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Enron Mail |
I assume that Jeff D. will give us his reactions but in the mean time here=
's=20 the proposal: December 1, 2000 =20 Honorable James Hoecker Chairman Federal Energy Regulatory Commission 888 First Street, N.E.=20 Washington, D.C. 20426=20 Dear Chairman Hoecker: I told you on November 14 in San Diego that, by December 1, I would respond= =20 to your plan with my suggestions to protect the interests of the people and= =20 businesses of California by providing reliable electricity supplies at the= =20 lowest reasonable cost. Obviously, a complete plan by the State of Californ= ia=20 must await your review of my suggested changes to your proposed order, and= =20 final action on that order on December 13. This letter outlines the first= =20 steps toward a plan that my administration is developing based on extensive= ,=20 ongoing discussions with legislative leaders, consumers, business, utilitie= s,=20 generators, environmentalists, labor, agricultural interests and other=20 California stakeholders.=20 This emerging plan will indicate to you that I am prepared to act with the= =20 concurrence of the Legislature in California to fulfill our obligations to= =20 assure reliable service at reasonable costs to the consumer. The free market applied to electricity can work, but only if market=20 conditions allow for real competition, and if all parties act responsibly.= =20 The Federal Energy Regulatory Commission (FERC) has found that the wholesal= e=20 market in California is dysfunctional and that the wholesale prices charged= =20 by generators in your jurisdiction are unjust and unreasonable.=20 For that reason, I renew my call for the FERC to undertake the actions that= =20 are critical -- and clearly within your jurisdiction -- to order retroactiv= e=20 refunds to the consumers who have been harmed this year, and to establish= =20 hard price and bid caps that will protect consumers until the energy=20 marketplace becomes truly competitive. I do not believe that your proposed= =20 $150/MW clearing price limit will provide any real protection. I again ask= =20 you to impose real price and bid caps in the $100/MW range on a transitiona= l=20 basis over the next 36 months. If you do your job of protecting consumers by rectifying the wholesale=20 markets, the steps I have to take can be transitional in nature and limited= =20 in scope. I cannot in good conscience, however, forego any measure that wou= ld=20 serve to protect the people of California until I am satisfied that the=20 sellers in the wholesale markets will not victimize Californians again. Since our meeting in San Diego, several things have occurred which influenc= e=20 my current thinking. On November 20, 2000 the California Energy Commission (CEC) published the= =20 results of a detailed bottom-up study of available electricity supply for= =20 2001. It shows that -- taking into account expected load growth, firm and= =20 dynamically scheduled imports, and new supply already under construction or= =20 under contract -- California should be able to avoid emergencies if supplie= s=20 are properly managed and scheduled. This presumes, of course, no gaming or= =20 withholding by sellers in wholesale markets and an absence of panic buying.= =20 But the CEC study also shows that supplies are sufficiently tight that mark= et=20 power will exist and will need to be mitigated during periods of high deman= d.=20 The same opportunity for wholesale price gouging through the exercise of=20 market power and withholding that existed in summer 2000 will exist in 2001= .=20 You must take decisive action to preclude such behavior. During the week of November 13-19, while you and regulatory commissioners= =20 from around the country were in San Diego, California was subjected to=20 several Stage 2 Alerts, reflecting severe shortages of generation, even=20 though these are the lowest load months of the year. Prices were=20 astronomical. More than 12,000 megawatts of generation were off-line at the= =20 same time, including over 5,000 megawatts for "unscheduled outages." I will= =20 recommend steps to assure that existing resources in California are availab= le=20 to meet California=01,s local energy needs, and that information and the=20 authority necessary to prevent a recurrence of such events are available to= =20 state and local officials. On November 22 the California Public Utilities Commission (CPUC) and=20 Electricity Oversight Board (EOB) filed comments with you that summarize th= e=20 current status of their ongoing investigations. They confirm the conclusion= s=20 of the independent market monitors that California has been victimized by t= he=20 exercise of market power by merchant generators and marketers during summer= =20 and fall 2000. The state agencies have been hampered in their investigation= s=20 by the refusal of merchant generators to provide information that will both= =20 assist in the understanding of last summer=01,s prices and in the fashionin= g of=20 remedies to assure that we are not victimized again. I urge you to compel t= he=20 necessary disclosure of information to complete these investigations. On November 21 the CPUC issued an Environmental Impact Report (EIR) on the= =20 proposal by PG&E to move its hydroelectric facilities out of the regulated= =20 utility. The EIR concludes that such a project would cause significant=20 unmitigated harm to the environment and recommends retention as the preferr= ed=20 alternative. This suggests that California=01,s course of generation divest= iture=20 by utilities may be slowed or stopped.=20 With these events as background, I want to describe the steps I have taken= =20 and plan to take to begin to address the energy problems in California. Increase Supply and Expand Infrastructure During the 10 years preceding my administration, virtually no power plants= =20 were built in California.=20 Since April 1999, six power plants representing 4,700 MW of new generation= =20 have been approved by the CEC. Five of these plants are under construction= =20 and the sixth will begin construction no later than April 2001. Twenty more= =20 applicants have completed pre-filing and have active applications under=20 review by the commission staff. Eleven more applications are in the=20 pre-filing stage.=20 This represents a significant change in policy and performance and responds= =20 to the fact that we must increase supply as rapidly as possible without=20 abrogating our commitment to state and federal public health and=20 environmental protection. Much has been made about the difficulty of siting and permitting generation= =20 in California. With enactment of AB 970 and the creation of the Governor=01= ,s=20 Clean Energy Green Team this September, California has aggressively committ= ed=20 itself to continue to accelerate the siting and permitting of generation an= d=20 to coordinate local, state and federal government agency review and action.= =20 Federal and state air quality requirements present unique challenges to the= =20 construction and operation of new power plants. Through the Green Team, we= =20 are developing new and creative approaches to meet these challenges, workin= g=20 with local air quality districts, the California Air Resources Board and th= e=20 United States Environmental Protection Agency. These might, for example,=20 expand upon the case of the proposed Otay Mesa power plant, where mobile=20 emissions credits are being used to offset stationary source emissions that= =20 will be generated by the new facility. If necessary, I will seek legislatio= n=20 to enable these new approaches. I am also calling on the CPUC to aggressively reduce barriers and to=20 otherwise encourage the locating of distributed generation and co-generatio= n=20 where it is viable, cost effective and environmentally sound. The CPUC has= =20 already initiated action that will provide a forum for expediting=20 certificates for transmission facilities, including environmental review.= =20 Finally, I believe it is important to assure that all supplies of electrici= ty=20 are available when emergency conditions exist, to avoid interruptions such = as=20 those experienced last summer and as recently as last week. Suggestions we= =20 are considering for achieving this include new means of coordinating=20 power-plant maintenance and operations activities. Forward Contracting by Utilities Many parties, including the FERC, have recommended expanding the use of=20 forward contracting by the utilities including multi-year bi-lateral=20 contracts as a way of reducing exposure to volatile spot market prices. The= =20 contracts, as a part of a larger utility energy portfolio, represent an=20 important tool to moderate price volatility and ensure reliability. I am=20 asking the CPUC to expeditiously develop benchmarks to assure the=20 reasonableness of these contracts without unfairly "second guessing" these= =20 decisions in later years. This process should be in place early in 2001 to provide adequate opportuni= ty=20 for contracts to be negotiated and in place before Summer 2001.=20 Coupled with the forward contracting issue is the question of the obligatio= n=20 of utilities to buy and sell all of their electricity through the Californi= a=20 Power Exchange (PX). This issue requires careful consideration since these= =20 transactions through the PX are currently subject to full disclosure, and= =20 safeguards are in place to assure delivery. These protections for consumers= =20 and business must not be lost. Among the suggestions that have been made to ensure that utilities have a= =20 cost-effective portfolio of energy is the proposal that utilities retain=20 their existing generation, as was recommended in the CPUC's environmental= =20 impact report regarding PG&E's hydroelectric facilities. There is growing= =20 consensus around this matter. I would hope that the paramount objective in this series of regulatory=20 decisions will be the protection of the interests of consumers.=20 Invigorating the Demand Side Conservation and efficiency are the cornerstones of California=01,s energy= =20 future.=20 Under my Executive Order, the State of California has achieved more than 18= 0=20 MW of load reduction earlier this year during Stage 2 alerts, and is moving= =20 quickly to add another 250 MW of demand reduction for summer 2001. The=20 federal government is following suit for federal facilities. The state and= =20 federal governments should set an example for similar voluntary load=20 reduction initiatives in the private sector. I was pleased to work with the California Grocers Association this summer t= o=20 develop a voluntary 10 percent demand reduction program during peak hours f= or=20 more than 2,000 groceries statewide. This program must be duplicated in oth= er=20 areas where feasible and the business community in California has pledged t= o=20 work cooperatively toward that end. I am calling on the CPUC to expedite its investigation of the state=01,s de= mand=20 reduction programs for commercial and industrial users, including the=20 interruptible programs. Those that are successful should be expanded. Those= =20 that require change should be modified. And new opportunities should be=20 developed to reduce and shift loads during peak hours and short supply. The= se=20 programs must be in place no later than March 2001, to provide adequate=20 opportunity for private sector planning and participation. I am also calling on the CPUC and CEC to coordinate efforts to demonstrate= =20 and implement programs which provide real-time price signals and=20 energy-reduction systems to sophisticated commercial electricity users, and= =20 to recommend a process for voluntary participation by consumers and small= =20 businesses. In September, I signed historic urgency legislation that provides $50 milli= on=20 for demand reduction programs that can be implemented by Summer 2001. I als= o=20 signed legislation that provides approximately $500 million annually for th= e=20 next 10 years for energy efficiency, research and development and renewable= =20 resource support. The CPUC and CEC are aggressively pursuing innovative=20 demand reduction programs using these funds.=20 Institutional Reform As I testified at the FERC hearing on November 14, I agree that the=20 stakeholder boards of the California Independent System Operator (CAISO) an= d=20 California Power Exchange present inherent conflicts of interest for their= =20 members and must be replaced. The composition of these boards is specified = by=20 state law, both as to size and as to qualifications for directors. I will propose legislation to replace the stakeholder boards with independe= nt=20 boards that are accountable for their actions, and that will consider both= =20 the need to assure reliability and the most economic method to do so.=20 I intend to move quickly on this aspect of the problem. Your concurrence in= =20 this effort is extremely important. It will little serve the consumers,=20 utilities, merchant generators or other parties to become embroiled in=20 litigation over exactly what powers Congress conferred on the FERC in 1935,= =20 or what traditional state powers, if any, Congress meant to circumscribe or= =20 override.=20 Recognizing that there may be a need for more extensive reconstitution of= =20 these entities, as some have suggested, I do not intend to let the status q= uo=20 continue while those debates are carried on. California will alter the=20 composition and membership of the boards so that the entities are in positi= on=20 to contribute to achieving the paramount objectives of both state and feder= al=20 law -- protection of the consumers' interests. In 1996 Governor Pete Wilson and his CPUC reposed a great deal of trust in= =20 the FERC in moving California=01,s electricity system into an unbundled,=20 federalized mode. Now is the time for you to justify that trust. I want to= =20 cooperate with you in transitioning to a market-based approach to provide= =20 this essential service. However, first and foremost, I want you to do your= =20 job and to let me do mine. Together we can protect the electricity consumer= s=20 of California and work to restore their confidence. Sincerely, =20 =20 =20 GRAY DAVIS
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