The near-bankrupt Southern California Edison last week calledfor the formation of an independent agency or agencies that wouldmonitor and punish market-power abusers in the state’s bulk powerand natural markets.

As envisioned by SoCal Edison, the proposed monitors would notbe part of the Federal Energy Regulatory Commission, but they wouldbe subject to its oversight, said Gary A Stern, manager of marketmonitoring & analysis for the Rosemead, CA-based utility.

SoCal Edison originally conceived the idea for an agency to onlyoversee the tumultuous wholesale electricity market in California,but Stern told NGI he now believes a similar monitor on the gasside “might make sense,” given the steep rise in natural gas pricesin the state over the past months. “California customers are beingharmed by high gas prices” that may be due to causes other thanthose associated with supply/demand problems, he said.

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

Stern stressed the monitors should be independent of theCalifornia Independent System Operator (Cal-ISO) and the CaliforniaPower Exchange (Cal-PX), and should report to FERC. He believesboth the Cal-ISO and Cal-PX would have a conflict of interest inmonitoring the market. The Cal-ISO would likely be “reluctant topenalize sources of reliability – generation,” while the Cal-PXwould be “reluctant to sanction/identify abuses by influentialparticipants.”Stern further said it would be “difficult” for FERCto handle this task alone.

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

Stern stood alone Tuesday in his belief that monitors shouldhave the authority to impose penalties against abusers in the powerand natural gas markets. “Such penalties should not only retractany profits derived from the abuse, but should be sufficientlylarge to deter future abuses.”

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

Craig R. Roach, who represented the Electric Power SupplyAssociation (EPSA), believes that any enforcement of market-powerabuses should rest with either FERC or the DOJ. Furthermore, whileSoCal Edison’s Stern believes that power bids that exceed the”actual variable cost of production” should be considered an abuseof market power and thus mitigated, Roach thinks a number of otherfactors – capacity value, opportunity costs, scarcity value andrisk – must be analyzed before it can be determined if any abusehas occurred.

Reliant Energy agrees that only FERC should be able to takeremedial action against market-power abusers. Under the company’sproposal, a market monitor would report incidents of alleged marketabuses to an RTO/ISO board, which would decide whether themisconduct actually occurred. The matter then would be referred toFERC to take the appropriate action.

SoCal Edison believes the agency monitoring California’swholesale electricity market should have vast powers. It “must havethe authority to monitor and investigate all operational and biddata, to monitor the amount of MWs controlled by parties throughbilateral contracts, the authority to mitigate potential abusesprior to running markets, the authority to penalize parties thathave abused the market, and the authority to change market rulesand, when appropriate, authority to rerun markets or re-calculateprices.”

Presently, market monitors in California “have scant authorityto do anything but observe abuses and suggest remedies,” Sternnoted. “This is wholly insufficient to deter, prevent or mitigateabuses. The future monitoring and enforcement agency must have theability to mitigate bids before markets are run.”

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

On the gas side, he believes an agency should monitor theownership of gas transportation; prices at the source ofproduction, and the price of gas delivered to California; ownershipof gas storage; and a market participant’s specific use of gasstorage.

Susan Parker

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