Although none of the major merchant generators in Californiawill talk about pulling back from the nation’s largest electricitymarket, they are not happy with some of the proposals that haverecently landed in the federal regulators’ lap advocating pricecaps and cost-based ratemaking, at least for interim periods.Several generators noted this week they are watching the situationclosely and intend to be heard at the federal level as well asamong the California energy policymakers.

Like other generators, Dynegy is critical of what it calls “toomuch finger pointing and placing of blame,” and not enough focus onlonger term, market-based solutions, said Lynn Lednicky, Dynegy’sexecutive in charge of its California operators. The generatorsargue that FERC is being made the primary forum even though most ofthe solutions it may develop will require state implementation.

“We’re hoping California can come together in the next fewmonths with a program that acknowledges that we are in a transitionphase and gives a clear path to market solutions going forward,then we’ll have a much more favorable view on California,” saidLednicky, a Dynegy senior vice president.

“If California winds up in some type of cost-of-servicearrangement, we are going to react accordingly (negatively) and itwon’t be very attractive to us. With everything up in the air rightnow, we are trying to assess the situation as best we can and keepour options open.”

In principle, both Dynegy and Duke Energy, another merchantoperator with substantial holdings in California, agree with lastweek’s California Independent System Operator (Cal-ISO) FERC filingthat calls for encouraging more load to be sold out of the spotmarket. However, the generators view that as including getting awayfrom the bulk of the power going through the state-chartered,nonprofit California Power Exchange (Cal-PX).

Dynegy’s Lednicky said other states are watching Californiaclosely to determine what not to do in terms of opening upelectricity markets. He cites his home state of Texas as anexample, which is staying away from creating a PX (mandatedwholesale spot market) and concentrating on having a strong retailmarket.

“One of the lessons from California is that it is important tohave a strong, competitive retail market because a great deal ofthe problems in California this summer were tied to the fact thatSan Diego Gas and Electric (SDG&E) let its customers be exposedentirely to the spot market, and the customers really had nochoice,” Lednicky said. “There were structural issues thateffectively inhibited other electric service providers (ESPs) fromcompeting. So when the shortage showed up, you had a provider(SDG&E) simply passing on wholesale prices, and that was notpolitically acceptable.”

A situation that relies too heavily on the spot market createseconomic and reliability problems, Lednicky said. “Californiashouldn’t have to deal with these.

Richard Nemec, Los Angeles

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