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Gov. Davis, Industry Weigh in on FERC Fixes for CA

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 well.

"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 in California.

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 fixed costs.

"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 forward markets.

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 Electric (PG&E).

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 state.

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."

Susan Parker

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