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Hoecker: No 'Lynching' of Suppliers, No Refunds for CA

Hoecker: No 'Lynching' of Suppliers, No Refunds for CA

In the wake of FERC's much-anticipated investigation report and companion order on the California wholesale power market last week, out-of-state power marketers breathed a collective sigh of relief when the Commission declared it didn't uncover any "specific" instances of market-power abuse on which to pin the huge run-up in power prices this past summer. The Commission focused instead on correcting regulatory and structural design flaws, specifically with the California Independent System Operator (Cal-ISO) and Power Exchange (Cal-PX), which were aggravated by severe weather and market conditions.

However, Gov. Gray Davis and officials with the state's investor-owned utilities had a tough time swallowing the finding, and called on the Commission to continue its probe of alleged market-power abuses that they strongly suspect were behind the price spikes in the state.

Moreover, while power suppliers were spared from having to provide retroactive refunds to California electric customers, Gov. Davis vowed to press ahead to obtain some type of relief for the state, especially for customers in San Diego. Energy suppliers, however, were concerned by FERC's decision to offer prospective refund relief to customers who are charged "unjust and unreasonable" rates over the next two years.

Many expected two things from last week's order --- "first, they expected a lynching [of power suppliers], and then they expected the transfer of large amounts of money," said Chairman James Hoecker. "...I know that ideally some people would want us to round up the bad guys who manipulated this market," but "as our staff report concludes, it's not as simple as all that."

Also promising to be a controversial issue was one of a wide range of remedies proposed by the Commission to overhaul the "seriously flawed" rules and structure of the California bulk power market. Specifically, FERC wants to impose a "soft" $150/MWh cap on power sales into the Cal-ISO and Cal-PX over the next two years. Some welcomed FERC's initiative as an affirmation of the price-cap concept, while power marketers expressed significant concerns with a further reduction in the existing cap of $250/MWh.

Immediately following the release of the Commission report, Gov. Davis indicated he was far from convinced that out-of-state electricity suppliers didn't act illegally this summer, causing the escalation in power prices in the wholesale market.

The "generators, who happen to be out-of-state companies, are charging 600 to 700 times for the same electricity we purchased last year," he said at a press briefing last Wednesday. "They are simply taking advantage of an ill-advised scheme envisioned in the 1996 (state) law to charge what the market will bear. I am standing up and saying, 'No more! We're not going to take this lying down. We're going to fight back.'"

The state's utility consumer watchdog group, TURN, said the state's consumers have now "lost hope" after the long-awaited FERC report "failed to address the central problem of unreasonably high prices for electricity."

Stephen E. Frank, chairman and president of Southern California Edison, joined the governor in urging FERC to continue the "unfinished task of investigating past market power abuses by sellers and adopting effective structural remedies to make the California markets workably competitive." Clearly, "more work is required here," he said.

The results of FERC's three-month investigation found "clear evidence" that the dysfunctional structure and rules of the California wholesale market "provide the opportunity for sellers to exercise market power when [power supplies are] tight and can result in unjust and unreasonable rates." However, FERC reported it didn't find any evidence that specific power suppliers acted illegally or exercised their market power to cause the doubling and tripling of electric prices this summer. A Cal-PX report released last Wednesday came to the same conclusion.

As for refunds, FERC said it was prevented under federal law from ordering retroactive relief for the state's customers, but would consider refunds going forward.

If he had experienced the price hikes that Californians did this summer, Hoecker conceded he'd want a refund as well. "Hell, I'd want my money back or at least some assurances that this big anonymous thing called a market couldn't pilfer my finances again in the future." However, "our ability to refund excessive rates retroactively ultimately rests with the Congress," he said.

"All this does not mean that perhaps some form of equitable relief for San Diego is...impossible," Hoecker noted. "I'd still like to be open to that, although I think it's a tough climb to get to that point." He did not expand on what he meant by "equitable relief."

"We were pleased what FERC said about refunds on one level, and then concerned on another," said Tom Williams, a spokesman for Duke Energy in California. "They said they won't do retroactive refunds on this past summer until the end of September, but we think they left the door open for refunds going forward after October...We're going to read the fine print on that one and give appropriate comments."

Edison's Frank had a mixed reaction to the Commission's proposal for a "soft" price cap of $150/MWh in the markets operated by the Cal-ISO and Cal-PX. Under the proposal, sellers could bid above the $150/MWh level, but such bids would not set the market-clearing price.

"We are pleased that FERC reaffirmed the price cap concept and that the caps would apply to all parts of the spot markets in California. We are disappointed, however, with the cap limit of $150/MWh. We think this is too high." Last month, Edison proposed that the cap, which currently is at the $250/MWh level, be lowered to $100/MWh.

The Electric Power Supply Association, which represents power marketers, said it had "significant concerns" about further reducing the price cap on power sales in California. In fact, it has asked FERC to issue a cease and desist order to prevent the Cal-ISO board from implementing a recently adopted load-differentiated cap, which could put the ceiling as low as $100/MWh or more [See related story].

Duke Energy has two problems with a proposed $150/MWh cap: first, it is opposed to any caps in principle; and second, it has many questions about how this specific cap would be applied, according to the company's spokesman in California.

The majority of the market strongly endorsed the Commission's proposal to eliminate the requirement that the state's three IOUs - Southern California Edison, Pacific Gas and Electric (PG&E) and San Diego Gas and Electric - sell their generation into and buy from the Cal-PX. This "would free utilities to have broad discretion to buy power in other markets, expand our contracting ability, and enable us to use our own generation to better serve our customers," Edison's Frank said.

Gov. Davis certainly welcomed the Commission's decision to disband the existing stakeholder boards for the Cal-ISO and Cal-PX. In fact, he said he would change both organizations himself if he could.

"They [Cal-ISO and Cal-PX stakeholder governing boards] are too self-serving, too in-bred, too incestuous and don't represent consumer interests, plus you can't hold anyone accountable. There is no one public official on any one of those boards. They determine pretty much what the price of electricity is, and how shortages are allocated across the state. These are serious responsibilities given to these boards with no public members on them."

PG&E applauded FERC's investigation report and companion order, saying they were a "sound beginning to the process of repairing the marketplace," which President Gordon R. Smith said is "clearly broken" (see related story).

In its report, FERC specifically declared that the market rules and structure for wholesale sales of electricity in California are "seriously flawed," and that they --- along with the imbalance in supply and demand --- have caused and will continue to cause "unjust and unreasonable" rates for short-term services in markets operated by the Cal-ISO and Cal-PX.

At a special meeting last Wednesday, FERC voted out an order proposing a series of short- and long-term remedial measures to overhaul the structure and rules for California's bulk power markets. The immediate fixes would be put into effect within 60 or 90 days, while the longer term proposals could take up to two years to enact. FERC will hear oral comments on its proposals at a hearing Thursday (Nov. 9) in Washington D.C., which will be followed by three weeks of written comments by industry. It expects to take a final vote on the proposed remedies in December.

At the top of its list of immediate market fixes is the proposal to nix the requirement that the three California investor-owned utilities sell all of their generation into and purchase all of their power needs from the Cal-PX [EL00-95 et al]. FERC believes this measure will help to increase the market participants' reliance on forward energy markets as opposed to the spot markets.

The state-chartered wholesale spot market, the Cal-PX, whose board and structure FERC suggests revamping, "welcomed much of the FERC proposal," said George Sladoje, Cal-PX CEO. The federal agency's action was "helpful in highlighting the multitude of market structural and fundamental events" causing the power price spikes in California and throughout the West this past summer.

With respect to the proposal to eliminate the Cal-PX buy-sell requirement for California IOUs, Sladoje said the move "is consistent with independent governance, market and regulatory flexibility" that he and other Cal-PX officials had anticipated.

FERC also proposed that market participants be required to schedule 95% of their power transactions in the (forward) day-ahead markets in order to reduce the "chronic under-scheduling" of load and generation, as well as the over-reliance on the Cal-ISO's real-time imbalance market to meet supply. FERC said it will seek a penalty charge for scheduling deviations in excess of 5% of hourly load requirements.

In its order, the Commission attempts to "rightly focus attention on forward contracts" to hedge the volatility in the Cal-ISO and Cal-PX spot markets, Commissioner William Massey said. The dependence of the California utilities on the spot market is why consumers there "suffered" so much this summer, he said.

While he shared FERC's "enthusiasm for risk management and forward contracting," Commissioner Curt Hebert Jr. said he drew the line at "dictating to market participants precisely how much of their transactions to schedule in forward markets and how much to schedule in real-time markets." Market participants shouldn't be "locked into particular allocation methods." Hebert objected to a number of the proposed remedial measures, but he still voted in favor of the order since the proposals are subject to change.

Hebert said he couldn't support FERC's proposal for a "soft" $150/MWh price ceiling on power sales into the Cal-ISO and Cal-PX for the next 24 months. Under such a ceiling, sellers still could bid above $150/MWh, but such bids would not be permitted to set the market-clearing price in the California energy markets. Also, sellers bidding above $150/MWh would be required to report such transactions each week to FERC, according to the order. The Cal-ISO and Cal-PX would have to submit monthly reports on such bids as well. This proposed cap would go into effect at the beginning of 2001, a staffer said, adding that the Commission set it at that level because "we felt it was a fair breaking point."

Hebert believes lowering the "de facto" price cap from the current $250/MWh level would further stymie investment in generation and transmission facilities in California. As for the host of price-cap requests that were filed at FERC over the past months, the Commission rejected raising the cap to $350/MWh, extended the effectiveness of the Cal-ISO's current $250/MWh purchase cap for ancillary services and imbalance energy for 60 days after the date of the order, and continued the Cal-ISO's authority to adjust its buyer caps, a staff member said.

The Commission further advocates replacing the existing Cal-ISO and Cal-PX stakeholder governing boards with seven-member independent boards effective 90 days after the date of the order. In the order, FERC cited concerns about the "independence and effectiveness" of the existing two boards. Also, it noted there was no longer any reason for a stakeholder body to govern the Cal-PX, given that FERC was seeking to abolish the requirement for California IOUs to sell into and buy from the Cal-PX.

Hebert took issue with the Commission majority's attempt to restructure the two governing boards, saying this was a matter to be addressed by the Cal-ISO and Cal-PX, and could lead to a "constitutional showdown" between California and FERC. But Gov. Davis and other California policymakers don't seem to share these concerns over state-federal jurisdiction, and in fact welcome FERC efforts to fix the broken California market.

Among its other proposals, FERC seeks to establish generation interconnection procedures for the market; submit a design proposal for congestion management; explore alternatives to the single-price auction by the Cal-ISO and Cal-PX; and further refine market rules to ensure the availability of sufficient supply to meet load and reserve requirements.

But FERC acknowledged it also will need the help of California policymakers in several areas --- specifically in adding new generation and transmission capacity in the state; implementing demand-response programs; assuring sufficient reserve requirements; and allowing load-serving entities to pursue power supplies on a more forward basis.

Susan Parker; Richard Nemec, Los Angeles

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