As the Federal Energy Regulatory Commission prepared to weigh inthis morning with the federal government’s answer to California’sbe-deviled power market, free market advocates issued last minutewarnings against taking the price cap route espoused by theCal-ISO. FERC’s meeting is scheduled to start at 9 AM EST. (Check this morning for updates)

In a letter fired off to FERC Chairman James J. Hoeckeryesterday, Enron CEO Kenneth Lay urged the Commission to find a fixfor the underlying structural problems in the power market ratherthan follow the steps of policy makers who have placed “price cap’band aids’ over hemorrhaging wounds.”

Lay told Hoecker the power market is “halfway across a busystreet in its transition from monopoly to competition. It can’tstand where it is.” He said FERC has to make a choice betweenfalling into the “same trap of political expediency as California’sISO, leaving the nation’s electric system in the lurch from onecrisis to the next, [o]r it can take a big step toward fundamentalstructural reform.”

At the same time the Electric Power Supply Association (EPSA)called on FERC to issue an emergency cease and desist orderprohibiting the Cal-ISO from “unilaterally implementing” any changesto its current $250/MWh price cap for wholesale electricitypurchases. In a motion filed Monday, the marketer group specificallyasked the Commission to bar the Cal-ISO board of directors fromputting into effect its decision to impose a fiendishly complexload-differentiated price cap of $100 or less during the off-peakseason effective Nov. 3. The plan was designed by the state’s mainutility consumer group (see Daily GPI, Oct.30). In addition, the EPSA urged FERC to “state explicitly” thatthe Cal-ISO does not have the authority to impose or extend price orbid caps, unless expressly authorized to do so by the Commission. TheCal-ISO’s current authority to set price caps expires on Nov. 15.

Lay said the Cal-ISO’s complicated new formula caps prices belowthe cost of gas-fired generation, “making obvious errors such asfailing to take into account gas transportation costs between theHenry Hub and power plants in California; in doing so the bid capmakes it more economic for generators to sell their gas supply,rather than use it to make electricity in California.” The newformula also forces the ISO into the market to buy power on an adhoc basis “to keep the lights on when the capped market fails toattract sufficient supplies (which it inevitably will do),” Laysaid. In addition, the capped formula “invites generators to shutin production, export power out of state and deploy their turbinesin other states or countries.”

He noted that the ISO’s Chairman voted against the measure whileall of the state’s utilities voted for it “presumably knowing fullwell that it simply will not work.”

California is “just the latest failure of partial or compromisedopen access,” said Lay. “It’s time for the Commission to rejectthis approach.

“The power industry — the nation’s most essential industry —is mired in the transition from regulated monopoly to open accessand customer choice. Every step forward has been compromised out ofconcern for alienating one vested interest or another. As a result,utilities are free to slow the interconnection of new generation,withhold equal access to the transmission system, favor their ownsales over those of competitors, miscalculated availabletransmission capacity, and exercise control over supposedly’independent’ system operators and reliability organizations.

Lay predicted that installing price caps for politicalexpediency would “plunge markets into greater uncertainty anddiscourage new supplies and conservation methods…”

FERC has to complete the work that it started, said Lay. It hasto ensure that all parties have equal and fair access totransmission by “ending the special priority for utility uses ofthe system. Second, FERC must require transmission owners toseparate operation of the monopoly transmission assets from theirother businesses. Third, FERC must take politics out oftransmission system operations by revising governance structures toensure independence. Finally, FERC must end its reliance onshortsighted price caps by putting in place the necessary reformsto allow these markets to operate efficiently to encourageconservation and attract new supplies.”

EPSA said the Cal-ISO board “acted in obvious disregard for theCommission’s orderly processes.” It “cannot be permitted to makethe Commission’s decisions for it, or to alter so radically marketrules, thereby injecting more uncertainty and confusion in themarket and subverting the process for fashioning fair, effectiveand comprehensive remedies” for California’s “flawed” electricmarkets, the group noted.

The EPSA believes that any remedial actions taken by FERC withrespect to the California markets will be “severely compromised” ifthe Cal-ISO board’s imposition of new prices caps is allowed totake effect.

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