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 (c) 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.