FOR IMMEDIATE RELEASE December 1, 2000
GOVERNOR DAVIS RESPONDS TO FERC WITH INITIATIVES ON ELECTRICITY PRICES,
SUPPLY
SACRAMENTO - Responding to a draft proposal by the Federal Energy Regulatory
Commission (FERC), Governor Gray Davis today announced several initiatives
to ensure reliable and affordable electricity in California.
In a letter to the federal regulators, the Governor outlined a variety of
regulatory and legislative actions to keep the state,s electricity prices at
the lowest reasonable cost. They include innovative measures to encourage
the siting of power plants in compliance with the state,s environmental
laws, restructuring the state,s power-buying agencies to eliminate conflicts
of interests, and promoting energy conservation and voluntary cutbacks by
larger users during periods of high electricity demand.
"If you do your job of protecting consumers by rectifying the wholesale
markets, the steps I have to take can be transitional in nature and limited
in scope," wrote Gov. Davis, who also reiterated his call to FERC to order
retroactive refunds to San Diego and Orange County consumers, and to impose
price caps on the price of wholesale electricity. "I cannot in good
conscience, however, forego any measure that would serve to protect the
people of California until I am satisfied that the sellers in the wholesale
markets will not victimize Californians again."
Governor Davis, who inherited the problems of deregulation as a result of
legislation signed by Governor Pete Wilson in 1996, said that "The free
market applied to electricity can work, but only if market conditions allow
for real competition, and if all parties act responsibly." The Governor
added "Even though FERC had recently concluded that California,s market was
+dysfunctional,, its draft proposal fails to include measures to stop
out-of-state electrical generators from price gouging, and would lead to
higher prices next summer."
The Governor,s proposals include:
Introducing legislation to dramatically change the membership of the ISO and
PX, eliminating members of the board that have what he called "inherent
conflicts of interest" and replacing them with independent members;
Seeking legislation that will allow new approaches - such as emissions
credit trading - to aid in the siting of new power plants;
Calling on the state,s Public Utilities Commission (PUC) to promote
distributed generation and co-generation;
Accelerating voluntary efforts by the private sector as well as state
agencies to reduce their energy use during peak periods;
Expanding "forward contracting" by utilities that would allow multi-year
contracts to reduce price volatility and ensure reliability;
Asking the PUC to expedite its investigation of the state,s electricity
demand reduction programs for commercial users, and adopt new programs to
allow voluntary interruptions that will allow the reduction of electricity
use during peak power periods;
Reviewing new measures to coordinate power-plant maintenance and operating
activities;
Requiring utilities to retain their existing generation facilities instead
of selling them off at least until the market becomes competitive; and
Calling on the PUC and California Energy Commission (CEC) to study providing
"real time price signals" (such as metering) to large energy users to reduce
energy use.
Governor Davis noted that in the decade prior to his administration, no
power plants were built in the state. But since April 1999, six power plants
representing 4,700 MW of new generation have been approved. Twenty more
applications are under review and 11 more are in the pipeline.
"This represents a significant change in policy and performance and responds
to the fact that we must increase supply as rapidly as possible without
abrogating our commitment to state and federal public health and
environmental protection," he said.
The Governor,s initiatives announced today reflects his commitment to FERC
Chairman James Hoecker at a hearing last month in San Diego to provide input
into FERC,s final order on the California electricity market. That decision
could come as early as December 13, 2000.
The Governor will continue to meet with legislative leaders, consumer
groups, and other interested parties to discuss additional options. He said
a more complete plan cannot be developed until FERC,s final order has been
announced and analyzed.

Please see attached letter. <hoecker121.html>
# # #

GOVERNOR GRAY DAVIS ? SACRAMENTO, CALIFORNIA 95814 ? (916) 445-2841

December 1, 2000
Honorable James Hoecker
Chairman
Federal Energy Regulatory Commission
888 First Street, N.E.
Washington, D.C. 20426
Dear Chairman Hoecker:
I told you on November 14 in San Diego that, by December 1, I would respond
to your plan with my suggestions to protect the interests of the people and
businesses of California by providing reliable electricity supplies at the
lowest reasonable cost. Obviously, a complete plan by the State of
California must await your review of my suggested changes to your proposed
order, and final action on that order on December 13. This letter outlines
the first steps toward a plan that my administration is developing based on
extensive, ongoing discussions with legislative leaders, consumers,
business, utilities, generators, environmentalists, labor, agricultural
interests and other California stakeholders.
This emerging plan will indicate to you that I am prepared to act with the
concurrence of the Legislature in California to fulfill our obligations to
assure reliable service at reasonable costs to the consumer.
The free market applied to electricity can work, but only if market
conditions allow for real competition, and if all parties act responsibly.
The Federal Energy Regulatory Commission (FERC) has found that the wholesale
market in California is dysfunctional and that the wholesale prices charged
by generators in your jurisdiction are unjust and unreasonable.
For that reason, I renew my call for the FERC to undertake the actions that
are critical -- and clearly within your jurisdiction -- to order retroactive
refunds to the consumers who have been harmed this year, and to establish
hard price and bid caps that will protect consumers until the energy
marketplace becomes truly competitive. I do not believe that your proposed
$150/MW clearing price limit will provide any real protection. I again ask
you to impose real price and bid caps in the $100/MW range on a transitional
basis over the next 36 months.
If you do your job of protecting consumers by rectifying the wholesale
markets, the steps I have to take can be transitional in nature and limited
in scope. I cannot in good conscience, however, forego any measure that
would serve to protect the people of California until I am satisfied that
the sellers in the wholesale markets will not victimize Californians again.
Since our meeting in San Diego, several things have occurred which influence
my current thinking.
On November 20, 2000 the California Energy Commission (CEC) published the
results of a detailed bottom-up study of available electricity supply for
2001. It shows that -- taking into account expected load growth, firm and
dynamically scheduled imports, and new supply already under construction or
under contract -- California should be able to avoid emergencies if supplies
are properly managed and scheduled. This presumes, of course, no gaming or
withholding by sellers in wholesale markets and an absence of panic buying.
But the CEC study also shows that supplies are sufficiently tight that
market power will exist and will need to be mitigated during periods of high
demand. The same opportunity for wholesale price gouging through the
exercise of market power and withholding that existed in summer 2000 will
exist in 2001. You must take decisive action to preclude such behavior.
During the week of November 13-19, while you and regulatory commissioners
from around the country were in San Diego, California was subjected to
several Stage 2 Alerts, reflecting severe shortages of generation, even
though these are the lowest load months of the year. Prices were
astronomical. More than 12,000 megawatts of generation were off-line at the
same time, including over 5,000 megawatts for "unscheduled outages." I will
recommend steps to assure that existing resources in California are
available to meet California,s local energy needs, and that information and
the authority necessary to prevent a recurrence of such events are available
to state and local officials.
On November 22 the California Public Utilities Commission (CPUC) and
Electricity Oversight Board (EOB) filed comments with you that summarize the
current status of their ongoing investigations. They confirm the conclusions
of the independent market monitors that California has been victimized by
the exercise of market power by merchant generators and marketers during
summer and fall 2000. The state agencies have been hampered in their
investigations by the refusal of merchant generators to provide information
that will both assist in the understanding of last summer,s prices and in
the fashioning of remedies to assure that we are not victimized again. I
urge you to compel the necessary disclosure of information to complete these
investigations.
On November 21 the CPUC issued an Environmental Impact Report (EIR) on the
proposal by PG&E to move its hydroelectric facilities out of the regulated
utility. The EIR concludes that such a project would cause significant
unmitigated harm to the environment and recommends retention as the
preferred alternative. This suggests that California,s course of generation
divestiture by utilities may be slowed or stopped.
With these events as background, I want to describe the steps I have taken
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
were built in California.
Since April 1999, six power plants representing 4,700 MW of new generation
have been approved by the CEC. Five of these plants are under construction
and the sixth will begin construction no later than April 2001. Twenty more
applicants have completed pre-filing and have active applications under
review by the commission staff. Eleven more applications are in the
pre-filing stage.
This represents a significant change in policy and performance and responds
to the fact that we must increase supply as rapidly as possible without
abrogating our commitment to state and federal public health and
environmental protection.
Much has been made about the difficulty of siting and permitting generation
in California. With enactment of AB 970 and the creation of the Governor,s
Clean Energy Green Team this September, California has aggressively
committed itself to continue to accelerate the siting and permitting of
generation and to coordinate local, state and federal government agency
review and action.
Federal and state air quality requirements present unique challenges to the
construction and operation of new power plants. Through the Green Team, we
are developing new and creative approaches to meet these challenges, working
with local air quality districts, the California Air Resources Board and the
United States Environmental Protection Agency. These might, for example,
expand upon the case of the proposed Otay Mesa power plant, where mobile
emissions credits are being used to offset stationary source emissions that
will be generated by the new facility. If necessary, I will seek legislation
to enable these new approaches.
I am also calling on the CPUC to aggressively reduce barriers and to
otherwise encourage the locating of distributed generation and co-generation
where it is viable, cost effective and environmentally sound. The CPUC has
already initiated action that will provide a forum for expediting
certificates for transmission facilities, including environmental review.
Finally, I believe it is important to assure that all supplies of
electricity are available when emergency conditions exist, to avoid
interruptions such as those experienced last summer and as recently as last
week. Suggestions we are considering for achieving this include new means of
coordinating power-plant maintenance and operations activities.
Forward Contracting by Utilities
Many parties, including the FERC, have recommended expanding the use of
forward contracting by the utilities including multi-year bi-lateral
contracts as a way of reducing exposure to volatile spot market prices. The
contracts, as a part of a larger utility energy portfolio, represent an
important tool to moderate price volatility and ensure reliability. I am
asking the CPUC to expeditiously develop benchmarks to assure the
reasonableness of these contracts without unfairly "second guessing" these
decisions in later years.
This process should be in place early in 2001 to provide adequate
opportunity for contracts to be negotiated and in place before Summer 2001.
Coupled with the forward contracting issue is the question of the obligation
of utilities to buy and sell all of their electricity through the California
Power Exchange (PX). This issue requires careful consideration since these
transactions through the PX are currently subject to full disclosure, and
safeguards are in place to assure delivery. These protections for consumers
and business must not be lost.
Among the suggestions that have been made to ensure that utilities have a
cost-effective portfolio of energy is the proposal that utilities retain
their existing generation, as was recommended in the CPUC's environmental
impact report regarding PG&E's hydroelectric facilities. There is growing
consensus around this matter.
I would hope that the paramount objective in this series of regulatory
decisions will be the protection of the interests of consumers.
Invigorating the Demand Side
Conservation and efficiency are the cornerstones of California,s energy
future.
Under my Executive Order, the State of California has achieved more than 180
MW of load reduction earlier this year during Stage 2 alerts, and is moving
quickly to add another 250 MW of demand reduction for summer 2001. The
federal government is following suit for federal facilities. The state and
federal governments should set an example for similar voluntary load
reduction initiatives in the private sector.
I was pleased to work with the California Grocers Association this summer to
develop a voluntary 10 percent demand reduction program during peak hours
for more than 2,000 groceries statewide. This program must be duplicated in
other areas where feasible and the business community in California has
pledged to work cooperatively toward that end.
I am calling on the CPUC to expedite its investigation of the state,s demand
reduction programs for commercial and industrial users, including the
interruptible programs. Those that are successful should be expanded. Those
that require change should be modified. And new opportunities should be
developed to reduce and shift loads during peak hours and short supply.
These programs must be in place no later than March 2001, to provide
adequate opportunity for private sector planning and participation.
I am also calling on the CPUC and CEC to coordinate efforts to demonstrate
and implement programs which provide real-time price signals and
energy-reduction systems to sophisticated commercial electricity users, and
to recommend a process for voluntary participation by consumers and small
businesses.
In September, I signed historic urgency legislation that provides $50
million for demand reduction programs that can be implemented by Summer
2001. I also signed legislation that provides approximately $500 million
annually for the next 10 years for energy efficiency, research and
development and renewable resource support. The CPUC and CEC are
aggressively pursuing innovative demand reduction programs using these
funds.
Institutional Reform
As I testified at the FERC hearing on November 14, I agree that the
stakeholder boards of the California Independent System Operator (CAISO) and
California Power Exchange present inherent conflicts of interest for their
members and must be replaced. The composition of these boards is specified
by state law, both as to size and as to qualifications for directors.
I will propose legislation to replace the stakeholder boards with
independent boards that are accountable for their actions, and that will
consider both the need to assure reliability and the most economic method to
do so.
I intend to move quickly on this aspect of the problem. Your concurrence in
this effort is extremely important. It will little serve the consumers,
utilities, merchant generators or other parties to become embroiled in
litigation over exactly what powers Congress conferred on the FERC in 1935,
or what traditional state powers, if any, Congress meant to circumscribe or
override.
Recognizing that there may be a need for more extensive reconstitution of
these entities, as some have suggested, I do not intend to let the status
quo continue while those debates are carried on. California will alter the
composition and membership of the boards so that the entities are in
position to contribute to achieving the paramount objectives of both state
and federal law -- protection of the consumers' interests.
In 1996 Governor Pete Wilson and his CPUC reposed a great deal of trust in
the FERC in moving California,s electricity system into an unbundled,
federalized mode. Now is the time for you to justify that trust. I want to
cooperate with you in transitioning to a market-based approach to provide
this essential service. However, first and foremost, I want you to do your
job and to let me do mine. Together we can protect the electricity consumers
of California and work to restore their confidence.
Sincerely,
GRAY DAVIS




Karen Edson
kedson@ns.net
916/552-7070


Karen Edson
kedson@ns.net
916/552-7070