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
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
"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
"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