Although stability has returned to California’s electricity markets, those markets face many remaining challenges that, if not handled correctly, could easily throw the state and the broader interconnected Western grid into renewed chaos, the California Independent System Operator (Cal-ISO) recently told FERC.

“As tempting as it may be, having come through a season of peak demand with reliability intact and prices showing signs of moderation, to leap to conclusions of success that, unfortunately, would be premature,” the grid operator told the Commission in a status report submitted on Sept. 28.

Cal-ISO said that the success of this summer was the result of a combination of factors, including moderate weather conditions, an economic downturn particularly affecting sectors that are traditionally electricity-sensitive and the “unprecedented response” of consumers to calls for conservation.

“It would be a most serious mistake were the avoidance of catastrophe this summer to lull us into a state of complacency, to lead us to the conclusion that the boat now is sufficiently stable that we again can risk it being rocked,” the ISO went on to say. “Progress has been made, but the crisis is far from over.”

The grid operator noted that the PG&E bankruptcy has entered a critical phase with the filing by the company of a “controversial and revolutionary” reorganization plan. Also, the financial plight of California’s second largest utility, Southern California Edison, remains in doubt.

A memorandum of understanding designed to help assure recovery has been negotiated by Gov. Gray Davis, but whether it will be allowed to take shape is yet uncertain, Cal-ISO said. “If it cannot be implemented, or if it is implemented in a way that falls short of restoring financial stability, a second bankruptcy could prove inevitable.”

The ISO said that over the next 60 to 90 days, much will become clearer. “We should know whether the bankruptcy of the second largest utility has been averted,” Cal-ISO said. Also, more light may be shed during that timeframe on the likely future ownership of major transmission assets.

Cal-ISO told FERC that it is willing to consider anew fundamental issues of market structure and of the grid operator’s governance. The ISO said its board stands ready to participate in any dialogue that the Commission may want to initiate, “and to do so without any preconceptions or preconditions, save for the reality that the state of California has legitimate interests that must be heard.”

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