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

As envisioned by SoCal Edison, the proposed market monitorswould not be part of the Federal Energy Regulatory Commission, butthey would be subject to its oversight, said Gary A Stern, managerof market monitoring & analysis for the Rosemead, CA-basedutility.

SoCal Edison originally conceived the idea for an agency to onlyoversee the out-of-control wholesale electricity market inCalifornia, but Stern told NGI he now believes a similar monitor onthe gas side “might make sense,” given the steep rise in naturalgas prices in the state over the past months. “California customersare being harmed by high gas prices” that may be due to causesother than those associated with supply/demand problems, he said.

The utility offered the proposals for market-monitoring agenciesas an alternative to its preferred course of action: FERCre-imposing cost-based rates on sales of electricity in California.

Stern stressed the monitoring agencies should be independent ofthe California Independent System Operator (Cal-ISO) and theCalifornia Power Exchange (Cal-PX), and should have reportingresponsibility to FERC. He believes both the Cal-ISO and Cal-PXwould have a conflict of interest in monitoring the market. TheCal-ISO would likely be “reluctant to penalize sources ofreliability – generation,” while the Cal-PX would be “reluctant tosanction/identify abuses by influential participants.”Sternfurther said it would be “difficult” for FERC to handle this taskalone.

At a staff technical conference at FERC yesterday, 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 said a number of otherfactors — capacity value, opportunity costs, scarcity value andrisk — must be analyzed before it can be determined if any abusehas occurred.

SoCal Edison said it believes an 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, an agency should monitor: the ownership of gastransportation; prices at the source of production, and the priceof gas delivered to California; ownership of gas storage; and amarket participant’s specific use of natural gas storage.

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