Gov. Davis, Industry Weigh in on FERC Fixes for CA
Although he praised FERC as a "fine group of people," California
Gov. Gray Davis last week made very clear that he doesn't like what
that group has prescribed to mend his state's seriously flawed bulk
power market. Power executives and state market officials said they
favored the general direction in which the Commission seemed to be
headed, but they had problems with specific proposed reforms as
"You agree with us that California has a problem.but you are not
willing to do anything about it. Moreover, what you are prepared to
do further reduces California's ability to solve its problems," the
governor said at a hearing Thursday during which state and industry
officials responded to FERC's proposed remedies for California's
wholesale electric market (see NGI, Nov. 6).
Although FERC concluded that customers in California were
charged "unjust and unreasonable" prices for electricity during the
summer, "I was greatly disappointed and perplexed that the
Commission did not take the next logical step and order refunds to
customers," Davis noted.
He said he supported the need to restructure the existing
stakeholder boards of the California Independent System Operator
(Cal-ISO) and California Power Exchange (Cal-PX), replacing them
with independent boards. But the governor argued that the actual
reshaping of the boards was up to the state, not FERC.
As for the Commission's market remedies, Davis called them
"untried, experimental" proposals that would make "guinea pigs" of
California's customers for years to come. On top of this, FERC has
stripped the state of the protection of any real wholesale price
caps, he said.
Several state energy market officials and electric company
executives called on FERC to initiate reforms in California "as
soon as possible," rather than waiting two or three months. At the
same time, however, they were critical of a number of the
Commission's proposed reforms and suggested potential alternatives,
which could push back the timetable for implementing market fixes
At the hearing, state and company officials mostly cited
concerns with three issues: the proposed "soft" $150/MWh price cap
on power sales into the California bulk electric market; the lack
of retroactive refunds and the potential for future refunds; and
who has the jurisdiction - FERC or the state - to determine the
make-up of a new, independent Cal-ISO board.
Williams Energy Marketing & Trading believes FERC has taken
an "excellent step in the right direction" by encouraging
California utilities to shift their focus from the spot market to
forward energy markets, said President William E. Hobbs, but it is
opposed to price caps "in any form." If FERC persists with its
proposal for a "soft" $150/MWh price cap, it should be "truly
temporary in nature," he noted.
The Commission has called the $150/MWh benchmark a "soft" cap
because power suppliers still would be able to sell above the cap,
although such sales would have to be reported to FERC. But several
at the hearing said they feared it would evolve into a "hard" cap,
restricting power transactions above $150/MWh. They argued the
price restraint would dampen interest in siting and construction of
much-needed generation capacity in the state, and would make it
difficult for existing generators in California to recover their
"I think most in the generation community believe that the soft
cap is, in fact, a hard cap," said Jan Smutny-Jones, chairman of
the board of the Cal-ISO. He urged FERC to hold a "very specific"
technical conference to address the issue.
Keith R. McCrea, attorney for the California Manufacturers and
Technology Association, said his group supported an as-bid auction
rather than a price cap. "We are concerned that even if $150 is the
correct number now, it's almost guaranteed that it will be
incorrect down the road a year or so."
Chairman James Hoecker was caught somewhat off-guard by the
focus on the $150/MWh bid cap at the hearing. He stressed the
$150/MWh threshold wasn't a "hard" cap, but rather it was simply
one of a "variety of measures" that was intended to reduce the
stress in the real-time markets. He said the "most important
remedy" was the proposal requiring California's three
investor-owned utilities to transact more of their business in the
California utilities told FERC that its decision not to provide
California electric consumers with retroactive refunds was hasty.
"We think until there's further investigation, it's premature to
answer that question. We don't think that any option, including
retroactive refunds, should be rejected at this point," said Dede
Hapner, vice president of regulatory affairs for Pacific Gas and
On the flip side, marketers were worried by FERC's decision to
make power sales into California subject to potential refunds over
the next two years. Williams Energy's Hobbs asked the Commission to
clarify what it meant by the subject-to-refund language in its
recent order. He further proposed that the refund obligation not be
attached to sales below the $150/MWh threshold, and that FERC
quickly review transactions greater than $150/MWh.
Without this action, he believes it would breed further
uncertainty in the market. "We believe this uncertainty will drive
liquidity in the forward markets, which is exactly what FERC is
trying to avoid," Hobbs said.
This continuing threat of refunds for marketers, combined with
the price cap proposal, could "undermine" the Commission's other
reforms intended for the California power markets, warned Steven J.
Kean, executive vice president of Enron Corp. It already has begun
to discourage construction of new peaking facilities, he said.
Nearly everyone at the hearing agreed it was time to bury the
stakeholder board of the Cal-ISO, and replace it with an
independent body. But the debate now has centered on who should do
this - the state or FERC, or both.
"I think it will probably invite litigation" if the Commission
were to reshape the ISO stakeholder board to the exclusion of the
state, said Michael P. Florio, senior staff attorney for The
Utility Reform Network (TURN) in California. He noted the ISO board
was in the awkward position of having "two masters," FERC and the
Terry Winter, president and CEO of the Cal-ISO, suggested that
the California Electricity Oversight Board (EOB) and FERC each
should have a role in picking new members for the Cal-ISO
independent board. If the Commission doesn't involve the state, he
warned there's "going to be resistance."
Energy suppliers also had a problem with FERC's proposal to
impose a penalty charge on sellers that schedule more than 5% of
their hourly load requirements in real-time markets. TURN's Florio
suggested that the penalty apply equally to both sellers and buyers
to discourage them from relying on real-time markets. Subjecting
only one group to the penalty would be like putting a "thumb on the
scale" in the market, he said.
Another market participant suggested that the 5% figure appeared
to be "quite arbitrary," and recommended that the Commission
consider a "wider band because there's always going to be some
reason for an imbalance."