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U.S. Panel Proposes Big Market Change To Curb California's Electricity Prices
The Wall Street Journal, 11/02/00 U.S. Proposes Changes in Electricity Marketing in California The New York Times, 11/02/00 The Cutting Edge U.S. Urges Major Fixes for State's Power Market Energy: Federal panel says electricity crisis is product of flaws in deregulation, but it stops short of ordering reductions in sky-high prices. Los Angeles Times, 11/02/00 U.S. Panel Proposes Big Market Change To Curb California's Electricity Prices By Rebecca Smith ? 11/02/2000 The Wall Street Journal Page A3 (Copyright © 2000, Dow Jones & Company, Inc.) The Federal Energy Regulatory Commission proposed sweeping changes in California's deregulated electricity market in a bid to push down high electricity prices. The proposed order, which will be open to industry and public comment before being implemented, comes as Californians are suffering record high power prices. The proposals go further than many industry watchers had expected but stop short of ordering that profits be seized from generators and refunded to consumers, as the state's utilities and many public officials had demanded. The move also marks the first time the federal government has intervened to make major changes in a state market since the era of electricity deregulation began four years ago. "California's market had become a threat to the health and financial well-being of the average citizen," said FERC Chairman James Hoecker. "We had to do something after the tsunami hit." The draft order proposes to cap wholesale electricity prices for two years at $150 per megawatt hour but to allow electricity-plant owners to receive higher prices, on a case-by-case basis, if they can demonstrate they deserve it. The cap in New York and New England, other deregulated markets, is $1,000 per megawatt hour. The cap has been set higher there because competition in those markets has held down retail prices. The four-member commission, in authorizing the new "soft cap" for wholesale prices charged in California, dismissed a variable-price scheme adopted last week by the California Independent System Operator, the organization responsible for keeping enough electricity on hand to meet actual demand. That scheme, which now won't be implemented, would have capped prices at between $65 and $250 per megawatt hour, depending on demand. An important element in FERC 's new pricing plan is that it makes it less likely that a single generator will be able to effectively set the price that everyone receives, as has previously been the case. Under the old regime, even a small generator could ramp up prices for the entire spot market if it could position itself as the last unit called into service to meet demand. The commission came down hard in its interpretation of the high prices seen in the California market last summer. It said the wholesale prices paid to generators failed to satisfy the federal test that electricity rates be "just and reasonable." But Mr. Hoecker, FERC 's chairman, also said the commission had no authority to order profits seized from power generators and traders so that refunds could be made to those who paid the high prices. "We exercise such authority as Congress gives us," he said. "It's as simple as that." Mr. Hoecker acknowledged that FERC 's decision not to seek refunds would undoubtedly disappoint California regulators, utilities and consumer advocates. "They expected a lynching and . . . the disgorgement of ill-gotten gains," he said. FERC 's decision to not take action on refunds, at least for now, leaves the state of California with a major mess on its hands. Since June, wholesale power costs have exceeded the amount utilities were able to charge their customers by more than $5 billion. For now, utilities are footing the bill since customer rates are frozen and it is impossible to pass those costs along. But the utilities are lobbying state regulators for permission to dump the cost on consumers, offering to soften the blow somewhat by stretching out the collection period over four or five years. State regulators and legislators, without help from FERC to retrieve profits from generators and traders, now have an unpalatable choice: leave the burden on utilities or back-bill consumers who never asked for deregulation in the first place. While the FERC proposal does nothing to remedy the problem of past shortfalls, the commissioners said they were doing their utmost to push down prices in the future. FERC said it wants to eliminate a requirement that California's investor-owned utilities buy and sell all their power through state-sanctioned energy auctions -- regardless of the prices in those markets. That is the law now. This simple change would enable utilities that have sold most of their plants and buy power in the open market to hedge their price risk by signing contracts with a variety of suppliers. The commission also effectively issued a vote of no confidence to the governance structure used by the state's market-making organizations, the ISO, which operates the transmission system and runs a "balancing market" to keep energy supplies in sync with fluctuating demand, and the California Power Exchange, which runs a day-ahead market and a forward auction. Both organizations have large,unwieldy stakeholder boards consisting of representatives of different interest groups such as generators, utilities, large consumers and others and have been accused of putting the parochial interests of members ahead of the state's 35 million consumers. "They've become a debating society among interest groups," says Curt Hebert, one of the commissioners. FERC said it wants the boards of the ISO and the power exchange dissolved, most likely within 60 days. In their place, it wants smaller, disinterested boards such as those that exist in the East, where New York, New England and the mid-Atlantic states all have ISOs. It didn't, however, order the boards merged as some members had speculated might occur. Terry Winter, chief executive of the ISO, said he was an "avid supporter" of the stakeholder boards that looked like a worthy experiment in democracy "until all the heavy financial and political pressures caved in on them" last summer. This year alone, the ISO board changed price ceilings three times as different coalitions garnered the necessary votes, each time sending shock waves through the markets. In general, observers reacted positively to the FERC proposals, which will be the subject of a public hearing on Nov. 9. Generators were relieved there won't be refunds and were happy that the new "soft cap" system would allow price variation among generators with different costs. Steve Bergstrom, president of Dynegy Inc., which owns power plants in California, said he is pleased " FERC has shown it isn't going to stop deregulation." Utilities were pleased at the effort at cost containment and purchasing flexibility. But Mike Florio, an attorney for a San Francisco consumer group who sits on both the ISO and Power Exchange boards, said he finds it impossible to reconcile FERC 's conclusion that prices weren't fair with its reluctance to seize profits. "I thought `just and reasonable' rates were a requirement of the law, not just some guiding principle," he said. Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved. National Desk; Section A U.S. Proposes Changes in Electricity Marketing in California By NEELA BANERJEE ? 11/02/2000 The New York Times Page 21, Column 1 c. 2000 New York Times Company Citing the ''seriously flawed'' nature of the California electricity market, which was plagued with price spikes and brownouts this summer, the Federal Energy Regulatory Commission proposed changes yesterday in the sale and pricing of electricity intended to overhaul deregulation in the state. The commission's review was set off by widespread outrage after consumers in San Diego saw their electricity bills triple this summer. Once viewed as a pioneer in developing an efficient electricity market, California is now thought to embody the many problems that can arise from deregulation. States that are taking a go-slow approach to deregulation are sure to follow closely the changes proposed for California. Commission and industry analysts warned that the proposed measures, which would affect 85 percent to 90 percent of the California market, were but a first step to undoing the complicated knot of factors that led to high prices. They said the measures were not a guarantee that prices would be lower next summer. ''Some people want, to use a psychobabble word, closure on all this,'' said Robert Michaels, a deregulation expert and professor of economics at California State University at Fullerton. ''But the California institutions are so complex that no one measure by F.E.R.C. will resolve it. The process will go on for a long time.'' The commission oversees the progress of deregulation across the country although states determine the specific conditions. The commission will accept commentary on the proposals and issue a binding order in December, a spokeswoman said. California electricity prices rocketed last summer largely because consumer demand for power outstripped supply. As a result, the commission warned, California officials will have to find ways to build more power plants and transmission lines. The commission's recommendations center on the sale of power through institutions set up as part of California's deregulation process. Many investor-owned utilities no longer generate power, but buy it on the wholesale market. Currently, utilities can buy and sell power only through the California Power Exchange, a state-run electricity marketplace. The commission has proposed eliminating that requirement so utilities can shop around for long-term electricity contracts, a move most analysts welcomed. ''This gives us more flexibility to obtain affordable power for customers,'' said Shawn Cooper, a spokesman for the PG&E Corporation, the major utility in Northern California. ''Right now, we're limited on the energy product we can buy.'' Turning to the exchange, Mr. Cooper said, ''is like going to a car lot and being able to buy only one or two models.'' But experts said the other proposals might be easily thwarted by power-generating companies seeking top dollar. The commission proposed, for example, to lower the price cap for a megawatt hour to $150 from $250. Power suppliers that bid over $150 would be paid their price but would be required to explain the reasons for their bid. Such a system, some experts say, would prove a sizable loophole. James Bushnell, a research associate with the Energy Institute of the University of California, said, ''I think a clever engineer at any power company could come up with a whole bunch of reasons for whatever they want their costs to be.'' Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved. Business; Financial Desk The Cutting Edge U.S. Urges Major Fixes for State's Power Market Energy: Federal panel says electricity crisis is product of flaws in deregulation, but it stops short of ordering reductions in sky-high prices. NANCY RIVERA BROOKS NANCY VOGEL; CHRIS KRAUL ? 11/02/2000 Los Angeles Times Home Edition Page C-1 Copyright 2000 / The Times Mirror Company California's electricity crisis is the product of flaws in the deregulated market and a long-term shortage of power in the state, federal regulators said Wednesday, proposing sweeping changes to fix the $23-billion electricity trade. But the Federal Energy Regulatory Commission stopped short of ordering retroactive reductions of the sky-high electricity prices paid since June, saying it lacked the legal authority. The commission, which found no evidence of individual companies driving up electricity prices, left the door open for some sort of refund should it uncover specific instances of such market abuses. That leaves undetermined whether major utilities can pass on more than $5 billion in electricity costs to consumers across the state. The technical changes proposed to fix California's flawed market include giving utilities freedom to buy power from sources other than the state-mandated exchange and imposing loose price caps on power purchases. Still, California faces years of high prices and threatened blackouts, the commission said, unless legislators and regulators tackle problems beyond the federal body's scope, particularly the faster building of power plants and transmission lines. "Ideally, some people would want us to round up the bad guys who manipulated this market without restraint or conscience and order disgorgement of all their ill-gotten gains. It's not as simple as that," Chairman James J. Hoecker said at a special meeting of the four-member commission. "If information that the market was or is being manipulated unlawfully comes to us through complaint or as product of our own investigation--we will act on that information, I guarantee you." The commission's menu of proposed changes to the California market, which it hopes to enact by the end of the year after public comment, drew scalding criticism from consumer groups, tepid praise from utilities and power generators, and a mixture of hot and cold responses from politicians. Nonetheless, observers expect the proposals will be approved in their current form. Some lauded the commission's proposed order for what it didn't do, mainly impose cost-based electric rates that would have represented a "re-regulation" of the industry. Generators breathed a sigh of relief that the commission--at least for the time being--did not judge the power merchants as having wielded illegal "market power," and therefore subject to refunds to the utilities and consumers they sold power to. And even consumer advocates, angry as they are, were comforted by the commission's finding that electricity rates at times this summer were "unjust and unreasonable," legal language that could open the way for the California Public Utilities Commission or the California Legislature to go after any profits they consider excessive. Gov. Gray Davis, during a news conference with U.S. Energy Secretary Bill Richardson to unveil initiatives to improve electricity supply and reliability, called the federal commission's proposal "a mixed blessing." "They do recognize that we're operating in a dysfunctional market and they do agree that rates are not just and reasonable," Davis said. "However, they did not, as I encouraged, order rebates to the consumers and businesses in San Diego who were literally gouged for the profiteering and market manipulation San Diego had to suffer through." Among the market changes proposed by the Federal Energy Regulatory Commission: * A temporary reworking for the next two years of the way prices are set for electricity in the California Power Exchange, the primary market for electricity. Currently, the highest bid for each hour sets the price for all the bids during that hour. The commission would change that policy so that bids higher than $150 a megawatt hour could not set the "market clearing price" paid by all participants. * Freeing the big utilities--Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric--from the requirement that they purchase most of their electricity from the Power Exchange. This would give the utilities greater freedom to shop for the best deals on electricity. * Requiring all market participants to schedule 95% of their transactions the day before rather than--as happened repeatedly this summer--waiting until the day the power is needed, buying at the last minute in an emergency market operated by the California Independent System Operator. This nonprofit was formed to schedule and transmit electricity, but found itself this summer in the unexpected position of running a major market for electricity as generators sought the best price for their electrons. * Overhauling the boards of governors of the California Power Exchange and the California Independent System Operator, which currently are composed of "stakeholders" representing all parties to deregulation, including generators, utilities and consumer advocates. Instead, the two nonprofit corporations would have smaller, independent boards selected by the current boards. (Customers of the Los Angeles Department of Water and Power, which is not participating in market deregulation and has escaped the state's power woes, are not affected by these proposals.) The commission based its proposals on a staff investigation that blamed high electricity prices on a supply-demand imbalance and market design problems that give electricity sellers the opportunity to drive up prices when supplies are tight. But the commission found no evidence of specific attempts by individual companies to drive up the price of electricity, partly because there was not enough time to conduct such a thorough, formal investigation. Curt Hebert Jr., the only Republican on the commission, offered the most criticism of the proposed order. "If it were up to me, today's order would be much, much different," Hebert said. "However, on balance, it appears to be a step in the right direction." Hebert said he could support the order only because it does not represent the final order and may be changed after the three-week public comment period. He said he would prefer that the order eliminate all price controls. California's two biggest utilities--Southern California Edison and Pacific Gas & Electric--commended the commission for its proposed fixes, calling them "a sound beginning." In particular, PG&E called the proposed reform of bidding "a creative attempt to fix the market and moderate prices, while still allowing competition to evolve." Power players praised FERC 's decision to allow utilities to go outside the PX to procure energy--a practice that a couple of years ago was deemed too risky because it might give the big utilities the temptation and impunity to self-deal: buying from their own affiliates. Although utilities have had limited power to make long-term energy contracts outside the PX, utilities have been reluctant to enter into them. That's because state regulators reserve the right to review such deals and to force companies and their shareholders to eat added costs if market rates decline below the contracts. Together, PG&E and Edison estimate that they have spent at least $5 billion more on electricity this summer than they could pass on to customers who are protected by a rate freeze imposed in 1996 as part of the deregulation law. The Public Utilities Commission is weighing the utilities' requests to eventually pass on those costs to customers. But consumer groups were outraged by the lack of rebates to customers of San Diego Gas & Electric, and, by extension, to the customers of SCE and PG&E, who currently are protected by a rate freeze but could face sharply higher bills if the utilities are allowed to pass along their uncollected electricity costs. "They are trying to give medicine for an incurable disease, and that's electricity deregulation," said Doug Heller of the Foundation for Taxpayer and Consumer Rights. " FERC has found that rates were excessive, yet they failed to take action. That's like a judge that says we have all the evidence in the world that this guy committed murder, but it's all inadmissible." Mike Florio, a lawyer with the San Francisco-based consumer group called the Utility Reform Network and a member of the Cal-ISO board, said the commission took a step backward by nullifying Cal-ISO's recent decision to set a sliding rate cap of as low as $100 per megawatt hour. The commission ordered that the price cap in the Cal-ISO market remain at $250 a megawatt hour until the new FERC pricing mechanism is finalized. "I wasn't one of those that thought FERC was going to ride in on a white horse and rescue us, but this appears to have made things worse," Florio said. San Diego County Supervisor Bill Horn said that county attorneys would review the FERC order to assess the county's options for pursuing rebates. "We're proceeding on our own," he said. On Tuesday, supervisors voted to study creating a municipal utility district. Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved.
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