Showing a carrot, but keeping a “stick” in reserve, CaliforniaGov. Gray Davis Friday outlined for federal regulators steps hewill pursue to fix the state’s ailing wholesale electricity market,stopping short of proposing a state takeover but hinting he will gofurther if federal measures fall short.

Davis outlined California’s proposals in a six-page letter toFERC Chairman James Hoecker that was released to news media.Nothing new was included that the governor and other Californianshad not already suggested to FERC during its public hearings in SanDiego 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 spikedprices from last summer and take steps to protect against similarspikes next year with price caps, the governor hinted he wouldfollow the lead of some elected, regulatory and consumer officialsin the state and move to establish a state government-run powersystem. The governor’s action came as in-state and nationalconsumer groups were calling for re-regulation because of spikingprices and brown-outs (see related story, this issue).

The strict clamp-down on energy companies, proposed by theDemocratic governor, were backed by the Energy Department inWashington, which proposed a tougher wholesale bid cap, rather thanthe soft cap proposed by FERC, and extending the cap throughout theWest.

The Federal Trade Commission, however, basically backed FERC’sapproach (see NGI, Nov. 6), adding the Commission should providemore concrete advice on how best to configure the organization thatwill operate and control the transmission grid in the state. In itscomments filed last week, the FTC said FERC should considercreating a benchmark or a baseline of characteristics andoperations for regional transmission organizations that can be usedas a starting point as part of its revisions to California’swholesale electric power market rules and institutions. Inaddition, the comments suggest refinements to FERC’s proposedremedies to ensure that market power is not exercised in wholesaleelectric 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 callingfor eliminating stakeholder board members who he said have”inherent conflicts of interest”; (b) expanding current laws andother efforts to enhance the siting of new generating plants,demand-side management programs, and utility forward contractingfor power supplies; (c) reviewing new approaches to power plantmaintenance and operation to avoid problems that create in-statepower shortages, (d) requiring utilities to retain their existinggeneration plants (hydro-electric and nuclear); and (e) providingmore “real-time price signals” to large energy users to reducetheir energy use.

Once again, Davis used the FERC forum to reiterate that no newpower plants were built over the past decade and especially beforehe took office in January 1999, but since then six plants totaling4,700-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 intensepolitical and regulatory focus during the first two weeks ofDecember, California electricity proposals last week were flowingfreer than movie scripts and dot.com start-up business plans – allanticipating the governor’s state plan and the subsequent finalFERC decision by Dec. 13 for stabilizing California’s powermarkets. Gov. Davis indicated in his news release summarizing hisletter that he will “continue to meet with legislative leaders,consumer groups and other interested parties to discuss additionaloptions.”

Among the deluge of recent press releases out of California wereones alleging independent proof of market manipulation last summer,promoting utility rate increases to stabilize future retail powerrates, commitments by merchant generators to keep investing in newplants and an eleventh-hour proposal to hedge San Diego’s entire3,300-MW peak-load power requirements.

A spokesperson for Davis last week said the governor conducted aseries of meetings with major stakeholders, including thegenerators and marketers, who Davis has repeatedly criticized for”price-gouging” and “marketeering,” if not illegally abusing theirmarket power.

Another state energy official said FERC sources are indicatingthat its Nov. 1 proposed order is going to “stay pretty muchintact,” 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 ofits current state-mandated uniform price auction method, andrecommendations made for possible changes in the way thestate-chartered wholesale spot power market operates.

As the governor and state officials contemplate completelyrevamping both the Cal-PX and the independent transmission gridoperator (Cal-ISO), including possible merger of the twostate-chartered, nonprofit corporations, Cal-PX will have its panelof outside economists look at the possibility that the statewholesale market expand into a regional entity.

A lot of the buzz ongoing in Sacramento is pointed toward anISO-PX merger, although the Cal-PX spokesperson said FERC does notfavor that move. Both state entities sent FERC information on whythey 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 twomajor investor-owned utilities have made separate five-yearproposals for raising retail rates on a fixed basis to protectcustomers from the volatility of the wholesale market, and one ofthe utilities, Southern California Edison Co., has released a studyit commissioned by two nationally recognized utility economiststhat alleges marketers and generators withheld supplies from theCalifornia power market at crucial times last summer.

Edison released its study in Washington, D.C., as part of itswritten comments to FERC in which it criticized the federalregulators’ proposed remedies to California’s electricity problemsfor failing to “protect California’s consumers and economy fromexcessive electricity prices resulting from the exercise of marketpower by sellers.”

Edison’s CEO Stephen Frank said, “Unfortunately, we don’t seethis current FERC proposal as providing any relief at all.”

On the basis of two technical economic analyses – oneestablishing “competitive benchmark prices” and another of”capacity withholding” in the California wholesale power market,economists Paul Joskow, an MIT professor from Cambridge, MA, andEdward Kahn, a San Francisco consultant, concluded in a 34-pagereport that they found “considerable empirical evidence to supporta presumption that the high prices experienced in the summer of2000 were the product of deliberate actions on the part ofgenerators or marketers controlling the dispatch of generatingcapacity 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 tothe information necessary to conduct a thorough analysis.”

Aside from the question of the market players’ behavior, Joskowand Kahn noted that the increased costs of air emission creditsplayed a significant role in causing wholesale prices to skyrocket,and that an effort to accelerate the deployment of more airemission control devices on Southern California power plants inparticularly “can help to reduce wholesale market electricityprices very significantly.”

Almost simultaneously, the California Public UtilitiesCommission unanimously voted before Thanksgiving to urge FERC toimpose price caps throughout the California electricity market,which it reiterated is “dysfunctional.” The CPUC formally filedNov. 22 its proposals to FERC, reinforcing earlier calls for thefederal regulators to order refunds from wholesalers toCalifornia’s retail market participants.

“CPUC staff estimates that California households and businesseswere overcharged more than $4 billion in recent months as a resultof market power in wholesale electricity markets,” the CPUC said ina prepared statement following its actions. “CPUC staff also findsevidence that power sellers have manipulated the market in effortsto increase prices.”

Richard Nemec, Los Angeles

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