Cal-PX Won't Go Quietly Despite Lawsuits, FERC Flak, Chapter 11
Regardless of what state and federal officials would prefer, California's now-Chapter 11-bound former wholesale spot power market, the California Power Exchange (Cal-PX) is not going quietly. The PX perfers to fight to re-attain former utility futures contracts seized by the governor and to support the viability of electricity commodity exchanges if regulators and politicians will make a commitment to make them work.
In an interview laced with some regret and bitterness, Cal-PX's CEO George Sladoje showed offers for five-year futures contracts available to California's three major investor-owned utilities last summer through early fall that were at $10 to $20/MWh cheaper than what the state has now negotiated.
"The utilities never responded," Sladoje said. "They absolutely refused. They could have come back with lower prices even to see what would happen. They never even did that. The CPUC (California Public Utilities Commission) hadn't given them reasonableness reviews beyond March of 2002. I'm saying they should have taken a chance and done a few of these, but they didn't."
An offshoot of a running battle the exchange has had with FERC related to the Cal-PX implementing the so-called "soft" $250 and $150/MWh price caps is potential additional refunds the federal regulators would have to order from generators related to the January transactions. Cal-PX has suggested several methodologies for the essentially closed exchange to recalculate some of its past charges.
"The methodology we have recommended gives various alternatives," Sladoje said. "FERC is going to pick one, and it is going to result in millions of more dollars refunded for January."
He said that the Cal-PX still holds the collateral of its 70-odd participants in the form of letters of credit and bonds worth hundreds of millions of dollars even as the state-chartered nonprofit exchange made a Chapter 11 bankruptcy filing March 9. Chapter 11 was prompted by the preponderance of litigation and federal regulatory actions pending, Sladoje said.
Cal-PX is still providing its regular settlement services, so most of its remaining employees have something to do with billings or with the myriad of regulatory and legal data requests that are an ongoing chore. All the marketing, trading, scheduling and more computer people have been let go, Sladoje said.
In hindsight, the "beginning of the end" for the Cal-PX came last July when the Federal Energy Regulatory Commission (FERC) lowered the price caps from $750/MWh, said Sladoje, at the power exchange's Pasadena offices where staff has dwindled to around 40 from a peak of 200. Because of the pending court and FERC cases, Sladoje said he expected to be working at least through May. (FERC-authorized tariffs run out April 30.)
Among the many unfinished pieces of business facing Cal-PX is its continuing attempt to get back the two major California private-sector utilities' defaulted bock forward contracts from the governor, who seized them in actions Feb. 2 and 5 to preserve below-market supplies for California consumers. Cal-PX estimates the value of the contracts in today's market at nearly $1.5 billion.
"The fact of the matter is that the utilities last year didn't do very much with the forward market," Sladoje said. "Now it is ironic that the biggest asset they have for 2001 is the forward contracts they bought last year. Everyone is fighting over them now. The governor has commandeered them, and the sellers are trying to weasel out of them.
"We sent a bill to the governor's office for a little over a billion dollars the day after they were commandeered. This week we are applying to the state board of control in a formal application and it now comes out to close to a billion-and-a-half dollars."
Ironically before "all hell broke loose" last summer in California's wholesale power market, the Cal-PX was close to getting some local traders interested in its future market, said Sladoje, a former executive with the Chicago Board of Trade, who noted that the lack of local individual traders was one of the shortcomings the Cal-PX couldn't overcome, and it will be tough, he said, for the privately financed Automated Power Exchange (APX) in Santa Clara, CA, or another electricity exchange to overcome this.
The model should be the Nymex natural gas and petroleum exchanges, both of which, Sladoje said, have managed to get local traders involved. And "efficient, smooth-running" commodity exchange has between 50 and 70% of its volume down by individuals --- not commercial and trading professionals.
Before its demise when FERC Dec. 15 ordered the end of mandatory trading in the Cal-PX and a ban against California's investor-owned utilities even selling through the nonprofit exchange, Sladoje's power exchange had agreed to open new exchanges in New England and Alberta, Canada, both of which have now been set aside for the time being.
Aside for California's well-documented supply, frozen retail rates, transmission congestion and natural gas price spikes, Sladoje said there are four more important, but less recognized reasons for why the state's electricity restructuring failed:
The two (PG&E and SoCal Edison) largest utilities' size was too disproportionally large relative to the total marketplace.
Those two, along with San Diego Gas and Electric Co., were unprepared for deregulation, totally unable to push forward contracting until it was too late.
State regulators, legislators and utilities distrusted market solutions; and
FERC, despite its commissioners' contention, has not been market-oriented either.
"The jury is still out on FERC," Sladoje said. "It ordered us to shut down, and it never wanted us running a day-ahead market, and they put this 'soft cap' on us (and the Cal-IS0), the only place in the country. And then, FERC turns around last Friday and orders refunds based on costs. I don't think it is very market oriented.
"In all my years at the Chicago Board of Trade and the Chicago Stock Exchange, I never once saw a transaction on the floor when I saw a buyer run across the pit and say 'before I buy this contract I have to know what you paid for it'."
Richard Nemec, Los Angeles
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