering heat, punctuated by
Stage One and Stage Two emergency power alerts. Last Wednesday the
region came within a few MWs of a Stage Three Alert, which would
have activated rolling blackouts. Hardest hit were customers of San
Diego Gas & Electric (SDG&E), the only California utility
to have completed deregulation, who have racked up an additional
$80 million in power costs. Additional power costs across the
state for June and July are said to total $1 billion.
According to observers, the most far-reaching action may have
been that of the CPUC last Thursday in allowing utilities to enter
into bilateral power supply contracts outside the state-created
monolithic Cal-PX. Investor-owned utilities had been prohibited
from doing so under the state's electric restructuring.
John Stout, Houston-based vice president with Reliant Energy,
who oversees its California operations, pointed to the prohibition
as "a fundamental market design flaw that forces all demand through
the wholesale spot market (Cal-PX)." He said ideally the IOUs
should only be buying about 15% or 20% of their supplies through
the PX and that would moderate prices overall, but he added new
generation is also needed to alleviate the supply crunch.
Freeing utilities to enter into bilateral supply contracts was
one of nine items approved unanimously by the CPUC yesterday. The
agency also gave utilities authority to encourage various purchased
power (QF) suppliers to offer supplies above-contract but below the
Cal-PX price as another means of tempering price spikes.
Another major move was to grant Southern California Edison a
request to re-operate one of the smaller power plants it had sold
on an interim basis.
The agency's actions came after California Gov. Gray Davis
Wednesday issued executive orders to speed up the approval process
for new power plants, cut down electricity use in state facilities
and establish a statewide task force on energy reliability modeled
after the federal government's National Security Council. The
governor acted on the basis of a strongly worded 40-page emergency
report on California's power shortfalls this summer submitted by
the CPUC president and the Electricity Oversight Board chairman.
The governor and state legislative and regulatory officials see
the state's economic and political security being threatened by
peak electric supplies that are stretched dangerously thin and by
wholesale power price spikes. Davis also formally asked the state
attorney general's office to investigate "possible manipulation in
the wholesale electricity marketplace."
The governor's action came on the same day SDG&E petitioned
FERC, asking the federal agency to install a $250/MWh price cap on
sellers' offerings of power into California's bulk power markets.
FERC action is necessary, the utility said because a $250 cap
installed by the California Independent System Operator (Cal-ISO)
Aug. 1 only limits extra emergency power supplies and does not
apply to the day-ahead or forward markets operating through the
Cal-PX. FERC action is needed to rein in the Cal-PX.
SDG&E's filing noted fueling costs for power generation were
double those of a year ago, but "higher gas prices do not begin to
explain the dramatically elevated prices that prevail in 2000
compared to 1999" during high use periods. While gas prices have
risen to a June/July average at the Southern California border of
$4.62, compared to $2.30 in the same period in 1999, that only
equates to $60/MWh versus $36/MWh. It does not explain triple digit
power price increases, SDG&E said.
In a letter to Gov. Davis last Wednesday, FERC Chairman James
Hoecker attempted to assuage the governor's concerns, but he did
not respond to Davis' urgent requests for the Commission to extend
the wholesale power price caps in California beyond the October
deadline, declare that "no competitive market exists in the state,"
and grant "immediate refunds" to state customers if FERC's
investigation into the price volatility and reliability of the bulk
power market reveals that the rates aren't just and reasonable.
"I cannot comment on specific proposals that may be filed with
the Commission," Hoecker wrote, but "I stand ready to take
appropriate action on matters" within the Commission's
jurisdiction, which is limited to the wholesale power market. He
noted FERC has been following "this summer's events in California
closely," and shared Davis' concern about the effect of high prices
on "certain California consumers."
Further, Hoecker told NGI, "I think the solutions here are
largely long-term solutions having to do with the way the ISO does
business, how much [generation] capacity there is in California,
and how the distribution utilities use the forward market" he said.
"It may be a while before we sort out exactly what the causes of
this [are]. I think on its face we've got a market that's very
short of capacity in a peak air conditioning period. California
clearly needs more generation and may need more transmission in
some places, and we need to keep pushing ahead to make sure the
rules are certain and that people continue to have confidence in
competitive markets because frankly I don't think there's an
alternative here.....We also need the ISO to be a real RTO, and we
need to ensure that investors are willing to invest in the
The emergency report noted costs for wholesale power since
mid-June have averaged 270% above the same period in 1999, which
experienced cooler-than-normal weather. The total electricity bill
for California was $1 billion higher over the period, and
Californians will pay billions of dollars more before the summer is
complete. The report includes 30 possible actions - many of which
already are under way - and it makes numerous references to FERC
actions that are deemed necessary "to give California the tools to
handle electricity pricing problems."
The language in the report is particularly strong in regard to
state regulators' inability to obtain recent pricing statistics
from both the Cal-ISO and the Cal-PX.
"The data we need to assess wholesale market pricing and supply
scheduling behavior is in the hands of two private, autonomous
entities (Cal-PX and Cal-ISO), and despite the Electricity
Oversight Board's legislative mandate to oversee those
institutions, we have been unable to obtain this data.
"Nevertheless, we believe enough evidence of questionable
behavior exists that the (state) attorney general should conduct an
investigation into these statewide market practices, coordinating
with other state agencies, including the CPUC and EOB. Such an
investigation would provide the factual foundation that California
policymakers and regulators need to recover any illegally obtained
Meanwhile, marketers were not long in responding to the
Cal-ISO's price cap. Late last week three top power
marketers/generators in California's besieged electricity market
filed a complaint at FERC, saying the Cal-ISO's price cap reduction
is backfiring because it's causing more and more suppliers to
market already-strained generation supplies to out-of-state buyers,
where they can recoup much higher prices.
For example, last Tuesday --- when the Cal-ISO reduced the bid
cap for imbalance energy and ancillary services to $250/MWh ---
power was trading in neighboring markets for as much as $1,500/MWh,
said Reliant Energy Power Generation, Dynegy Power Marketing and
Southern Energy California. As a result, 1,300 MW of power was
exported when the Cal-ISO was on the verge of declaring a Stage 3
In light of this, the three companies have asked FERC to order
the Cal-ISO to compensate participating generators, scheduling
coordinators or other sellers for "actual damages and lost
opportunity costs" should the Cal-ISO begin to curtail scheduled
energy exports to adjoining states. Further, they urged the
Commission to prohibit the Cal-ISO from limiting payments for
curtailed energy exports to the Cal-ISO-imposed capped prices. They
are seeking expedited consideration of the matter.
In other action Duke Energy last week offered additional
facilities dedicated to the California market, urging state
officials to speed up the permitting process to bring new
generation online (see related story this issue).
Richard Nemec, Los Angeles; Susan Parker, Ellen Beswick,