Responding to a California power market gone haywire andteetering on the brink of operational and financial disaster, FERCFriday issued a series of remedial measures, virtually strippingthe Cal-PX and Cal-ISO of their control of the market and callingmarket stakeholders together to negotiate bilateral forwardcontracts.

The Commission’s main action, effective with the issuance of theorder after the Friday afternoon meeting, removes the requirementthat California utilities buy and sell exclusively through theCalifornia Power Exchange (Cal-PX) and clears the way forbi-lateral contracts in the forward market. FERC scheduled asettlement conference for Dec. 19 in Washington of parties in thestate’s power market to negotiate those contracts.

“California does [not] have the benefit of a competitivemarket,” Chairman James Hoecker said, noting he had heard thestate’s power market called “crisis by design.” The design was “anunworkable state law, the product of command and control thatdescribed in detail” exactly how the market should function. “Itwasn’t competition,” Hoecker said. “It’s time to get serious aboutsaving the future of competitive markets…Competition did not failin principle at either the wholesale or retail level because it wasnever well-conceived or tried. This version of competition was adisaster.”

Commissioner William Massey defended the Federal EnergyRegulatory Commission’s backing away from price caps. “Rather thancap the spot market created by the state of California, the orderwould simply shrink its size and diminish its influence.” This will”give back participants’ ability to find the right price; Thisability is what California has taken away from that market.”

Massey said the action would allow bilateral transactions,support forward contracts, and allow the parties to manage risk. Heurged the California Public Utilities Commission to “step up to itsresponsibilities” in supporting the FERC-directed activities.

Massey said the transfer of wealth in what he described as the”apocalypse” in California “is absolutely staggering. The twolargest utilities are virtually bankrupt.” He predicted a court,acting on accepted law and precedent, would eventually rule theutilities are entitled to recover the costs from customers,spreading the costs out over the entire state.

PG&E Corp. officials lambasted the Commission’s actions,saying they left California’s electric customers “exposed to pricegouging and future electric supply reliability uncertainty.”

“The California wholesale market is broken. And we are extremelydisappointed by the insufficiency of today’s FERC order,” PG&Eofficials said in a statement. “The remedies outlined in the orderdo not go nearly far enough to provide a solution that ensuresreliability of the state’s electric supply and equally importantly,provides relief from future price gouging,” the Northern Californiautility company said. PG&E said it was particularlydisappointed that FERC did not call for retroactive price refundsfor California electric customers, as was requested by Gov. GrayDavis. The utility also said it was “especially troubled” that FERCshortened the timeframe for the electric price cap from the end of2002 to April 2001, “leaving customers exposed during thehigh-demand summer season.”

Sen Dianne Feinstein, (D-CA), said FERC’s action wasunacceptable. “Rome is burning, our utilities are close tobankruptcy, Californians are facing major blackouts, and theCommission is fiddling.”

Hoecker said similar competitive problems in states in thePacific Northwest have led to pleas from governors and others forregional price caps. But he pointed to the fact that FERC isseverely limited in what it can do in that region. For one, itlacks authority over the Bonneville Power Authority and otherfederal operations there, which make up a major portion of themarket. Further, there is no Northwest spot market that can becapped in the way caps operate in California. There also would beproblems with the many purchasers who already had hedged orprotected themselves in some way. Hoecker strongly urged EnergySecretary Bill Richardson to convene a conference to try toidentify regional problems, and offered his help in this.

Commissioners Curt Hebert and Massey said they would issueconcurring opinions. Hoecker said he will submit a concurringopinion next week on items such as RTOs that are beyond the scopeof the order. The Commission’s actions, which went beyondrecommendations it had made earlier (see Daily GPI, Nov. 2), cameat an emergency meeting following a week of continuous power alertsand emergency measures to avoid rolling blackouts in the state.

The Commission’s reforms call for: