Although he praised FERC as a “fine group of people,” CaliforniaGov. Gray Davis yesterday made very clear that he doesn’t like whatit’s prescribed to mend his state’s seriously flawed bulk powermarket.

“You agree with us that California has a problem…but you arenot willing to do anything about it. Moreover, what you areprepared to do further reduces California’s ability to solve itsproblems,” the governor said at a hearing Thursday, during whichstate and industry officials responded to FERC’s proposed remediesfor California’s wholesale electric market.

Although FERC concluded that customers in California werecharged “unjust and unreasonable” prices for electricity during thesummer, “I was greatly disappointed and perplexed that theCommission did not take the next logical step and order refunds tocustomers,” Davis noted.

He said he supported the need to restructure the existingstakeholder boards of the California Independent System Operator(Cal-ISO) and California Power Exchange (Cal-PX), replacing themwith independent boards. But the governor argued that the actualreshaping of the boards was up to the state, not FERC.

As for the Commission’s market remedies, Davis called them”untried, experimental” proposals that would make “guinea pigs” ofCalifornia’s customers for years to come. On top of this, FERC hasstripped the state of the protection of any real wholesale pricecaps, he said.

Several state energy market officials and electric executivescalled on FERC to initiate reforms in California “as soon aspossible,” rather than waiting two or three months. At the sametime, however, they were critical of a number of the Commission’sproposed reforms and suggested potential alternatives, which couldonly further postpone implementing any fixes in California.

At the hearing, state and company officials mostly citedconcerns with three issues: the proposed “soft” $150/MWh price capon power sales into the California bulk electric market; the lackof retroactive refunds and the potential for future refunds; andwho has the jurisdiction — FERC or the state — to determine themake-up of a new, independent Cal-ISO board.

Williams Energy Marketing & Trading believes FERC has takenan “excellent step in the right direction” by encouragingCalifornia utilities to shift their direction to the forward energymarkets, said President William E. Hobbs, but it is opposed toprice caps “in any form.” If FERC persists with its proposal for a”soft” $150/MWh price cap, it should be “truly temporary innature,” he noted.

Several contend the $150/MWh cap, which FERC described as “soft”because suppliers still could sell above the benchmark, is really ahard cap. They argued the price restraint would further dampenconstruction of direly needed generation capacity in the state, andwould prevent some suppliers from recovering their fixed costs.

“I think most in the generation community believe that the softcap is, in fact, a hard cap,” said Jan Smutny-Jones, chairman ofthe board of the Cal-ISO. He urged FERC to hold a “very specific”technical conference to address the issue.

Keith R. McCrea, attorney for the California Manufacturers andTechnology Association, said his group supported an as-bid auctionrather than a price cap. “We are concerned that even if $150 is thecorrect number now, it’s almost guaranteed that it will beincorrect down the road a year or so.”

California utilities told FERC that its decision not to provideCalifornia electric consumers with retroactive refunds was hasty.”We think until there’s further investigation, it’s premature toanswer that question. We don’t think that any option, includingretroactive refunds, should be rejected at this point,” said DedeHapner, vice president of regulatory affairs for Pacific Gas andElectric (PG&E).

On the flip side, marketers were worried by FERC’s decision tomake power sales into California subject to refunds over the nexttwo years. Williams’s Hobbs asked the Commission to clarify what itmeant by the subject-to-refund language in last week’s order. Hefurther proposed that the refund obligation not be attached tosales below the $150/MWh threshold, and that FERC quickly reviewtransactions greater than $150/MWh.

Without this action, he believes it will breed uncertainty inthe market. “We believe this uncertainty will drive liquidity inthe forward markets, which is exactly what FERC is trying toavoid,” Hobbs said.

This continuing threat of refunds for marketers, combined withthe price cap proposal, could “undermine” the Commission’s otherreforms intended for the California power markets, warned Steven J.Kean, executive vice president of Enron Corp. It already has begunto discourage construction of new peaking facilities, he said.

Nearly everyone at the hearing agreed it was time to bury thestakeholder board of the Cal-ISO, and replace it with anindependent body. But the debate now has centered on who should dothis – the state or FERC, or both.

“I think it will probably invite litigation” if the Commissionwere to reshape the ISO stakeholder board to the exclusion of thestate, said Michael P. Florio, senior staff attorney for TheUtility Reform Network (TURN) in California. He noted the ISO boardwas in the awkward position of having “two masters,” FERC and thestate.

Terry Winter, president and CEO of the Cal-ISO, suggested theCalifornia Electricity Oversight Board (EOB) and FERC each shouldhave a role in picking new members for the Cal-ISO independentboard. If the Commission doesn’t involve the state, he warnedthere’s “going to be resistance.”

Energy suppliers also had a problem with FERC’s proposal toimpose a penalty charge on sellers that schedule more than 5% oftheir hourly load requirements in real-time markets. TURN’s Floriosuggested that the penalty apply equally to both sellers and buyersto discourage them from relying on real-time markets. Subjectingonly one group to the penalty would be like putting a “thumb on thescale” in the market, he said.

Another market participant suggested that the 5% figure appearedto be “quite arbitrary,” and recommended that the Commissionconsider a “wider band because there’s always going to be somereason for an imbalance.”

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