With various energy players attempting to seize the moment ofintense political and regulatory focus during the first two weeksof December, California electricity proposals are flowing freerthan movie scripts and dot.com start-up business plans are allanticipating the impending state plan from Gov. Gray Davis onFriday and the subsequent final decision by the Federal EnergyRegulatory Commission Dec. 13 for stabilizing California’s powermarkets.

Among the deluge of press releases are independent proof of allegedmarket manipulation last summer, utility rate increases to stabilizefuture retail power rates, commitments by merchant generators to keepinvesting in new plants and an eleventh-hour proposal to hedge SanDiego’s entire 3,300-MW peak-load power requirements. (see Daily GPI,Nov. 28)

On Monday, a spokesperson for Davis said the governor willsubmit California’s plan to FERC in the form of a detailed letterthat will provide new ideas that have been constructed from aseries of meetings with major stakeholders, including thegenerators and marketers, who Davis has repeatedly criticized for”price-gouging” and “marketeering,” if not illegally abusing theirmarket power.

Both legislative and regulatory proposals in California arelikely to emerge from Davis’ submittal to FERC, the spokespersonsaid. Another state energy official indicated that FERC sources areindicating that its Nov. 1 proposed order is going to “stay prettymuch intact,” except for lowering of the proposed price cap to$100. (see Daily GPI, Nov. 10)

Amid the heightened anticipation, the California Power Exchange(Cal-PX) is having an independent review of its currentstate-mandated uniform price auction method, and recommendationsmade for possible changes in the way the state-chartered wholesalespot power market operates.

As state officials contemplate completely revamping both theCal-PX and the independent transmission grid operator (Cal-ISO),including possible merger of the two state-chartered, nonprofitcorporations, Cal-PX will have its panel of outside economists lookat the possibility that the state wholesale market expand into aregional entity.

A lot of the buzz ongoing in Sacramento is pointed toward anISO-PX merger, although the Cal-PX spokesperson said FERC does notfavor that move. Both state entities sent FERC information on whythey should not be merged, an action that is being construed as”political” as opposed to economically motivated.

In the meantime, in little more than a week, California’s twomajor investor-owned utilities have made separate five-yearproposals for raising retail rates on a fixed basis to protectcustomers from the volatility of the wholesale market, and one ofthe utilities, Southern California Edison Co., has released a studyit commissioned by two nationally recognized utility economiststhat alleges marketers and generators withheld supplies from theCalifornia power market at crucial times last summer.

Edison released its study in Washington, D.C., as part of itswritten comments to FERC in which it criticized the federalregulators’ proposed remedies to California’s electricity problemsfor failing to “protect California’s consumers and economy fromexcessive electricity prices resulting from the exercise of marketpower by sellers.”

Edison’s CEO Stephen Frank said, “Unfortunately, we don’t seethis current FERC proposal as providing any relief at all.”

On the basis of two technical economic analyses — oneestablishing “competitive benchmark prices” and another of”capacity withholding” in the California wholesale power market,economists Paul Joskow, an MIT professor from Cambridge, MA, andEdward Kahn, a San Francisco consultant, concluded in a 34-pagereport that they found “considerable empirical evidence to supporta presumption that the high prices experienced in the summer of2000 were the product of deliberate actions on the part ofgenerators or marketers controlling the dispatch of generatingcapacity to withhold supply and increase market prices.”

They also urge FERC to dig deeper in its ongoing investigations,noting that the federal agency “is the only entity with access tothe information necessary to conduct a thorough analysis.”

Aside from the question of the market players’ behavior, Joskowand Kahn noted that the increased costs of air emission creditsplayed a significant role in causing wholesale prices to skyrocket,and that an effort to accelerate the deployment of more airemission control devices on Southern California power plants inparticularly “can help to reduce wholesale market electricityprices very significantly.”

Almost simultaneously, the California Public UtilitiesCommission unanimously voted before Thanksgiving to urge FERC toimpose price caps throughout the California electricity market,which it reiterated is “dysfunctional.” The CPUC formally filedNov. 22 its proposals to FERC, reinforcing earlier calls for thefederal regulators to order refunds from wholesalers toCalifornia’s retail market participants.

“CPUC staff estimates that California households and businesseswere overcharged more than $4 billion in recent months as a resultof market power in wholesale electricity markets,” the CPUC said ina prepared statement following its actions. “CPUC staff also findsevidence that power sellers have manipulated the market in effortsto increase prices.”

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