California Utilities, IPPs, Nymex Argue Over Power Crisis
While Chairman James Hoecker last week expressed doubt FERC could provide
any real "immediate" relief to California electric customers,
the state's two largest investor-owned utilities called on the Commission
to move quickly to rescue the malfunctioning wholesale power market, saying
it could not stand on the sidelines as the nation's first retail electric
experiment teeters on the brink of disaster. (See related report, this
FERC "must be a constructive participant in the effort to fix the
problem in California. It cannot sit by and watch injured consumers overthrow
the new competitive markets. Failure to act may set restructuring and competition
back in a politically irreversible manner," said Southern California
Edison in a plea filed at the Commission. "The worst possible alternative
[for FERC] would be to do nothing while the promise of restructuring dies
As an interim measure to restore public confidence, Edison and Pacific
Gas and Electric (PG&E) said in separate filings they supported San
Diego Gas and Electric's (SDG&E) request for a $250/MWh price cap on
wholesale electric sales in the state [EL00-95]. But they urged the Commission
to quickly investigate potential medium- and long-term solutions to California's
market problems, the possibility of "anomalous behavior" by market
participants, whether customer refunds are due and to establish the earliest
possible effective date for the refunds, as well as change the rules of
the California Power Exchange (Cal-PX) and California Independent System
Operator (Cal-ISO), if needed. The Commission already has initiated an
investigation of the bulk power market nationwide, with particular focus
on the California and New York ISOs.
In contrast, Dynegy Power Marketing Inc. and others, which oppose SDG&E's
request for a $250/MWh price cap, contend the utility has failed to show
evidence of "sustained market power" by generators or of structural
flaws in the Cal-PX. "California's problems today are primarily a
lack of generation, a lack of transmission and a lack of demand response,"
Dynegy Power said. Further, it contends some of SDG&E's problems are
of its own making. SDG&E "chose not to hedge in the forward markets,
thereby leaving its retail customers subject to spot market prices."
(see related report, this issue).
The price cap being sought by SDG&E will have "little more
than a placebo" effect on the California market, according to a protest
brought by the New York Mercantile Exchange (Nymex) last week. It agreed
with SDG&E that the market institutions in California require "fundamental
reform," but it doesn't think "generic wholesale rate caps are
the answer." Rather, Nymex advocates holding off action until after
a comprehensive evaluation of the California market is completed.
The "'cocktail' combination" of the policies of the California
Public Utilities Commission (CPUC), the California Legislature and FERC
"has yielded the expected results this summer" in the state,
Nymex told FERC. Many have pointed to the state's lack of new generation
capacity as the culprit, but Nymex believes that's a "red herring."
It sees a lot of problems with California bulk power market. First,
it "is dominated by transactions that focus on next-day or sooner
delivery (spot market). Relatively little contracting for delivery further
out (forward market) takes place." The emphasis on spot market sales
has been has been "more pronounced" this summer than it was two
"Spot markets are intended to be residual markets, not primary
markets, but California's policies have squarely reversed this. The result
is that the 'high' spot market prices experienced this year in California
have had a riveting effect as opposed to a residual one. This misplaced
role for the spot market is what California has been reeling from."
Although California likes to think of itself as a pioneer in electricity
deregulation, Nymex said the market there still is "highly regulated."
Because of the "many regulator-installed artificial constraints on
competition," the state "falls dramatically short of a competitive
market by comparison to other energy markets."
It faulted FERC and the CPUC for placing "overwhelming emphasis
on achieving competition in generation to the exclusion of other major
considerations," such as "shaping demand to be more market responsive."
Also, federal and state regulators/legislators have established the Cal-PX
as the "stand-alone transaction center in California," while
virtually eliminating the opportunities for potential competitors of the
Cal-PX - marketers, aggregators and brokers.
In a nutshell, the policies of the CPUC, FERC and the state legislature
have created a market that lacks: 1) retail access to the wholesale market;
2) a level playing field for competitors to the Cal-PX; 3) commercially
priced firm transmission; and 4) greater emphasis on forward contracts,
according to Nymex.
Given all the market shortfalls, "does anyone seriously expect
California-based suppliers to ignore profitable opportunities located outside
California, especially while operating under the yoke of competition-stunting
policies that have so severely restricted the ability to pursue opportunities
Edison, the CPUC and the Cal-ISO do. Edison called on FERC last week
to reject a plea by three generators to be to reimbursed for "lost
opportunity" and replacement costs if the Cal-ISO curtails their exports
of firm power to customers in more lucrative neighboring markets during
in-state power emergencies.
A favorable response to the request of Reliant Energy Power Generation,
Dynegy Power Marketing, and Southern Energy California would permit generators
to reap "windfall profits" at the expense of the state's electric
customers, Edison warned FERC [EL00-97]. It would be the final nail in
the coffin for the state's electricity restructuring program, a movement
that "threatens to spread nationwide..."
The three generators filed a complaint earlier this month seeking reimbursement
for "lost opportunity" and replacement costs after the Cal-ISO
set a $250/MWh price cap on emergency power purchases. Soon afterwards,
SDG&E asked FERC to second the Cal-ISO's move and impose a matching
cap on all sales of energy and ancillary services into the Cal-PX as well.
Edison contends the Cal-ISO has full authority to curtail power exports
in times of emergencies, and says the generators should have included provisions
in their export contracts with customers to cover this contingency. Specifically,
it noted each of the generators signed Participating Generator Agreements
(PGA) subjecting them to the "control by the ISO during a system emergency,"
and absolving the ISO of any liability for "losses, damages, claims,
liability, costs or expenses..."
The CPUC called the generators' complaint a "sham" designed
to "avoid the ISO price caps by making sales to affiliates or cooperating
entities located out of state," which then would "sell the power
back to the ISO at uncapped prices." The Cal-ISO argued the complaint
was much ado about nothing since it has never curtailed a generator's firm
exports, and added that it was "exceedingly unlikely" to occur
in the future. It noted it would only consider curtailment of firm power
exports during a Stage 3 emergency, which it has never declared. But if
such an emergency did happen, the Cal-ISO said it would be bound to compensate
the generator only for an amount equal to the clearing price within its
The generators cited two recent FERC decisions involving the New York
and New England ISOs to justify their request. But Edison argued otherwise.
In the New England case, for instance, Edison said the Commission required
the ISO to reimburse the export buyer "only the extra amount, if any,
that [he] must pay to replace the power that the ISO recalled." Likewise
in New York, it noted FERC directed the ISO in the event of curtailed sales
"to pay the generators the applicable New York market-clearing energy
price - not the price that would have been received for exports to other