Aside from the political cries for regulatory actions to provideconsumer electricity rate relief, two days of federal hearingsMonday and Tuesday turned up a wide array of diagnoses andpotential prescriptions for curing what ails California’sstill-convalescing wholesale power market.
State officials mostly want to first satisfy theconsumer-related problems, while Federal Energy RegulatoryCommission members don’t want to abandon their almost decade-longpush for market-based energy industries.
The proposed cures are a combination of structural and ruleschanges, along with new actions by various market participants.
“In California, there has been an utter lack of vision of what aderegulated market should look like,” Nymex’s Robert Levine toldthe FERC hearing Tuesday in San Diego, adding that his exchangecannot be “blamed” for the malfunctioning of the state’s wholesalepower market, since at the time it was formed none of Nymex’ssuggestions to state policymakers were adopted.
Levine told FERC commissioners and two members from theCalifornia Public Utilities Commission that California’s market has”two glaring weaknesses:” (1) no demand-response contractingprovisions and (2) no risk management provisions. He urged FERC to”take the bull by the horns and get this market deregulatedproperly.”
At one point FERC Chairman James Hoecker asked the two CEOs fromthe state’s nonprofit transmission grid operator (Cal-ISO) andwholesale spot market (Cal-PX) to submit their views of the “prosand cons of combining the two organizations.” Both organizationsare looking at some self-generated internal changes, but Cal-PX CEOGeorge Sladoje said he would not favor the combination because thetwo organizations have “different missions and different people.”
Nonetheless, CPUC Commissioner Wood indicated privately that heexpects a push in next year’s state legislature for a combinationor elimination of the PX.
Over-reliance on the spot market is a major flaw, according toseveral of the economists and others testifying, and SempraEnergy’s CEO Steve Baum acknowledged that since June his company’sSan Diego Gas and Electric utility has been trying to get authorityto buy from larger markets outside of the Cal-PX, but still lacksthat authority.
“We still to this day have no more authority to deal in othermarkets in much larger volumes,” said Baum, although, in responseto questioning from Hoecker, he acknowledged that in retrospect itshould have done more hedging last spring through the Cal-PXforward market. “I regret that we did not exercise our authority(for the 400 MW in the block-forward market), said Baum, whoappeared on a panel of utility, ISO, PX and Nymex representativesin the FERC hearings. “The reason we did not is that we did notforesee the prices that we saw this summer. We did not, and I thinkvery few did. Nevertheless, we didn’t do it. I regret that becausewe might have saved our customers some money.”
A senior executive with Southern California Edison, Harold Ray,indicated in his testimony that “hedging alone” is not the answer.He said Edison hedged more than 30,000 MWh, saving an estimated$415 million in wholesale power costs, but the utility is “stillone billion dollars in the hole” because of the difference betweenfrozen retail rates it charges customers and what it had to pay forpower this summer through the Cal-PX.
Levin urged FERC (and state officials) to “start to focus onsuppliers supplying lots of customers and competing for them. Itclearly hasn’t been accomplished in California. And you might asksuppliers why they are focusing on auctioning (Cal-PX) strategiesmore than on supplying customers?”
One of the causes, Levin said, is that suppliers “have noability to rely on transmission. Thus, his other recommendation toFERC is to focus on creating “sensible, commercially usefultransmission” policy based on financial equivalents. Just providingthe financial equivalent of lost load in congestion situations”doesn’t do it,” Levine said, noting that the payments “break theconnection between the customer and the supplier.”
Aside from a seemingly endless array of proposed changes in theCal-PX and ISO operations, from schedule coordination to bidding,many California stakeholders — including the incumbentinvestor-owned utilities — allege they think the market has beengamed, inferring that merchant generators have done that as theyhave learned to operate more in the complex system. Edison’s Ray,however, points out that the market power abuse often doesn’t comefrom the power generators because they have sold most of theiroutput in the forward markets, but from other middlemen —marketers. In the five or six ongoing state and federalinvestigations it is hoped some light is shed on this situation.
Generators, including Reliant Energy and Duke Energy among them,told FERC and Congressional hearings that they welcome theinvestigations and have done nothing wrong except made a profit ina peak-demand market with supplies very tight. The economistsheading the Cal-ISO and Cal-PX market surveillance and oversightboards, respectively, acknowledge there is market power and thatthey can pinpoint who held the power at what time, but identifyingspecific participants abusing the power is not that easy, and maybe impossible, according to one economist.
“I don’t think we know which market design does the best job ofbringing the most benefits to consumers,” said Frank Wolak, aneconomist and chairman of the Cal-ISO market surveillance committeethat submitted its analysis of California’s June wholesale pricespikes Sept. 6, noting that the state’s power markets continue “tobe plagued by the market design flaws identified in previousreports” by his committee.
Wolak urged FERC to require other ISOs around the nation tocomplete reports documenting how they are “delivering benefits toconsumers.”
He noted that he did not think the generators or other marketparticipants were intentionally trying to undermine reliability,but rather doing what “every market participant does in acompetitive market — pursuing their own self-interest.”
Meanwhile, back in Washington Thursday, Hoecker opened FERC’sbi-weekly meeting saying the hearing had given the commissioners abetter understanding of plight of California citizens, and what weneed to do about it.” He pointed out the problems were complex,including the wholesale and retail markets, that are both state andfederal responsibilities.
“Many would like to think this is the beginning of the end forcompetition in electric markets. I reject that notion, not only asa matter of policy, but as a practical matter. We have to make sometough decisions soon. It’s not sufficient to sprinkle deregulationdust on old cost-of-service principles.” Hoecker said theCommission would be working with California officials in framingits response.
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