|
|
Enron Mail |
http://www.consultrci.com
************************************************************************ A new SCIENTECH PowerHitter interview with Cary Bullock, Co-Founder,=20 President, and CEO of Excelergy, is now available. Find out more at: http://www.consultrci.com ************************************************************************ =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH IssueAlert, November 2, 2000 FERC Proposes Major Changes to California's Wholesale Market By: Will McNamara, Director, Electric Industry Analysis =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D The Federal Energy Regulatory Commission (FERC) issued a draft order outlin= ing a major overhaul of the California wholesale market, including changes to market rules concerning the California ISO (Cal-ISO) and Power Exchange (PX). Conceding that the market rules and structure for wholesale sales of electricity are "flawed" and have caused "unjust and unreasonable" rates= , FERC has proposed a number of remedies that will become effective in=20 approximately 60 days. The full commission is expected to vote on the draft order in December, after a period of industry comment. ANALYSIS: FERC based its 77-page draft order on several assumptions, and through the order intends to offer long-term (rather than band-aid) solutio= ns. First, FERC wants to hold overall rates to competitive levels that benefit consumers, while at the same time induce sufficient investment in capacity to ensure adequate service. Second, FERC acknowledged that some matters that have adversely impacted the California wholesale market are not under its jurisdiction, but that of the CPUC. Thus, FERC focused on matters withi= n its "exclusive jurisdiction," even if some of the proposals preempt prior state decisions, while at the same time urging the state of California to rectify issues within its own jurisdiction. This is an important point, as FERC maintains that, unless the CPUC addresses issues such as the=20 inadequate siting of generation and transmission and demand-side response, California customers may still be exposed to higher prices that result from low supply= . Third, FERC could find no evidence of market power abuses, although it did concede that the market in California certainly allows the opportunity for market abuse when energy supplies are tight. Further, FERC contends that California IOUs have been bidding up to 80 percent of their load into the day-ahead market and hour-ahead spot markets= , creating substantial short-term cost exposure. Due to regulatory restrictio= ns from California's restructuring law (AB1890), the IOUs were not able to pursue a balanced portfolio, including long-term and intermediate contracts= . The central mission of FERC's order is to remove the restrictions that kept California IOUs from moving significant amounts of wholesale transacti= ons into forward markets. The less reliant that the IOUs become on spot markets= , so goes FERC's theory, the less chance of price volatility=01*which should not only reduce costs for customers, but also increase reliability and increase prospects for new generation. With that established, here's what FERC's order prescribes: 1). Eliminate the requirement that California's three IOUs (PG&E, SCE and SDG&E) must sell into and buy from the PX. This proposal essentially permits the three IOUs to establish bilateral contracts with energy suppliers, which was previously restricted under AB1890. 2). Require market participants to schedule 95 percent of their transactions in the day-ahead markets. A penal= ty charge will be affixed for deviations in scheduling in excess of 5 percent of an entity's hourly load requirements. Disbursement of penalty revenues will be distributed to the loads that scheduled accurately. 3). The=20 establishment of independent (non-stakeholder) governing boards for the California ISO and PX. 4). The establishment of generation interconnection procedures. FERC wants the CPUC to address the following issues: delays in siting=20 additions of generation and transmission capacity; implementation of additional deman= d response programs at the retail level; and elimination of impediments on load serving entities pursuing power supplies on a forward basis. Perhaps most contentious within the order is FERC's decision to set a $150/= MWh rate cap so that bids above this amount cannot set the market clearing price that is paid to all bidders. This policy negates a previous proposal from the Cal-ISO, under which it lobbied for a $100/MWh bid cap (reduced from $250/MWh) on electricity purchases in the ISO's spot market. FERC's order freezes the ISO bid cap at its current $250 level for the next 60 days. However, beyond that FERC is instating what is being referred to as a "soft price cap" of $150/MWh, to remain in place until December 2002. It's referred to as "soft" because sellers may bid above this level and receive their bid if they are dispatched, but anything higher than $150/MWh will not set the price that all generators will receive. Also, any generato= r setting a bid above $150/MWh must report their bid to the Commission, and presumably fall under intense scrutiny. The order revealed again some dissension with the FERC itself. Although generally the four commissioners that delivered the order (Hoecker, Massey, Breathitt, and H,bert) probably would agree that it is not perfect,=20 Commissioner Hebert voiced the strongest disagreement with the order's principles. H,ber= t "hesitantly concurred" with the order, although he believed the commission went too far in its attempt to mitigate prices, something he believes FERC is ill-equipped to do. Specifically, H,bert dissented with the decision to place any sort of price cap on wholesale transactions, preferring instea= d=01* as he has advocated throughout his tenure as a FERC commissioner=01*"to entrus= t market participants with the ability and responsibility to mitigate their price exposure as they deem best." Moreover, it is questionable whether or not FERC has achieved its goals of providing long-term solutions to California's problems. Rather, it seems that the commission is sending a mixed message. On one hand, it is allowing the California IOUs the freedom to buy and sell power outside of the PX, which seems like a very pro-competition policy. Yet, on the other hand, FERC establishes a price cap (albeit a soft, not hard, one) on wholesale transactions, which arguably will continue to restrict true competitive market forces from materializing in California. The commission is sending a clear signal that all bids should be under $150/MWh and will undergo interrogation if they are not, which essentially puts political pressure on suppliers to maintain a price cap. However, if one of the clear goals of this proposed order is to bring down energy prices for California customers, removing the requirement of the IOUs to buy and sell through the PX may actually accomplish this. The propo= sal changes the California structure to one in which local distribution compani= es (LDCs) could possibly wield more market power than the energy suppliers, who essentially controlled prices when going through the PX. If the LDCs know how to work economic deals, in which they set the price for the power they purchase, this could ultimately drive energy costs down for customers. As noted, FERC will vote on the proposed order in December, after receiving commentary from industry participants. FERC Chair James Hoecker already knows the position of one major player. He received a letter from Enron CEO Kenneth Lay just this week, in which Lay urged FERC to avoid placing "price cap band aids over hemorrhaging wounds." Lay further predicted that installing price caps would "plunge markets into greater uncertainty and discourage new supplies and conservation methods," and stated that a capped formula would encourage natural-gas suppliers to deploy their turbines in other states or countries. In addition, several consumer advocate groups have expressed anger that FERC did not order refunds for San Diego customer= s, who bore the brunt of high energy prices this summer. In fairness to FERC, it is questionable whether or not the commission has the legal authority to provide a refund to San Diego customers as it did not find any evidence of market manipulation. Thus, there is little chance that we will see the end of the debate over California any time soon. Rather, FERC's order, which presents itself as a remedy to conflicts surrounding the wholesale market, has shown just how polarized adversaries are within this debate. Yet, I believe the bottom line of the proposed order is that it is a good first step to addressing the fundamental problems within California's wholesale market, and marks a significant start to what will undoubtedly be an ongoing discussion. =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D For additional background coverage of the problems related to the wholesale market in California, please visit SCIENTECH's IssueAlert archives at: http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly at: http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert Sincerely, Will McNamara Director, Electric Industry Analysis wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Feedback regarding SCIENTECH's IssueAlert should be sent to=20 wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH's IssueAlerts are compiled based on independent analysis by=20 SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed or to be the basis for investment decisions of any kind. SCIENTECH's sole purpos= e in publishing its IssueAlerts is to offer an independent perspective regard= ing the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy and telecommunications issues. Copyright 2000. SCIENTECH, Inc. If you do not wish to receive any further IssueAlerts from SCIENTECH, pleas= e reply to this message and in the body of the email type "remove."
|