CA Seeks Clinton's Aid in FERC Electric Probe
Political repercussions from California's high-priced heat wave
reached all the way to the White House last week as Gov. Gray Davis
appealed to President Clinton to pressure the Federal Energy
Regulatory Commission to "accelerate its investigation of wholesale
energy prices in California."
The governor's letter was sent Thursday as lawmakers in an
acrimonious joint state legislative session struck out in all
directions, looking to lay blame and find a fix for the power
shortage situation which has rocketed electric prices in the state.
On Friday, after a week of somewhat milder weather, the heat
returned and California again went to a Stage Two Alert in which
utilities are asked to cut 500 MW of interruptible load.
Davis said it was "extremely important" that FERC's inquiry be
speeded up and "that the investigation and related proceedings be
conducted on a formal evidentiary basis. It is also important that
refunds to customers be made immediately upon a determination that
rates are not just and reasonable. It is my understanding that this
investigation can be completed within 30 to 60 days."
Noting that "San Diego consumers have paid an enormous price for
deregulation in a market that no one believes is functionally
competitive," the governor outlined the measures he had taken on
the state level to ameliorate the situation...But the outrageous
wholesale prices being charged by out-of-state generators makes any
rate stabilization plan a difficult and expensive endeavor,"
In the joint state legislative session state/federal regulators,
third-party transmission grid and market operators, academics,
private/public sector utilities, environmentalists, consumer groups
and merchant power plant developer/operators testified amid
repeated questions and speeches from San Diego lawmakers.
Bombast aside, the most concrete proposals that emerged were for
rolling back and re-freezing San Diego electric rates, cutting the
power plant siting time to six months and perhaps the state suing
the Federal Energy Regulatory Commission (FERC) to force merchant
generators to retroactively cough up their perceived "excess
profits" from recent peak-demand periods. In addition, state
authorities will put out a request for proposals next week for
3,000-MW of peaking units to put in place by next summer.
The only thing that could be counted on after a seven-hour
legislative session last week was that there will be more hearings,
new legislation and increased state regulatory action. In addition
there is likely to be increased pressure from California on FERC to
cap Western wholesale prices; quickly complete an investigation of
possible market gaming and price gouging by merchant generators and
marketers, and extend the state's authority to impose price caps on
wholesale emergency electricity purchases. In the remaining weeks
that California lawmakers are in session a variety of electricity
legislation could emerge.
Even before the marathon joint legislative session got under
way, the state senate quickly passed a bill to rollback and freeze
San Diego electric rates and sent the measure on to the Assembly.
In the meantime, Gov. Davis a day earlier directed the California
Public Utilities Commission to cut the San Diego rates in half, and
the CPUC has set a special meeting Aug. 21 to consider that and
other electricity proposals.
Almost all agreed California's electricity market is not working
correctly, but they couldn't agree on how to fix it or even whether
fixing it was a good idea. A stumbling block for advocates of
market-based solutions were statistics that show wholesale prices
this summer even on days that have lower demand than a year earlier
are five times higher than they were in 1999. These nonpeak-period
aberrations have lawmakers, utilities, consumer groups and others
pointing accusing fingers at a combination of the state's
transmission grid operator, power exchange or FERC.
"In California's market, there are single producers who can move
the market," said economist Severin Borenstein, director of the
University California Energy Institute. "In a truly competitive
market, no single producers can do that."
Two troubling market notes were sounded by the Cal-PX CEO George
Sladoje and Southern California Edison representative, Gary
Schoonyan. This summer total supply bids into the Cal-PX have been
down by 700 MW over historic summer levels, said Sladoje,
indicating the producers are holding back so they can bid into the
Cal-ISO's higher-priced emergency supply market. "That is
troubling," he said.
Edison's Schoonyan said his utility, which still has rates
frozen at 1996 levels, has energy charges of almost $1 billion more
than rates they have collected for the past 2-1/2 months. Prices
during a low-volume Sunday this past July were "eight times" higher
than those on a corresponding Sunday a year ago, he said,
concluding "that is not a competitive market."
San Diego Gas and Electric, the center a hailstorm of criticism,
was represented by Tom Shayles, a vice president from its parent
company, Sempra Energy. He said his companies "are outraged by what
a dysfunctional market is causing." He believes at some point
California may need to conduct an old-fashioned protest or sit-in
at FERC's headquarters in Washington, DC to get the federal action
to cure California's market ills.
Douglas Smith, FERC's chief counsel, countered the Commission
had acted quickly on a complaint regarding the California market
recently, supporting the Cal-ISO's move to install price caps on
its purchases of imbalance energy and ancillary services. He noted
the Commission now had complaints before it from SDG&E asking
to put a cap on prices suppliers could sell into markets operated
by the ISO and PX, and Reliant Energy requesting clarification on
the amount of compensation the ISO should pay them if it curtails
their exports of power from California.
"The Commission fully understand the importance and time
sensitivity of these matters and intends to act expeditiously." He
pointed out FERC has jurisdiction over sales for resale and
transmission only when they are done by public utilities. Also,
while FERC has authority to change utility tariffs, any relief
provided would be prospective in nature - taking effect 60 days
after the tariff change is filed. No refunds would apply until
after that period.
At the outset of the legislative hearings, the chairman of the
state energy commission (CEC), William Keese, said his agency
expects in the next few days to have a proposal to establish an
emergency six-month power plant siting process that does not
compromise environmental requirements sent to Gov. Davis who
ordered such a move earlier this month.
In another context, State Sen. Steve Peace, the San Diego
lawmaker who helped craft the 1996 electricity restructuring law,
said the legislature should also pass legislation to make the
Electricity Oversight Board (EOB) the direct overseer of both the
California Independent System Operator (Cal-ISO) and California
Power Exchange (Cal-PX) "much like you would have an audit team
take over a bankrupt company."
In response to calls from the CEC chairman for a "balanced"
approach of new generation, market reform and increased demand-side
management, Sen. Peace said "for five years I have heard this
Harvard grad school cockamamie that market-based solutions will
work along with demand-side management. There is no way we are
going to crawl out of this predicament with demand-side
The CEC's Keese said 3,000 MW in five power plants are now under
construction, and another 7,000 MW and 11 plants are in the siting
CPUC President Loretta Lynch and EOB Chairman Michael Kahn
portrayed the problem as being a combination of the market being
noncompetitive and the means of correcting that resting with FERC.
Therefore, Kahn repeated that California does not have a problems
with "deregulation," but rather what he calls "federalization." "We
ought to stop saying we're 'federalized,' it may be technically
true, but it is misleading," said S. David Freeman, general manager
at the Los Angeles Department of Water and Power and a former
energy official in both Washington, DC and Sacramento. "The state
of California has a lot of authority it can use. We can all work
together to solve the problem and then we can get back to letting
the 'grand experiment' work, which I support."
Sen. Peace indicated he thinks the newly passed state Senate
legislation to freeze San Diego rates will "curb" the wholesale
market to a certain extent, and that eliminating the stakeholder
oversight boards for the Cal-ISO and PX will solve the other part
of the state's problem. "There is now clear statistical proof that
the ISO prices created a target and drove up prices [in the
wholesale market]," he said.
The CPUC's Lynch said there was definitely a problem in
California market, "but we can't fix it; all we can do is go to the
Many officials and industry representatives advocate temporary
peaking plants be put in place to avoid the crunch state officials
predict will get much worse next summer before it gets better. The
debate is whether the regulated utilities should develop these
plants or the merchant operators. Both Duke Energy and Calpine
Corp. representatives said the non-utility generators could do it
quicker, cheaper and more efficiently. Sen. Peace expressed
"It is clear the state needs to add peaking generation by next
summer," said Jan Smutny-Jones, Cal-ISO board chairman and head of
the state's trade group for independent generators. "Ultimately the
way out is to build more generation. We do not need a 180-degree
move backwards [re-regulation], which would be a disaster for both
reliability and price."
Cal-ISO CEO Terry Winter, told the lawmakers that the reason no
appreciable new generation was built in the 1990s in California,
and for most of the United States, for that matter, was the
uncertainty of what was going to unfold. "I think it is very
important that we offer some stability moving forward to the people
building power plants. In our recommendations [to the governor] we
have identified a few plants - not all of them - that must get
built. One of those is [Calpine's] Metcalf in San Jose [to serve
Silicon Valley] and Otay Mesa in San Diego. They are absolutely
When he was a member of the utility industry, Winter said, "I
was involved in a 500-MW re-powering proposal for San Diego in 1998
that we canceled. Boy, would we love to have that 500 MW now."
Winter said he also supports demand-side programs, but he said
the lowering of the price cap to $250/MW is a disincentive for most
DSM. "Part of the reason the programs people talked about here were
not developed was because at the lower cap, people weren't
interested in participating."
Richard Nemec, Los Angeles