Edison Favors Monitoring Agencies for Power, Gas in CA
The near-bankrupt Southern California Edison last week called
for the formation of an independent agency or agencies that would
monitor and punish market-power abusers in the state's bulk power
and natural markets.
As envisioned by SoCal Edison, the proposed monitors would not
be part of the Federal Energy Regulatory Commission, but they would
be subject to its oversight, said Gary A Stern, manager of market
monitoring & analysis for the Rosemead, CA-based utility.
SoCal Edison originally conceived the idea for an agency to only
oversee the tumultuous wholesale electricity market in California,
but Stern told NGI he now believes a similar monitor on the gas
side "might make sense," given the steep rise in natural gas prices
in the state over the past months. "California customers are being
harmed by high gas prices" that may be due to causes other than
those associated with supply/demand problems, he said.
The utility offered the proposals for market monitors as an
alternative to its preferred course of action: FERC re-imposing
cost-based rates on sales of electricity in California.
Stern stressed the monitors should be independent of the
California Independent System Operator (Cal-ISO) and the California
Power Exchange (Cal-PX), and should report to FERC. He believes
both the Cal-ISO and Cal-PX would have a conflict of interest in
monitoring the market. The Cal-ISO would likely be "reluctant to
penalize sources of reliability - generation," while the Cal-PX
would be "reluctant to sanction/identify abuses by influential
participants." Stern further said it would be "difficult" for FERC
to handle this task alone.
At a staff technical conference at FERC last Tuesday, Stern and
representatives of the Cal-ISO and power generators serving
California offered proposals for monitoring and mitigating abuses
in the market. The Commission staff expects to develop a draft plan
by March 1, with FERC due to finalize it by May 1.
Stern stood alone Tuesday in his belief that monitors should
have the authority to impose penalties against abusers in the power
and natural gas markets. "Such penalties should not only retract
any profits derived from the abuse, but should be sufficiently
large to deter future abuses."
A Department of Justice (DOJ) official cautioned FERC not to
impose penalties against suppliers that exercise market power,
saying such action would only distort the pricing signals in the
market. "I don't think it's a good idea to uncover [incidences] of
market power and then impose fines," he said, adding this would
have a "chilling effect" on the pricing of power. He believes a
better course of action than SoCal Edison's "interventionist"
approach would be to impose "hard price caps," although this
wouldn't be a long-term solution.
Craig R. Roach, who represented the Electric Power Supply
Association (EPSA), believes that any enforcement of market-power
abuses should rest with either FERC or the DOJ. Furthermore, while
SoCal Edison's Stern believes that power bids that exceed the
"actual variable cost of production" should be considered an abuse
of market power and thus mitigated, Roach thinks a number of other
factors - capacity value, opportunity costs, scarcity value and
risk - must be analyzed before it can be determined if any abuse
Reliant Energy agrees that only FERC should be able to take
remedial action against market-power abusers. Under the company's
proposal, a market monitor would report incidents of alleged market
abuses to an RTO/ISO board, which would decide whether the
misconduct actually occurred. The matter then would be referred to
FERC to take the appropriate action.
SoCal Edison believes the agency monitoring California's
wholesale electricity market should have vast powers. It "must have
the authority to monitor and investigate all operational and bid
data, to monitor the amount of MWs controlled by parties through
bilateral contracts, the authority to mitigate potential abuses
prior to running markets, the authority to penalize parties that
have abused the market, and the authority to change market rules
and, when appropriate, authority to rerun markets or re-calculate
Presently, market monitors in California "have scant authority
to do anything but observe abuses and suggest remedies," Stern
noted. "This is wholly insufficient to deter, prevent or mitigate
abuses. The future monitoring and enforcement agency must have the
ability to mitigate bids before markets are run."
A market-monitoring agency should be focused on the delivered
cost of wholesale electricity, as well as all factors that
"immeasurably" impact the market, Stern said. "Factors include the
cost at which electricity is sold to the wholesale market, the cost
[of] transportation for electricity, the costs of variable inputs
for marginal generation (in California this is typically burner-tip
gas prices), and other variable costs (such as emission credits."
On the gas side, he believes an agency should monitor the
ownership of gas transportation; prices at the source of
production, and the price of gas delivered to California; ownership
of gas storage; and a market participant's specific use of gas