Edison Favors Monitoring Agencies for Power, Gas in CA

The near-bankrupt Southern California Edison last week called for the formation of an independent agency or agencies that would monitor and punish market-power abusers in the state's bulk power and natural markets.

As envisioned by SoCal Edison, the proposed monitors would not be part of the Federal Energy Regulatory Commission, but they would be subject to its oversight, said Gary A Stern, manager of market monitoring & analysis for the Rosemead, CA-based utility.

SoCal Edison originally conceived the idea for an agency to only oversee the tumultuous wholesale electricity market in California, but Stern told NGI he now believes a similar monitor on the gas side "might make sense," given the steep rise in natural gas prices in the state over the past months. "California customers are being harmed by high gas prices" that may be due to causes other than those associated with supply/demand problems, he said.

The utility offered the proposals for market monitors as an alternative to its preferred course of action: FERC re-imposing cost-based rates on sales of electricity in California.

Stern stressed the monitors should be independent of the California Independent System Operator (Cal-ISO) and the California Power Exchange (Cal-PX), and should report to FERC. He believes both the Cal-ISO and Cal-PX would have a conflict of interest in monitoring the market. The Cal-ISO would likely be "reluctant to penalize sources of reliability - generation," while the Cal-PX would be "reluctant to sanction/identify abuses by influential participants." Stern further said it would be "difficult" for FERC to handle this task alone.

At a staff technical conference at FERC last Tuesday, Stern and representatives of the Cal-ISO and power generators serving California offered proposals for monitoring and mitigating abuses in the market. The Commission staff expects to develop a draft plan by March 1, with FERC due to finalize it by May 1.

Stern stood alone Tuesday in his belief that monitors should have the authority to impose penalties against abusers in the power and natural gas markets. "Such penalties should not only retract any profits derived from the abuse, but should be sufficiently large to deter future abuses."

A Department of Justice (DOJ) official cautioned FERC not to impose penalties against suppliers that exercise market power, saying such action would only distort the pricing signals in the market. "I don't think it's a good idea to uncover [incidences] of market power and then impose fines," he said, adding this would have a "chilling effect" on the pricing of power. He believes a better course of action than SoCal Edison's "interventionist" approach would be to impose "hard price caps," although this wouldn't be a long-term solution.

Craig R. Roach, who represented the Electric Power Supply Association (EPSA), believes that any enforcement of market-power abuses should rest with either FERC or the DOJ. Furthermore, while SoCal Edison's Stern believes that power bids that exceed the "actual variable cost of production" should be considered an abuse of market power and thus mitigated, Roach thinks a number of other factors - capacity value, opportunity costs, scarcity value and risk - must be analyzed before it can be determined if any abuse has occurred.

Reliant Energy agrees that only FERC should be able to take remedial action against market-power abusers. Under the company's proposal, a market monitor would report incidents of alleged market abuses to an RTO/ISO board, which would decide whether the misconduct actually occurred. The matter then would be referred to FERC to take the appropriate action.

SoCal Edison believes the agency monitoring California's wholesale electricity market should have vast powers. It "must have the authority to monitor and investigate all operational and bid data, to monitor the amount of MWs controlled by parties through bilateral contracts, the authority to mitigate potential abuses prior to running markets, the authority to penalize parties that have abused the market, and the authority to change market rules and, when appropriate, authority to rerun markets or re-calculate prices."

Presently, market monitors in California "have scant authority to do anything but observe abuses and suggest remedies," Stern noted. "This is wholly insufficient to deter, prevent or mitigate abuses. The future monitoring and enforcement agency must have the ability to mitigate bids before markets are run."

A market-monitoring agency should be focused on the delivered cost of wholesale electricity, as well as all factors that "immeasurably" impact the market, Stern said. "Factors include the cost at which electricity is sold to the wholesale market, the cost [of] transportation for electricity, the costs of variable inputs for marginal generation (in California this is typically burner-tip gas prices), and other variable costs (such as emission credits."

On the gas side, he believes an agency should monitor the ownership of gas transportation; prices at the source of production, and the price of gas delivered to California; ownership of gas storage; and a market participant's specific use of gas storage.

Susan Parker

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