Although he praised FERC as a “fine group of people,” CaliforniaGov. Gray Davis last week made very clear that he doesn’t like whatthat group has prescribed to mend his state’s seriously flawed bulkpower market. Power executives and state market officials said theyfavored the general direction in which the Commission seemed to beheaded, but they had problems with specific proposed reforms aswell.

“You agree with us that California has a problem.but you are notwilling to do anything about it. Moreover, what you are prepared todo further reduces California’s ability to solve its problems,” thegovernor said at a hearing Thursday during which state and industryofficials responded to FERC’s proposed remedies for California’swholesale electric market (see NGI, Nov. 6).

Although FERC concluded that customers in California werecharged “unjust and unreasonable” prices for electricity during thesummer, “I was greatly disappointed and perplexed that theCommission did not take the next logical step and order refunds tocustomers,” Davis noted.

He said he supported the need to restructure the existingstakeholder boards of the California Independent System Operator(Cal-ISO) and California Power Exchange (Cal-PX), replacing themwith independent boards. But the governor argued that the actualreshaping of the boards was up to the state, not FERC.

As for the Commission’s market remedies, Davis called them”untried, experimental” proposals that would make “guinea pigs” ofCalifornia’s customers for years to come. On top of this, FERC hasstripped the state of the protection of any real wholesale pricecaps, he said.

Several state energy market officials and electric companyexecutives called on FERC to initiate reforms in California “assoon as possible,” rather than waiting two or three months. At thesame time, however, they were critical of a number of theCommission’s proposed reforms and suggested potential alternatives,which could push back the timetable for implementing market fixesin California.

At the hearing, state and company officials mostly citedconcerns with three issues: the proposed “soft” $150/MWh price capon power sales into the California bulk electric market; the lackof retroactive refunds and the potential for future refunds; andwho has the jurisdiction – FERC or the state – to determine themake-up of a new, independent Cal-ISO board.

Williams Energy Marketing & Trading believes FERC has takenan “excellent step in the right direction” by encouragingCalifornia utilities to shift their focus from the spot market toforward energy markets, said President William E. Hobbs, but it isopposed to price caps “in any form.” If FERC persists with itsproposal for a “soft” $150/MWh price cap, it should be “trulytemporary in nature,” he noted.

The Commission has called the $150/MWh benchmark a “soft” capbecause power suppliers still would be able to sell above the cap,although such sales would have to be reported to FERC. But severalat the hearing said they feared it would evolve into a “hard” cap,restricting power transactions above $150/MWh. They argued theprice restraint would dampen interest in siting and construction ofmuch-needed generation capacity in the state, and would make itdifficult for existing generators in California to recover theirfixed costs.

“I think most in the generation community believe that the softcap is, in fact, a hard cap,” said Jan Smutny-Jones, chairman ofthe board of the Cal-ISO. He urged FERC to hold a “very specific”technical conference to address the issue.

Keith R. McCrea, attorney for the California Manufacturers andTechnology Association, said his group supported an as-bid auctionrather than a price cap. “We are concerned that even if $150 is thecorrect number now, it’s almost guaranteed that it will beincorrect down the road a year or so.”

Chairman James Hoecker was caught somewhat off-guard by thefocus on the $150/MWh bid cap at the hearing. He stressed the$150/MWh threshold wasn’t a “hard” cap, but rather it was simplyone of a “variety of measures” that was intended to reduce thestress in the real-time markets. He said the “most importantremedy” was the proposal requiring California’s threeinvestor-owned utilities to transact more of their business in theforward markets.

California utilities told FERC that its decision not to provideCalifornia electric consumers with retroactive refunds was hasty.”We think until there’s further investigation, it’s premature toanswer that question. We don’t think that any option, includingretroactive refunds, should be rejected at this point,” said DedeHapner, vice president of regulatory affairs for Pacific Gas andElectric (PG&E).

On the flip side, marketers were worried by FERC’s decision tomake power sales into California subject to potential refunds overthe next two years. Williams Energy’s Hobbs asked the Commission toclarify what it meant by the subject-to-refund language in itsrecent order. He further proposed that the refund obligation not beattached to sales below the $150/MWh threshold, and that FERCquickly review transactions greater than $150/MWh.

Without this action, he believes it would breed furtheruncertainty in the market. “We believe this uncertainty will driveliquidity in the forward markets, which is exactly what FERC istrying to avoid,” Hobbs said.

This continuing threat of refunds for marketers, combined withthe price cap proposal, could “undermine” the Commission’s otherreforms intended for the California power markets, warned Steven J.Kean, executive vice president of Enron Corp. It already has begunto discourage construction of new peaking facilities, he said.

Nearly everyone at the hearing agreed it was time to bury thestakeholder board of the Cal-ISO, and replace it with anindependent body. But the debate now has centered on who should dothis – the state or FERC, or both.

“I think it will probably invite litigation” if the Commissionwere to reshape the ISO stakeholder board to the exclusion of thestate, said Michael P. Florio, senior staff attorney for TheUtility Reform Network (TURN) in California. He noted the ISO boardwas in the awkward position of having “two masters,” FERC and thestate.

Terry Winter, president and CEO of the Cal-ISO, suggested thatthe California Electricity Oversight Board (EOB) and FERC eachshould have a role in picking new members for the Cal-ISOindependent board. If the Commission doesn’t involve the state, hewarned there’s “going to be resistance.”

Energy suppliers also had a problem with FERC’s proposal toimpose a penalty charge on sellers that schedule more than 5% oftheir hourly load requirements in real-time markets. TURN’s Floriosuggested that the penalty apply equally to both sellers and buyersto discourage them from relying on real-time markets. Subjectingonly one group to the penalty would be like putting a “thumb on thescale” in the market, he said.

Another market participant suggested that the 5% figure appearedto be “quite arbitrary,” and recommended that the Commissionconsider a “wider band because there’s always going to be somereason for an imbalance.”

Susan Parker

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