CA Power Marketers, Suppliers Prevail in FERC Orders

As tempers continued to flare between utilities, power marketers and qualifying facility generators in California, the Federal Energy Regulatory Commission issued a series of orders in an attempt to douse some of the long-simmering disputes in the state's crippled wholesale power markets. California power marketers and suppliers prevailed on the key creditworthy and so-called "chargeback" issues, while the California Power Exchange (Cal-PX), the California Independent System Operator (Cal-ISO) and the state's two troubled investor-owned utilities suffered significant blows.

Power marketers and other suppliers to the California market got a major boost when FERC ordered the Cal-ISO to assure payment for all third-party energy sales made to the state transmission coordinator. Specifically, the Commission directed the Cal-ISO to abide by its Feb. 14 ruling, which prohibited the ISO from relaxing its creditworthiness standards for third-party electricity sales to the state's troubled investor-owned utilities Pacific Gas and Electric and Southern California Edison [ER01-889-002].

California generators --- Dynegy Power Marketing Inc., Reliant Energy Power Generation, Duke Energy North America, Duke Energy Trading and Marketing LLC, Mirant Corp., Williams Energy Marketing and Trading Co. and others --- asked the Commission to step in and enforce its earlier edict, claiming that they were racking up millions in unpaid bills from the two utilities and the Cal-ISO due to the ISO's failure to comply with the earlier order.

Several of the generators had been under a court order to supply power to the Cal-ISO for the last couple of months. The order was rescinded earlier this month.

In court, the Cal-ISO had argued that the Feb. 14 order did not apply to all third-party power transactions. It argued that the order exempted all real-time purchases, as well as power supplied in response to emergency dispatch orders issued by the Cal-ISO.

But the Commission said the Cal-ISO had twisted the meaning of its order. "The ISO has misinterpreted our order," it noted flatly. The Feb. 14 decision "did not exempt any transactions from the requirement to have in place a creditworthy buyer. Instead, our order provided third-party suppliers assurances of a creditworthy buyer for all energy delivered to the loads through the ISO."

The Cal-ISO's interpretation promotes the "continuation of over-reliance on the real-time market by increasing use of emergency dispatch instruction to serve load," which FERC said was contrary to its goal of expanding the amount of load that is supplied through forward contracts.

The Cal-ISO has estimated that the real-time market currently supplies about 15% of the state's load. "This is by far higher than our stated goal of limiting the amount of load supplied in the real-time market to no more than 5%," the FERC order said.

In related action, FERC refused to overturn an earlier order in which it held the now-bankrupt Cal-PX acted "unreasonably" when it relaxed its creditworthiness standards to permit PG&E and SoCal Edison to continue trading in its markets from Jan. 5 to Jan. 18, even though their credit ratings had been downgraded [ER01-889-001]. "California market participants negotiated over, and agreed to do business with the PX subject to tariff provisions that included standard creditworthiness protections... The PX had no reasonable grounds for assuming its relaxed standard would be accepted," the order said.

Commissioner William Massey disagreed with the majority's decision that the Cal-PX acted unreasonably. "This was a period of exceptional price volatility and razor-thin generation reserves. Chaos seemed to rule. There is merit to the PX's argument that it needed to hold the system together while around-the-clock negotiations to end the chaos were occurring at the highest levels of the nation's government under White House auspices. A decision by the PX to prohibit trading could very well have exacerbated the chaos," he said in a partial dissent.

"The bottom line here is that there is no need to reach any conclusion regarding the reasonableness of the PX's behavior. Yes, send the bills for the sales to PG&E and SoCal Edison. Beyond that, I would not second guess the PX in such extraordinary circumstances," he noted.

"We believe that the chargebacks, were they to be assessed under [current California] circumstances, would cause virtually all PX participants to default, thereby compounding adverse market conditions throughout the entire western region. Therefore, we conclude that the chargeback provision in the PX tariff was not designed to address [a] default of this magnitude, and, thus, its application in these circumstances is unjust and unreasonable," the order said.

In a separate yet related ruling, FERC dismissed as moot the utilities' complaints seeking to stop the Cal-PX from its planned liquidation of their block forward contracts as compensation for their unpaid power bills. Given that California Gov. Gray Davis commandeered these contracts in late January, the Commission noted there was no reason for it to act now. With respect to the governor's action, "we take no position on whether the state's commandeering of wholesale power sales contracts is in conflict with provisions of the Federal Power Act," the order said [EL01-29].

The Commission deferred action on the issue of how the Cal-PX should deal with the non-payments by SoCal Edison and PG&E --- at least until after SoCal Edison's complaint before a state court and the Cal-PX's complaint before the Government Claims Board are resolved. It ordered the Cal-PX to provide FERC with a decision on either complaint within 30 days after they are resolved, and a report on the decision's impact, if any, on the proceedings before the Commission. If neither of the complaints are resolved within 90 days, FERC directed the Cal-PX to submit a report to the Commission on the status of the complaint proceedings. At that point, the Commission said it would consider further action on the issue.

FERC also deferred action on the utilities' request to suspend penalties when their real-time loads exceed more than 5% of their scheduled loads [EL01-34]. The 5% limit was the centerpiece of the Dec.15 order enacting remedies in the California power market, and was intended to encourage utilities to rely less on the spot market and more on forward contracts when purchasing electricity.

Critics contend the penalty is just placing an additional burden on the utilities and their ratepayers, and is not having the desired effect of promoting more forward contracting. The utilities argue that their current credit problems have forced them to rely on the Cal-ISO's real-time imbalance (spot) market more because they haven't been able to purchase power under forward contracts.

Before deciding the penalty issue, the Commission said it wants more information on the "current and projected market situation" for California. It ordered the Cal-ISO to file a comprehensive report within 15 days with input from the state of California, Department of Water Resources (DWR), SoCal Edison and PG&E calculating the amount of load that the two utilities will serve through forward purchases and the projected amount of load that will continue to be supplied through the Cal-ISO's real-time imbalance market for each month from April to September of this year.

FERC indicated it is concerned that California hasn't made greater strides in forward contracting. A recent report by DWR reveals that the DWR has signed forward contracts for only 2,247 MWs of electricity for the remainder of the year, which is "significantly less than [what] is needed," the order noted. "If this report is correct and a substantial amount of new forward contracts are not signed for this summer, a significant amount of load will continue to be supplied in the most volatile spot market (i.e. the ISO's real-time imbalance market) which will in turn strain the ISO's ability to reliably operate the grid," it said.

The Commission also dismissed a challenge to a Jan. 29 ruling that found the Cal-PX had violated an order to implement the $150/MWh soft cap in its markets effective Jan. 1 [EL00-95-015]. In the January order, FERC directed the Cal-PX to immediately implement the $150/MWh soft cap so that suppliers in the PX day-ahead and day-of markets could be paid their as-bid prices above the $150/MWh level. But the Cal-PX failed to do so and subsequently filed for Chapter 11 bankruptcy in March. It then informed the Commission that it was barred from "continuing further litigation" against the PX due to the automatic stay provision in the U.S. bankruptcy code.

But FERC said it was exempt from the automatic stay provision, and ordered the Cal-PX to implement the $150/MWh soft cap for January power transactions. It also directed the Cal-PX to file a report within 15 days recalculating its January invoices to reflect suppliers' as-bid prices above the $150/MWh soft cap level. The report will be used to determine the level of compensation owed to suppliers and refunds owed to buyers.

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