Bills passed last week by the California legislature capping rates for small and medium-sized San Diego Gas & Electric customers through 2003 and speeding up siting of new power plants were the latest in a two-week series of events aimed at rescuing the state from its power market crisis.

A bill awaiting the signature of California Gov. Gray Davis, which would cut electrical rates for all except the largest SDG&E customers in half retroactive to June 1, has been tied to another bill, which would provide fast-track processing of new power plants and expand conservation efforts. A third bill sets aside $150 million to protect ratepayers when the rates are uncapped in two to three years.

SDG&E called the legislative action “well-intended, but badly flawed” because the bills are “vague” on who is going to pay for the difference between capped, below-market rates and the swollen wholesale power costs paid by the utility company. “A significant under-collection issue still remains,” said an SDG&E spokesperson.

Davis is expected to sign the measures, although a spokesperson said late last week the governor was keeping “options open.” Aides to the governor have expressed some reservations about creating a multi-million-dollar reserve fund to protect SDG&E if it would cut into the amounts of money available for schools and other programs.

As written by two San Diego lawmakers, the rate relief bill would cap SDG&E rates at 6.5 cents/kwh for all residences and most businesses, applying to 95% of SDG&E’s customers, according to the legislation’s sponsors. The measure reinforces and expands a rate cap instituted by the California Public Utilities Commission Aug. 21, which would have set the cap only on a pre-set usage level as an incentive to conserve energy. The rate relief is directed to customers of SDG&E, the only utility in the state which completed its deregulation plan, exposing customers to market rates, which have skyrocketed in the state this summer.

“I think we’ve got to put a firm price ceiling on the retail price of electricity in this state and make it stick,” said S. David Freeman, head of the Los Angeles Department of Water and Power, who noted late Wednesday that his utility’s load was the lowest summer day demand since 1991, indicating just how much the weather had reverted to cooler-than-normal this week.

“That just has to be done. Period. I don’t think the consumers are going to stand for it. It is just that simple. They need to put a tourniquet on the bleeding. Never in the U.S. history has anyone doubled the cost of electricity overnight. It is too fundamental to the overall economy.”

Eventually, Freeman said the state has to deal with the issue of building new power plants and transmission to ultimately make the electricity market function properly. Beyond the current actions, more will have to be done because “fundamentally transmission also has to be dealt with and they (legislators and regulators) are not dealing with that at all.”

One of the state energy system operators expressed concerns about the proposed relief for SDG&E being insufficient to cover the estimated bill the utility will be facing following this summer’s price spikes.

“They are going to start off about $75 million in the hole,” the state energy official said. “I still think there are a lot of state fiscal questions that haven’t been answered.”

The legislature’s action was the latest in a series of governmental actions on both coasts over the last two weeks directed at rescuing the California power market. A number of investigative panels were gearing up to delve into what went wrong, who’s to blame and how to fix the faltering California power deregulation operation.

FERC Launches Investigation

Two weeks ago, the Federal Energy Regulatory Commission launched a formal investigation of the electric rates and structure of California’s Independent System Operator (Cal-ISO) and Power Exchange (Cal-PX), as well-as market-based sellers in the state. This formal supplement to the Commission’s previously announced nationwide fact-finding probe of the bulk power markets would enable FERC to take remedial action if necessary.

As part of its investigatory effort, the Commission said it plans to hold at least one hearing in San Diego. The FERC action came Aug. 23 after California’s governor directed a strongly-worded letter to the President, urging him to ensure speedy FERC action and refunds to customers (see NGI, Aug. 14).

The same day FERC also denied SDG&E’s request for an immediate broad $250/MWh price cap on all electricity sellers in California. The California utility did not provide evidence that all potential sellers in the state have market power, nor did it show why a broad price cap would be an appropriate response, the order said. The order, however, doesn’t disturb the California ISO’s recent decision to set the maximum purchase price cap for imbalance energy and ancillary services at $250/MWh.

“We’re pleased with the way FERC presented the issue,” said a San Diego-based SDG&E spokesperson. “It dealt with the full range and scope of the problem. And it opens the door for reforming the Cal-ISO and PX.

In its action, FERC noted that “a number of factors” have contributed to this summer’s wholesale price spikes in California, and many of those factors fall within the state’s jurisdiction, such as siting of new power plants and transmission lines; increased demand-side management; SDG&E’s residential rates and the retail electric rate design.

FERC said that while SDG&E is necessarily focused on the behavior of generators and marketers, the problem “may in part” lie with California’s current market rules and institutional structures, so it intends to look at the operations and rules of both the Cal-PX and Cal-ISO, which fall under FERC jurisdiction.

Extension Sought for ISO/PX Caps

The California Electricity Oversight Board followed up last week by asking FERC for an extension of the current limited Cal-ISO and Cal-PX bid caps beyond their Nov. 15 expiration date.

The Board complained that the state’s bulk electric markets “are not workably competitive.” The complaint was filed against all sellers of energy and ancillary services, scheduling coordinators, and the Cal-ISO and Cal-PX. It said the current $250/MWh bid caps for wholesale energy and ancillary services, and the $100/MWh bid cap for replacement reserves should be continued because of suspected market-power abuse in the California bulk market. “We believe that is the case,” noted Erik N. Saltmarsh, counsel for the California board, which currently is investigating the matter.

“Once demand reaches or exceeds approximately 33,000 MW [statewide], sellers and scheduling coordinators have the ability, and do, exercise market power. It is not competitive forces but rather the Cal-ISO’s bid cap that most significantly moderates price run-up during these periods,” said the board, which has oversight authority over the Cal-ISO and Cal-PX and the energy/ancillary markets that they operate.

FERC Commissioner William Massey echoed a similar sentiment at a “summit” sponsored by the Electric Power Supply Association last Tuesday, saying that “some limits on price levels” may be needed during “extreme demand conditions,” when the market is most vulnerable to the exercise of market support. Such ceilings would remain until “all the pieces of a well-functioning competitive market are in place.”

The “high-cost generator operators — those on the upper end of the supply curve — know when these [extreme demand] conditions are likely and can bid very high prices with a fair degree of confidence that they will be dispatched,” setting a high market clearing price to the benefit of other generators and detriment of customers, he said.

As a result of price spikes, the Cal-ISO has estimated the total market costs for this past June were as much as $3.6 billion based on day-ahead, day-of and real-time prices for energy and ancillary services in the Cal-PX and Cal-ISO markets, the California board told FERC. This compares to total costs of about $8 billion for all of 1999.

The California board said the existing $250/MWh caps in the Cal-ISO and $350/MWh for the Cal-PX “are sufficiently high to allow generators to recover their variable costs and earn significant additional revenues.”

Changes to Cal-PX

A knowledgeable marketer with Texas-based TXU’s California energy operations said ultimately the way prices are set in the Cal-PX needs to be changed to move to a bid-ask system. A Cal-PX spokesperson said the state-chartered nonprofit has had an independent auditor review its bidding and it concluded that over the exchange’s two-plus years of operations prices would not have been any lower with a bid-ask system.

One national marketer with major interests in California’s power market said the fundamental problem is still lack of adequate new generating plants, and price caps won’t help solve that — “only deregulation will do it.” This source’s company, like a number merchant generators, earlier this week received subpoenas from the California Public Utilities Commission to supply market information as part of the state’s probe of summer electricity prices.

Several of the California merchant generators have indicated they are attempting to talk with the governor and his representatives in Sacramento, but that at this time he is not likely to sit down with any of them — as a group or individually.

Davis has said that he believes “strongly that out-of-state electrical generators are manipulating the market and gouging California consumers.”

Some generators anonymously are reacting strongly to such criticism, claiming they are being “declared guilty” even before the investigations are completed.

Reliant Energy’s Houston-based officials who were shuttling between California and Washington, DC, this week indicated that estimates in the energy trade press about “gross profits” by California generators that are five times greater than last year are based on bad information. “They don’t reflect that we hedged a considerable amount of our portfolio of power in the forward market for the rest of this year, so they have to be erroneous.” A Reliant spokesperson indicated that the company cannot say anything more publicly without releasing competitively sensitive information.

“There is a great deal of concern (among the generators) about the growing politicization of this complex process,” Simon said. “The behavior of some public officials has amazed some people. This subject was not ever intended to be politicized; it does not lend itself to sound bites. It is a complex, capital-intensive industry, and I don’t think it serves anybody well to be played out the way this is playing out in the news media.”

Adding to the growing political involvement in the electricity price issue, a House Commerce Subcommittee is now scheduled to hold a hearing on the electricity prices in San Diego Sept. 11. Richard Nemec, Los Angeles;

Susan Parker, Washington, D.C.

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