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FERC Restructures California Power Market

FERC Restructures California Power Market

Responding to a California power market gone haywire and teetering on the brink of operational and financial disaster, FERC Friday issued a series of remedial measures, virtually stripping the Cal-PX and Cal-ISO of their control of the market and calling market stakeholders together to negotiate bilateral forward contracts.

The Commission's main action, effective with the issuance of the order after the Friday afternoon meeting, removes the requirement that California utilities buy and sell exclusively through the California Power Exchange (Cal-PX) and clears the way for bi-lateral contracts in the forward market. FERC scheduled a settlement conference for Dec. 19 in Washington for parties in the state's power market to negotiate those contracts.

"California does [not] have the benefit of a competitive market," Chairman James Hoecker said, noting he had heard the state's power market called "crisis by design." The design was "an unworkable state law, the product of command and control that described in detail" exactly how the market should function. "It wasn't competition," Hoecker said. "It's time to get serious about saving the future of competitive markets..Competition did not fail in principle at either the wholesale or retail level because it was never well-conceived or tried. This version of competition was a disaster."

Commissioner William Massey defended the Commission's backing away from price caps. "Rather than cap the spot market created by the state of California, the order would simply shrink its size and diminish its influence." This will "give back participants' ability to find the right price; this ability is what California has taken away from that market." Massey said the action would allow bilateral transactions, support forward contracts, and allow the parties to manage risk. He urged the California Public Utilities Commission to "step up to its responsibilities" in supporting the FERC-directed activities.

PG&E Corp. officials lambasted the Commission's actions, saying they left California's electric customers "exposed to price gouging and future electric supply reliability uncertainty.

"The California wholesale market is broken. And we are extremely disappointed by the insufficiency of today's FERC order," PG&E officials said in a statement. "The remedies outlined in the order do not go nearly far enough to provide a solution that ensures reliability of the state's electric supply and equally importantly, provides relief from future price gouging," the Northern California utility company said. PG&E said it was particularly disappointed that FERC did not call for retroactive price refunds for California electric customers, as was requested by Gov. Gray Davis. The utility also said it was "especially troubled" that FERC shortened the timeframe for the electric price cap from the end of 2002 to April 2001, "leaving customers exposed during the high-demand summer season."

Sen. Diane Feinstein (D-CA) also blasted FERC's plan. "The action unacceptable," she said. "Rome is burning, our utilities are close to bankruptcy, Californians are facing major blackouts and the Commission is fiddling.

"It is clear to me that FERC is either too timid, too weak or too uninspired to do what is necessary in this crisis, which is to regulate the prices until a stable market can be developed."

Hoecker acknowledged pleas for regional price caps, but he said FERC is severely limited in what it can do. For one, it lacks authority over the Bonneville Power Administration and other federal operations there, which make up a major portion of the market. Further, there is no Northwest spot market that can be capped in the way caps operate in California. There also would be problems with the many purchasers who already had hedged or protected themselves in some way. Hoecker strongly urged Energy Secretary Bill Richardson to convene a conference to try to identify regional problems, and offered his help in this.

Commissioners Curt Hebert and Massey said they would issue concurring opinions. Hoecker said he will submit a concurring opinion this week on items such as RTOs that are beyond the scope of the order. The Commission's actions, which went beyond recommendations it had made earlier (see NGI, Nov. 6), came at an emergency meeting following a week of continuous power alerts and emergency measures to avoid rolling blackouts in the state. (see related report)

The Commission's reforms call for:

No retroactive refunds for California customers;

Elimination of the requirement that California's three investor-owned utilities --- Pacific Gas and Electric, San Diego Gas and Electric and Southern California Edison --- sell all of their power into the Cal-PX, and buy all of their power from the Cal-PX. This took effect Friday and is expected to free up 40,000 MW of generation from the spot market;

Return 25,000 MW of generation to state regulation;

Termination of the Cal-PX wholesale rate schedule effective the close of the trading day on April 30, 2001;

Create a benchmark price for wholesale bilateral contracts to assess prices of five-year energy supply contracts;

Create penalties for underscheduling power loads;

A requirement that market participants schedule 95% of their load prior to real time. Violators will incur penalties for scheduling deviations exceeding the greater of 10 MW or 5% of their hourly load;

Begin market monitoring and price mitigation for the Cal-ISO and PX spot markets. FERC will hold a technical conference to develop a monitoring an mitigation program. A proposed plan is to be submitted by March 1 so that the measure can be in place by May 1;

A single-priced auction to be used only for bids at or below $150/MW. Bids above $150/MW will not set the market clearing price, although they will be subject to FERC reporting requirements;

Replacing the current Cal-ISO stakeholder governing board with a non-stakeholder board. On Jan. 29, 2001, the Cal-ISO governing board members will be required to turn over their decision-making power and operating control to the management of the Cal-ISO. The members will be permitted to function in an advisory capacity until the new board is selected. FERC to discuss with California representatives a process for selecting new Cal-ISO board members; and

Modify interconnection procedures. The ISO and utilities must file generation interconnection procedures.

Susan Parker, Ellen Beswick, Rocco Canonica

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