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Federal Hearings Attract Ideas for California Power Market Fixes

Federal Hearings Attract Ideas for California Power Market Fixes

Separate Congressional and regulatory hearings in San Diego last week turned up a wide array of potential prescriptions for curing what ails California's still-convalescing wholesale power market, but it also exposed the continuing federal-state head-butting. State officials mostly want to first satisfy the consumer-related problems, returning to regulated rates if necessary, while Federal Energy Regulatory Commission members don't want to abandon their almost decade-long push for market-based energy industries.

The proposed cures are a combination of structural and rules changes, along with new actions by various market participants. California's elected and regulatory leaders collectively indicated the state is headed toward a revision of its four-year-old electric industry restructuring experiment, a return to more regulation and greater emphasis on demand-side management in the coming year

"In California, there has been an utter lack of vision of what a deregulated market should look like," Nymex's Robert Levin told the FERC hearing Tuesday in San Diego, adding that his exchange cannot be "blamed" for the malfunctioning of the state's wholesale power market since at the time that it was being formed he said none of Nymex's suggestions to state policymakers was adopted.

Levin told FERC commissioners and two members from the California Public Utilities Commission sharing the dais with the federal regulators that California's market has "two glaring weaknesses": (1) no demand-response contracting provisions and (2) no risk management provisions. He urged FERC to "take the bull by the horns and get this market deregulated properly."

At one point FERC Chairman James Hoecker asked the two CEOs from the state's nonprofit transmission grid operator (Cal-ISO) and wholesale spot market (Cal-PX) to submit their views of the "pros and cons of combining the two organizations." Both organizations are looking at some self-generated internal changes, but Cal-PX CEO George Sladoje said he would not favor the combination because the two organizations have "different missions and different people."

Nonetheless, CPUC Commissioner Carl Wood indicated privately that he expects a push in next year's state legislature for a combination or elimination of the PX. In some quarters, a de-emphasis of markets and a re-emphasis on demand-side programs may receive a lot of discussion.

"We can't build our way out of this problem," said state Sen. Debra Bowen, the energy committee chairperson. "Shifting from the supply- to the demand-side emphasis is the only way to put power back in the consumers' hands."

Market v. Cost-Based Rates

CPUC President Loretta Lynch, when not blaming merchant generators and the former Republican governor's electric restructuring blueprint, told federal officials that California must try to re-gain what she characterized as its past No. 1 status in the area of demand-side management. As part of a new electricity law signed by Gov. Gray Davis earlier this month, a "green team" has been established and that is where the governor is placing his focus these days, according to Sacramento sources following energy issues for large business operators in the state.

Lynch said that the "experiment" the previous CPUC asked FERC to support four years ago is clearly not working, so Gov. Davis' administration is now asking FERC to look for another path, but she said "I don't think our respective quests are necessarily incompatible." She said market-based rates have not provided just-and-reasonable rates for consumers, so "if it takes cost-based rates to get that, I would support it."

Lynch said that she is still hopeful the state can get to a competitive market for electricity, but "we don't have a path to that end right now, and until we can design a path that gets us there, I think our first and paramount duty is to protect consumers."

Outside of the formal hearings, CPUC and other representatives acknowledged that they expect state legislative proposals next year for either eliminating the Cal-PX or combining it with a scaled-back state-chartered nonprofit transmission grid operator (Cal-ISO). And both those two organizations, created by the 1996 state electricity law, are on their own initiative looking at ways to resolve some of the "flaws" in their operations that critics are focusing on in the midst of the summer's pernicious electricity problems in San Diego.

While FERC commissioners are expected to complete their investigation of the California wholesale electricity market and provide some interim relief to San Diego customers early this fall, re-inforcing what has already been done through new state laws this summer, none of the federal regulators expressed support for the California officials' move toward re-regulation. FERC Chairman James Hoecker several times indicated that some of the state officials appeared to be going in another direction than federal policy and almost two dozen other states around the nation.

"Are you contemplating pulling up the drawbridge and relying on municipalization, building your own baseload (power plants) and erecting some walls to interstate commerce, and ultimately re-regulating this market, which would defeat the goal of a viable interstate market in the West?" Hoecker asked state elected officials. "I think I am hearing two different messages."

Meanwhile, back in Washington Thursday, Hoecker opened FERC's bi-weekly meeting with a warning. "Many would like to think this is the beginning of the end for competition in electric markets. I reject that notion, not only as a matter of policy, but as a practical matter. We have to make some tough decisions soon. It's not sufficient to sprinkle deregulation dust on old cost-of-service principles." Hoecker said FERC would be working with California officials in framing its response.

Over-reliance on the spot market is a major flaw, according to several of the economists and others testifying, and Sempra Energy's CEO Steve Baum acknowledged that since June his company's San Diego Gas and Electric utility has been trying to get authority to buy from larger markets outside of the Cal-PX, but still lacks that authority.

"We still to this day have no more authority to deal in other markets in much larger volumes," said Baum, although, in response to questioning from Hoecker, he acknowledged that in retrospect it should have done more hedging last spring through the Cal-PX forward market, for which it had authority to buy up to 400 MW of power (it has since asked state regulators to expand that authority).

"I regret that we did not exercise our authority (for the 400 MW in the block-forward market), said Baum, who appeared on a panel of utility, ISO, PX and Nymex representatives in the FERC hearings. "The reason we did not is that we did not foresee the prices that we have seen this summer. We did not, and I think very, very few did. Nevertheless, we didn't do it, I regret that because we might have saved our customers some money."

A senior executive with Southern California Edison Co., Harold Ray, indicated in his testimony that "hedging alone" is not the answer. He said Edison hedged more than 30,000 MWh, saving an estimated $415 million in wholesale power costs, but the utility is "still one billion dollars in the hole" because of the difference between frozen retail rates it charges customers and what it had to pay for power this summer through the Cal-PX.

Levin urged FERC (and state officials) to "start to focus on suppliers supplying lots of customers and competing for them. It clearly hasn't been accomplished in California. And you might ask suppliers why they are focusing on auctioning (Cal-PX) strategies more than on supplying customers?"

One of the causes, Levin said, is that suppliers "have no ability to rely on transmission. Thus, his other recommendation to FERC is to focus on creating "sensible, commercially useful transmission" policy based on financial equivalents.

Generator Profits Disputed

Aside from a seemingly endless array of proposed changes in the Cal-PX and ISO operations, from schedule coordination to bidding, many California stakeholders --- including the incumbent investor-owned utilities --- allege the market has been gamed, inferring that merchant generators have done that as they have gained experience in the complex system. Edison's Ray, however, pointed out that the market power abuse often doesn't come from the power generators because they have sold most of their output in the forward markets, but from other middlemen - marketers. In the five or six ongoing state and federal investigations it is hoped some light is shed on this situation.

Generators, including Reliant Energy and Duke Energy among them, told the FERC and Congressional hearings that they welcome the investigations and have done nothing wrong except make a profit in a peak-demand market with supplies very tight. The economists heading the Cal-ISO and Cal-PX market surveillance and oversight boards, respectively, acknowledged there is market power and that they can pinpoint who holds the power at given times, but identifying specific participants abusing the power is not that easy, and may be impossible, according to one economist.

"I don't think we know which market design does the best job of bringing the most benefits to consumers," said Frank Wolak, an economist and chairman of the Cal-ISO market surveillance committee that submitted its analysis of California's June wholesale price spikes Sept. 6, noting that the state's power markets continue "to be plagued by the market design flaws identified in previous reports" by his committee.

Wolak urged FERC to require other ISOs around the nation to complete reports documenting how they are "delivering benefits to consumers." He noted that he did not think the generators or other market participants were intentionally trying to undermine reliability, but rather doing what "every market participant does in a competitive market --- pursuing their own self-interest."

Richard Nemec, Los Angeles

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