Separate Congressional and regulatory hearings in San Diego lastweek turned up a wide array of potential prescriptions for curingwhat ails California’s still-convalescing wholesale power market,but it also exposed the continuing federal-state head-butting.State officials mostly want to first satisfy the consumer-relatedproblems, returning to regulated rates if necessary, while FederalEnergy Regulatory Commission members don’t want to abandon theiralmost decade-long push for market-based energy industries.

The proposed cures are a combination of structural and ruleschanges, along with new actions by various market participants.California’s elected and regulatory leaders collectively indicatedthe state is headed toward a revision of its four-year-old electricindustry restructuring experiment, a return to more regulation andgreater emphasis on demand-side management in the coming year

“In California, there has been an utter lack of vision of what aderegulated market should look like,” Nymex’s Robert Levin told theFERC hearing Tuesday in San Diego, adding that his exchange cannotbe “blamed” for the malfunctioning of the state’s wholesale powermarket since at the time that it was being formed he said none ofNymex’s suggestions to state policymakers was adopted.

Levin told FERC commissioners and two members from theCalifornia Public Utilities Commission sharing the dais with thefederal regulators that California’s market has “two glaringweaknesses”: (1) no demand-response contracting provisions and (2)no risk management provisions. He urged FERC to “take the bull bythe horns and get this market deregulated properly.”

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 Carl Wood indicated privatelythat he expects a push in next year’s state legislature for acombination or elimination of the PX. In some quarters, ade-emphasis of markets and a re-emphasis on demand-side programsmay receive a lot of discussion.

“We can’t build our way out of this problem,” said state Sen.Debra Bowen, the energy committee chairperson. “Shifting from thesupply- to the demand-side emphasis is the only way to put powerback in the consumers’ hands.”

Market v. Cost-Based Rates

CPUC President Loretta Lynch, when not blaming merchantgenerators and the former Republican governor’s electricrestructuring blueprint, told federal officials that Californiamust try to re-gain what she characterized as its past No. 1 statusin the area of demand-side management. As part of a new electricitylaw signed by Gov. Gray Davis earlier this month, a “green team”has been established and that is where the governor is placing hisfocus these days, according to Sacramento sources following energyissues for large business operators in the state.

Lynch said that the “experiment” the previous CPUC asked FERC tosupport four years ago is clearly not working, so Gov. Davis’administration is now asking FERC to look for another path, but shesaid “I don’t think our respective quests are necessarilyincompatible.” She said market-based rates have not providedjust-and-reasonable rates for consumers, so “if it takes cost-basedrates to get that, I would support it.”

Lynch said that she is still hopeful the state can get to acompetitive market for electricity, but “we don’t have a path tothat end right now, and until we can design a path that gets usthere, I think our first and paramount duty is to protectconsumers.”

Outside of the formal hearings, CPUC and other representativesacknowledged that they expect state legislative proposals next yearfor either eliminating the Cal-PX or combining it with ascaled-back state-chartered nonprofit transmission grid operator(Cal-ISO). And both those two organizations, created by the 1996state electricity law, are on their own initiative looking at waysto resolve some of the “flaws” in their operations that critics arefocusing on in the midst of the summer’s pernicious electricityproblems in San Diego.

While FERC commissioners are expected to complete theirinvestigation of the California wholesale electricity market andprovide some interim relief to San Diego customers early this fall,re-inforcing what has already been done through new state laws thissummer, none of the federal regulators expressed support for theCalifornia officials’ move toward re-regulation. FERC ChairmanJames Hoecker several times indicated that some of the stateofficials appeared to be going in another direction than federalpolicy and almost two dozen other states around the nation.

“Are you contemplating pulling up the drawbridge and relying onmunicipalization, building your own baseload (power plants) anderecting some walls to interstate commerce, and ultimatelyre-regulating this market, which would defeat the goal of a viableinterstate market in the West?” Hoecker asked state electedofficials. “I think I am hearing two different messages.”

Meanwhile, back in Washington Thursday, Hoecker opened FERC’sbi-weekly meeting with a warning. “Many would like to think this isthe beginning of the end for competition in electric markets. Ireject that notion, not only as a matter of policy, but as apractical matter. We have to make some tough decisions soon. It’snot sufficient to sprinkle deregulation dust on old cost-of-serviceprinciples.” Hoecker said FERC would be working with Californiaofficials in framing its response.

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, for which it had authority to buy up to 400 MW ofpower (it has since asked state regulators to expand thatauthority).

“I regret that we did not exercise our authority (for the 400 MWin the block-forward market), said Baum, who appeared on a panel ofutility, ISO, PX and Nymex representatives in the FERC hearings.”The reason we did not is that we did not foresee the prices thatwe have seen this summer. We did not, and I think very, very fewdid. Nevertheless, we didn’t do it, I regret that because we mighthave saved our customers some money.”

A senior executive with Southern California Edison Co., HaroldRay, indicated in his testimony that “hedging alone” is not theanswer. He said Edison hedged more than 30,000 MWh, saving anestimated $415 million in wholesale power costs, but the utility is”still one billion dollars in the hole” because of the differencebetween frozen retail rates it charges customers and what it had topay for power 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.

Generator Profits Disputed

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 the market has been gamed,inferring that merchant generators have done that as they havegainedexperience in the complex system. Edison’s Ray, however,pointed out that the market power abuse often doesn’t come from thepower generators because they have sold most of their output in theforward markets, but from other middlemen – marketers. In the fiveor six ongoing state and federal investigations it is hoped somelight is shed on this situation.

Generators, including Reliant Energy and Duke Energy among them,told the FERC and Congressional hearings that they welcome theinvestigations and have done nothing wrong except make a profit ina peak-demand market with supplies very tight. The economistsheading the Cal-ISO and Cal-PX market surveillance and oversightboards, respectively, acknowledged there is market power and thatthey can pinpoint who holds the power at given times, butidentifying specific participants abusing the power is not thateasy, and may be 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 othermarket participants were intentionally trying to underminereliability, but rather doing what “every market participant doesin a competitive market — pursuing their own self-interest.”

Richard Nemec, Los Angeles

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