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Enron Mail |
At its special meeting today, FERC released the results of its eagerly
awaited probe into California's summer power crisis, concluding that under certain circumstances, California ratepayers were subjected to unjust and unreasonable power rates due to California's "seriously flawed" market structure and rules in conjunction with tight demand and supply conditions throughout the West. The FERC staff report on western markets and the causes of the Summer 2000 Price Abormalities, entitled, Part I of Staff Report on U.S. Bulk Power Markets, is available at the following website: http://www.ferc.fed.us/electric/bulkpower.htm In response, FERC issued an order proposing a series of sweeping structural changes to the California ISO and PX to help remedy the pricing problems, and solicited public comment by November 22. A technical conference has also been scheduled for November 9, to discuss the proposed solutions and other remedies that might be suggested (details TBA). While all four commissioners supported the order, the order stretched the Commission. Chairman Hoecker and Comm. Breathitt expressed strong endorsements, while Comms. Hebert and Massey concurred, citing areas where they felt the Commission had either "over-reached" or not gone far enough, as discussed below. A final order is expected to be issued by year's end. At the same time, the Commission warned California consumers of their continued risk of paying higher prices unless policy makers there resolve state issues, such as: (1) immediately implementing the availability of day ahead markets for power purchases; (2) development of demand responses; (3) siting of generation and transmission; and (4) assurance of sufficient reserve requirements. Highlights of Proposed California Structural Remedy In its order, FERC proposed a series of market overhauls, including: (1) Eliminating the state's mandatory requirement that the state's investor-owned utilities buy and sell electricity through the PX, and allowing these utilities to purchase electricity through forward contracts and other alternative mechanisms to manage supply risks. (2) Requiring market participants to schedule 95 percent of their transactions in the day-ahead market and instituting a penalty charge for under-scheduling (in excess of five percent of hourly load requirements), in order to discourage over-reliance on the real-time spot market. (3) Establishing independent, non-stakeholder governing boards for the ISO and PX. (4) Modifying the current single price auction system by (a) imposing a temporary $150/MWh "soft cap" that prohibits supply bids in excess of $150 from setting the market-clearing price for all bidders; (b) requiring sellers bidding above $150/MWh to report their bids to FERC on a confidential, weekly basis and provide certain cost support; and © requiring the ISO and PX to report monthly information on such bids. The Commission's price mitigation measures would remain in effect through December 31, 2002. (5) Declining to order retroactive refunds for the state's ratepayers and utilities, citing insufficient authority to do so, but subjecting sellers to potential refund liability for transactions from October 2, 2000 until December 21, 2002, but no lower than their marginal or opportunity costs, if FERC finds non-competitive behavior. (6) Encouraging accelerated state siting approval and introduction of demand response management programs. Separately, the draft order rejected the ISO's request for an extension of its current purchase price cap authority, and the PX's request for price capping authority. Commissioner Responses Comm. Herbert reluctantly concurred, noting that his decision may change when a final order is considered based on comments filed or testimony offered at the November 9 meeting. He stressed that he would have preferred that the order address four areas: (1) eliminate all price controls in California markets; (2) abolish the single price auction entirely; (3) terminate the "buy and sell" mandate in the PX; and (4) direct the ISO to address a long list of cited problems in its January 2001 RTO filing, rather than having the Commission prescribe specific remedies. Hebert stated that while he was opposed in principle to the "soft cap" concept, if one had to be adopted, then the soft cap should increase incrementally increase over time at specific pre-announced dates. He believes that this would serve to both encourage greater investment in facilities and additional forward contracting as well as provide an incentive for California regulators to address market design and other flaws. Also, he would not have disbanded the stakeholder governing boards at this time, but allow the ISO and PX to address this issue in their January 2001 RTO filings. In addition, he would not dictate risk management methods, preferring instead that market participants determine appropriate actions on their own. Finally, he advised Californians not to be so environmentally focused that they do not realize their tremendous need for generation capacity. Comm. Breathitt stated her approval of the Order while warning that FERC cannot allow the events of this past summer to reverse or slow the progress towards open and competitive markets. She noted that it was the Commission's job to guide the market to self-correct and not to conduct "command and control." She also commended the managers of the ISO and PX, saying that they have performed admirably. However, she noted she is awaiting comments on the single price auction remedy and its accompanying confidential reporting requirements. Comm. Massey concurred, but emphasized that he advocates a more aggressive approach. He feels that the Congress has "put its thumb on the scale" in the Federal Power Act to protect consumers. Stating that prices will continue to be unreasonable in the future, he believes that this Order moves in the right direction, by proposing solutions to identified problems such as an over reliance on the spot market, lack of demand response, the need to reconstitute governance of the ISO and PX and the elimination of the buy/sell mandate. Comm. Massey specifically called for comments regarding whether the $150/MWh soft cap went far enough, whether FERC has the legal authority to issue refunds and to determine whether there should be a requirement for a certain percentage of forward contracting to hedge against the spot market price volatility. Finally, Chairman Hoecker stated his strong support of the Order, but noted that this is "no time to pull punches." He emphasized that the Commission needed frank comments from the industry. He echoed Comm. Breathitt's warning that competition is at risk and that they needed to get the markets back on track. Noting that the Commission lacked authority to order refunds, he stated that the responsibility rests with Congress. Addressing jurisdictional issues, he stated that siting problems encountered at the state level are slowing the "meandering transition" to competition. He feels that the state of California and FERC need to work together to resolve these problems and that FERC is not attempting to usurp power. Rather, California is part of a broader interstate market and is dependent on the western region for reliable energy, thus placing the burden on federal action to make things work, Hoecker maintained. The Chairman also said that the Commission will fully investigate and act upon complaints of market power abuse or further evidence provided by staff's ongoing investigation. If you have any questions or comments, please call Jack Cashin at 202/508-5499.
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