Based on the results of its much-anticipated investigation, FERCyesterday found that the market rules and structure for wholesalesales of electricity in California are “seriously flawed,” and thatthey — along with the imbalance in supply and demand — havecaused and will continue to cause “unjust and unreasonable” ratesfor short-term services in markets operated by the CaliforniaIndependent System Operator (Cal-ISO) and California Power Exchange(Cal-PX).

The bad news for California consumers, however, was that theCommission didn’t find any evidence that specific power suppliersacted illegally or exercised their market power to cause thedoubling and tripling of electric prices this summer. A Cal-PXreport released Wednesday came to the same conclusion. Adding totheir chagrin, FERC said it was prevented under federal law fromordering retroactive refund relief for the state’s customers thatwere hit hardest by the escalating prices, such as those in SanDiego, but would consider refunds going forward.

“We were pleased what FERC said about refunds on one level, andthen concerned on another,” said Tom Williams, a spokesman for DukeEnergy in California. “They said they won’t do retroactive refundson this past summer until the end of September, but we think theyleft the door open for refunds going forward after October…We’regoing to read the fine print on that one and give appropriatecomments.”

California Gov. Gray Davis was mum on FERC’s action yesterday,saying he was waiting for more details before he commented on it.Davis still would like to press for some form of refunds to SanDiego customers, an aide said.

The state’s utility consumer watchdog group, TURN, said thestate’s consumers have now “lost hope” after the long-awaited FERCreport “failed to address the central problem of unreasonably highprices for electricity.”

Many expected two things from yesterday’s order — “first, theyexpected a lynching [of power suppliers], and then they expectedthe transfer of large amounts of money,” said Chairman JamesHoecker. “…I know that ideally some people would want us to roundup the bad guys who manipulated this market,” but “as our staffreport concludes, it’s not as simple as all that.”

If he had experienced the price hikes that Californians did thissummer, Hoecker noted he’d want a refund as well. “Hell, I’d wantmy money back or at least some assurances that this big anonymousthing called a market couldn’t pilfer my finances again in thefuture.” However, “our ability to refund excessive ratesretroactively ultimately rests with the Congress,” he said.

“All this does not mean that perhaps some form of equitablerelief for San Diego is…impossible,” Hoecker noted. “I’d stilllike to be open to that, although I think it’s a tough climb to getto that point.” He did not expand on what he meant by “equitablerelief.”

The order, however, does provide for prospective refund relief.Purchasers could be entitled to refunds for any “unjust andunreasonable” wholesale energy prices they may be charged over thenext 24 months, Commissioner William Massey said. The refundobligation would apply to the Cal-PX’s day-of market and to theCal-ISO’s ancillary services and real-time energy balancingmarkets, according to FERC staff.

By 4-0, the Commission at a special meeting Wednesday voted outthe order that proposes a series of short-term and long-termremedial measures to overhaul the structure and rules forCalifornia’s bulk power markets. The immediate fixes would be putinto effect within 60 or 90 days, while the longer term proposalscould take up to two years to enact. FERC will hear oral commentson its proposals at a hearing next Thursday in Washington D.C.,which will be followed by three weeks of written comments byindustry. It expects to take a final vote on the proposed remediesin December.

At the top of its list of immediate market fixes, the Commissionproposes to eliminate the requirement that the three Californiainvestor-owned utilities — San Diego Gas and Electric, SouthernCalifornia Edison and Pacific Gas and Electric — sell all oftheir generation into and purchase all of their power needs fromthe Cal-PX [EL00-95 et al]. FERC believes this measure will help toincrease the market participants’ reliance on forward energymarkets as opposed to the spot markets.

The state-chartered wholesale spot market, the Cal-PX, whoseboard and structure FERC suggests revamping, “welcomed much of theFERC proposal,” said George Sladoje, Cal-PX CEO. The federalagency’s action was “helpful in highlighting the multitude ofmarket structural and fundamental events” causing the power pricespikes in California and throughout the West this past summer.

With respect to the proposal to nix the Cal-PX buy-sellrequirement for California IOUs, Sladoje said the move “isconsistent with independent governance, market and regulatoryflexibility” that he and other Cal-PX officials had anticipated.

FERC also proposed that market participants be required toschedule 95% of their power transactions in the (forward) day-aheadmarkets in order to reduce the “chronic underscheduling” of loadand generation, as well as the over-reliance on the Cal-ISO’sreal-time imbalance market to meet supply. FERC said it will seek apenalty charge for scheduling deviations in excess of 5% of hourlyload requirements.

In its order, the Commission attempts to “rightly focusattention on forward contracts” to hedge the volatility in theCal-ISO and Cal-PX spot markets, Massey noted. The dependence ofthe California utilities on the spot market is why consumers there”suffered” so much this summer, he said.

While he shared FERC’s “enthusiasm for risk management andforward contracting,” Commissioner Curt Hebert Jr. said he drew theline at “dictating to market participants precisely how much oftheir transactions to schedule in forward markets and how much toschedule in real-time markets.” Market participants, he noted,shouldn’t be “locked into particular allocation methods.”

The Commission also seeks to impose a “soft” $150/MWh priceceiling on power sales into the Cal-ISO and Cal-PX for the next 24months. Under such a ceiling, sellers could still bid above$150/MWh, but such bids would not be permitted to set themarket-clearing price in the California energy markets. Also,sellers bidding above $150/MWh would be required to report suchtransactions each week to FERC, according to the order. The Cal-ISOand Cal-PX would have to submit monthly reports on such bids aswell. This proposed cap would go into effect at the beginning of2001, a staffer said, adding that the Commission set it at thatlevel because “we felt it was a fair breaking point.”

Hebert opposed lowering the “de facto” price cap from thecurrent $250/MWh — a level that he says already has stymiedinvestment in generation and transmission facilities in California.As for the host of price-cap requests that have been filed at FERC,the Commission rejected raising the cap to $350/MWh, extended theeffectiveness of the Cal-ISO’s current $250/MWh purchase cap forancillary services and imbalance energy for 60 days after the dateof the order, and continued the Cal-ISO’s authority to adjust itsbuyer caps, a staff member said.

The Commission further proposed abolishing the currentstakeholder governing boards for the Cal-ISO and Cal-PX, andreplacing them with seven-member independent boards effective 90days after the date of the order. In the order, FERC indicated ithad concerns about the “independence and effectiveness” of theexisting two boards. Also, it noted there was no longer any reasonfor a stakeholder body to govern the Cal-PX, given that FERC wasseeking to abolish the requirement for California IOUs to sell intoand buy from the Cal-PX.

Hebert took issue with the Commission majority’s attempt torestructure the two governing boards, saying this was a matter tobe addressed by the Cal-ISO and Cal-PX, and could lead to a”constitutional showdown” between California and FERC.

Among its other proposals, FERC seeks to establish generationinterconnection procedures for the market; submit a proposal forcongestion management design; explore alternatives to thesingle-price auction by the Cal-ISO and Cal-PX; and further refinemarket rules to ensure the availability of sufficient supply tomeet load and reserve requirements.

But FERC acknowledged it also will need the help of Californiapolicymakers in several areas – specifically in adding newgeneration and transmission capacity in the state; implementingdemand-response programs; assuring sufficient reserve requirements;and allowing load-serving entities to pursue power supplies on amore forward basis.

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