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CA Seeks Clinton's Aid in FERC Electric Probe

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 management."

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 approval process.

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 federal government."

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 skepticism.

"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 crucial."

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

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