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CA Governor Files State Power Plan with FERC

CA Governor Files State Power Plan with FERC

Showing a carrot, but keeping a "stick" in reserve, California Gov. Gray Davis Friday outlined for federal regulators steps he will pursue to fix the state's ailing wholesale electricity market, stopping short of proposing a state takeover but hinting he will go further if federal measures fall short.

Davis outlined California's proposals in a six-page letter to FERC Chairman James Hoecker that was released to news media. Nothing new was included that the governor and other Californians had not already suggested to FERC during its public hearings in San Diego and Washington, DC, this fall (see NGI, Nov. 20).

Among his requests, Davis asks FERC to impose "bid caps in the $100/MW range on a transitional basis" over the next three years.

If Hoecker and his colleagues do not order refunds of the spiked prices from last summer and take steps to protect against similar spikes next year with price caps, the governor hinted he would follow the lead of some elected, regulatory and consumer officials in the state and move to establish a state government-run power system. The governor's action came as in-state and national consumer groups were calling for re-regulation because of spiking prices and brown-outs (see related story, this issue).

The strict clamp-down on energy companies, proposed by the Democratic governor, were backed by the Energy Department in Washington, which proposed a tougher wholesale bid cap, rather than the soft cap proposed by FERC, and extending the cap throughout the West.

The Federal Trade Commission, however, basically backed FERC's approach (see NGI, Nov. 6), adding the Commission should provide more concrete advice on how best to configure the organization that will operate and control the transmission grid in the state. In its comments filed last week, the FTC said FERC should consider creating a benchmark or a baseline of characteristics and operations for regional transmission organizations that can be used as a starting point as part of its revisions to California's wholesale electric power market rules and institutions. In addition, the comments suggest refinements to FERC's proposed remedies to ensure that market power is not exercised in wholesale electric power markets, to the detriment of consumers.

Among the California governor's proposed measures are: (a) revising the oversight boards for the state's grid operator (Cal-ISO) and wholesale spot market (Cal-PX), specifically calling for eliminating stakeholder board members who he said have "inherent conflicts of interest"; (b) expanding current laws and other efforts to enhance the siting of new generating plants, demand-side management programs, and utility forward contracting for power supplies; (c) reviewing new approaches to power plant maintenance and operation to avoid problems that create in-state power shortages, (d) requiring utilities to retain their existing generation plants (hydro-electric and nuclear); and (e) providing more "real-time price signals" to large energy users to reduce their energy use.

Once again, Davis used the FERC forum to reiterate that no new power plants were built over the past decade and especially before he took office in January 1999, but since then six plants totaling 4,700-MW have been approved (three under construction currently) and another two dozen projects are under review or planned.

With various energy players attempting to seize on intense political and regulatory focus during the first two weeks of December, California electricity proposals last week were flowing freer than movie scripts and dot.com start-up business plans - all anticipating the governor's state plan and the subsequent final FERC decision by Dec. 13 for stabilizing California's power markets. Gov. Davis indicated in his news release summarizing his letter that he will "continue to meet with legislative leaders, consumer groups and other interested parties to discuss additional options."

Among the deluge of recent press releases out of California were ones alleging independent proof of market manipulation last summer, promoting utility rate increases to stabilize future retail power rates, commitments by merchant generators to keep investing in new plants and an eleventh-hour proposal to hedge San Diego's entire 3,300-MW peak-load power requirements.

A spokesperson for Davis last week said the governor conducted a series of meetings with major stakeholders, including the generators and marketers, who Davis has repeatedly criticized for "price-gouging" and "marketeering," if not illegally abusing their market power.

Another state energy official said FERC sources are indicating that its Nov. 1 proposed order is going to "stay pretty much intact," except for lowering of the proposed price cap to $100.

Amid the heightened anticipation, the California Power Exchange (Cal-PX) announced the start Nov. 27 of an independent review of its current state-mandated uniform price auction method, and recommendations made for possible changes in the way the state-chartered wholesale spot power market operates.

As the governor and state officials contemplate completely revamping both the Cal-PX and the independent transmission grid operator (Cal-ISO), including possible merger of the two state-chartered, nonprofit corporations, Cal-PX will have its panel of outside economists look at the possibility that the state wholesale market expand into a regional entity.

A lot of the buzz ongoing in Sacramento is pointed toward an ISO-PX merger, although the Cal-PX spokesperson said FERC does not favor that move. Both state entities sent FERC information on why they should not be merged, an action that is being construed as "political" as opposed to economically motivated.

In the meantime, in little more than a week, California's two major investor-owned utilities have made separate five-year proposals for raising retail rates on a fixed basis to protect customers from the volatility of the wholesale market, and one of the utilities, Southern California Edison Co., has released a study it commissioned by two nationally recognized utility economists that alleges marketers and generators withheld supplies from the California power market at crucial times last summer.

Edison released its study in Washington, D.C., as part of its written comments to FERC in which it criticized the federal regulators' proposed remedies to California's electricity problems for failing to "protect California's consumers and economy from excessive electricity prices resulting from the exercise of market power by sellers."

Edison's CEO Stephen Frank said, "Unfortunately, we don't see this current FERC proposal as providing any relief at all."

On the basis of two technical economic analyses - one establishing "competitive benchmark prices" and another of "capacity withholding" in the California wholesale power market, economists Paul Joskow, an MIT professor from Cambridge, MA, and Edward Kahn, a San Francisco consultant, concluded in a 34-page report that they found "considerable empirical evidence to support a presumption that the high prices experienced in the summer of 2000 were the product of deliberate actions on the part of generators or marketers controlling the dispatch of generating capacity to withhold supply and increase market prices."

They also urge FERC to dig deeper in its ongoing investigations, noting that the federal agency "is the only entity with access to the information necessary to conduct a thorough analysis."

Aside from the question of the market players' behavior, Joskow and Kahn noted that the increased costs of air emission credits played a significant role in causing wholesale prices to skyrocket, and that an effort to accelerate the deployment of more air emission control devices on Southern California power plants in particularly "can help to reduce wholesale market electricity prices very significantly."

Almost simultaneously, the California Public Utilities Commission unanimously voted before Thanksgiving to urge FERC to impose price caps throughout the California electricity market, which it reiterated is "dysfunctional." The CPUC formally filed Nov. 22 its proposals to FERC, reinforcing earlier calls for the federal regulators to order refunds from wholesalers to California's retail market participants.

"CPUC staff estimates that California households and businesses were overcharged more than $4 billion in recent months as a result of market power in wholesale electricity markets," the CPUC said in a prepared statement following its actions. "CPUC staff also finds evidence that power sellers have manipulated the market in efforts to increase prices."

Richard Nemec, Los Angeles

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