CA Governor Files State Power Plan with FERC
Showing a carrot, but keeping a "stick" in reserve, California
Gov. Gray Davis Friday outlined for federal regulators steps he
will pursue to fix the state's ailing wholesale electricity market,
stopping short of proposing a state takeover but hinting he will go
further if federal measures fall short.
Davis outlined California's proposals in a six-page letter to
FERC Chairman James Hoecker that was released to news media.
Nothing new was included that the governor and other Californians
had not already suggested to FERC during its public hearings in San
Diego and Washington, DC, this fall (see NGI, Nov. 20).
Among his requests, Davis asks FERC to impose "bid caps in the
$100/MW range on a transitional basis" over the next three years.
If Hoecker and his colleagues do not order refunds of the spiked
prices from last summer and take steps to protect against similar
spikes next year with price caps, the governor hinted he would
follow the lead of some elected, regulatory and consumer officials
in the state and move to establish a state government-run power
system. The governor's action came as in-state and national
consumer groups were calling for re-regulation because of spiking
prices and brown-outs (see related story, this issue).
The strict clamp-down on energy companies, proposed by the
Democratic governor, were backed by the Energy Department in
Washington, which proposed a tougher wholesale bid cap, rather than
the soft cap proposed by FERC, and extending the cap throughout the
The Federal Trade Commission, however, basically backed FERC's
approach (see NGI, Nov. 6), adding the Commission should provide
more concrete advice on how best to configure the organization that
will operate and control the transmission grid in the state. In its
comments filed last week, the FTC said FERC should consider
creating a benchmark or a baseline of characteristics and
operations for regional transmission organizations that can be used
as a starting point as part of its revisions to California's
wholesale electric power market rules and institutions. In
addition, the comments suggest refinements to FERC's proposed
remedies to ensure that market power is not exercised in wholesale
electric power markets, to the detriment of consumers.
Among the California governor's proposed measures are: (a)
revising the oversight boards for the state's grid operator
(Cal-ISO) and wholesale spot market (Cal-PX), specifically calling
for eliminating stakeholder board members who he said have
"inherent conflicts of interest"; (b) expanding current laws and
other efforts to enhance the siting of new generating plants,
demand-side management programs, and utility forward contracting
for power supplies; (c) reviewing new approaches to power plant
maintenance and operation to avoid problems that create in-state
power shortages, (d) requiring utilities to retain their existing
generation plants (hydro-electric and nuclear); and (e) providing
more "real-time price signals" to large energy users to reduce
their energy use.
Once again, Davis used the FERC forum to reiterate that no new
power plants were built over the past decade and especially before
he took office in January 1999, but since then six plants totaling
4,700-MW have been approved (three under construction currently)
and another two dozen projects are under review or planned.
With various energy players attempting to seize on intense
political and regulatory focus during the first two weeks of
December, California electricity proposals last week were flowing
freer than movie scripts and dot.com start-up business plans - all
anticipating the governor's state plan and the subsequent final
FERC decision by Dec. 13 for stabilizing California's power
markets. Gov. Davis indicated in his news release summarizing his
letter that he will "continue to meet with legislative leaders,
consumer groups and other interested parties to discuss additional
Among the deluge of recent press releases out of California were
ones alleging independent proof of market manipulation last summer,
promoting utility rate increases to stabilize future retail power
rates, commitments by merchant generators to keep investing in new
plants and an eleventh-hour proposal to hedge San Diego's entire
3,300-MW peak-load power requirements.
A spokesperson for Davis last week said the governor conducted a
series of meetings with major stakeholders, including the
generators and marketers, who Davis has repeatedly criticized for
"price-gouging" and "marketeering," if not illegally abusing their
Another state energy official said FERC sources are indicating
that its Nov. 1 proposed order is going to "stay pretty much
intact," except for lowering of the proposed price cap to $100.
Amid the heightened anticipation, the California Power Exchange
(Cal-PX) announced the start Nov. 27 of an independent review of
its current state-mandated uniform price auction method, and
recommendations made for possible changes in the way the
state-chartered wholesale spot power market operates.
As the governor and state officials contemplate completely
revamping both the Cal-PX and the independent transmission grid
operator (Cal-ISO), including possible merger of the two
state-chartered, nonprofit corporations, Cal-PX will have its panel
of outside economists look at the possibility that the state
wholesale market expand into a regional entity.
A lot of the buzz ongoing in Sacramento is pointed toward an
ISO-PX merger, although the Cal-PX spokesperson said FERC does not
favor that move. Both state entities sent FERC information on why
they should not be merged, an action that is being construed as
"political" as opposed to economically motivated.
In the meantime, in little more than a week, California's two
major investor-owned utilities have made separate five-year
proposals for raising retail rates on a fixed basis to protect
customers from the volatility of the wholesale market, and one of
the utilities, Southern California Edison Co., has released a study
it commissioned by two nationally recognized utility economists
that alleges marketers and generators withheld supplies from the
California power market at crucial times last summer.
Edison released its study in Washington, D.C., as part of its
written comments to FERC in which it criticized the federal
regulators' proposed remedies to California's electricity problems
for failing to "protect California's consumers and economy from
excessive electricity prices resulting from the exercise of market
power by sellers."
Edison's CEO Stephen Frank said, "Unfortunately, we don't see
this current FERC proposal as providing any relief at all."
On the basis of two technical economic analyses - one
establishing "competitive benchmark prices" and another of
"capacity withholding" in the California wholesale power market,
economists Paul Joskow, an MIT professor from Cambridge, MA, and
Edward Kahn, a San Francisco consultant, concluded in a 34-page
report that they found "considerable empirical evidence to support
a presumption that the high prices experienced in the summer of
2000 were the product of deliberate actions on the part of
generators or marketers controlling the dispatch of generating
capacity to withhold supply and increase market prices."
They also urge FERC to dig deeper in its ongoing investigations,
noting that the federal agency "is the only entity with access to
the information necessary to conduct a thorough analysis."
Aside from the question of the market players' behavior, Joskow
and Kahn noted that the increased costs of air emission credits
played a significant role in causing wholesale prices to skyrocket,
and that an effort to accelerate the deployment of more air
emission control devices on Southern California power plants in
particularly "can help to reduce wholesale market electricity
prices very significantly."
Almost simultaneously, the California Public Utilities
Commission unanimously voted before Thanksgiving to urge FERC to
impose price caps throughout the California electricity market,
which it reiterated is "dysfunctional." The CPUC formally filed
Nov. 22 its proposals to FERC, reinforcing earlier calls for the
federal regulators to order refunds from wholesalers to
California's retail market participants.
"CPUC staff estimates that California households and businesses
were overcharged more than $4 billion in recent months as a result
of market power in wholesale electricity markets," the CPUC said in
a prepared statement following its actions. "CPUC staff also finds
evidence that power sellers have manipulated the market in efforts
to increase prices."
Richard Nemec, Los Angeles