FERC COMMISSIONERS PLEDGE TO ADDRESS CALIFORNIA'S POWER MARKET PROBLEMS 
DURING AND AFTER EMOTIONAL HEARINGS; SAN DIEGO ELECTRICITY CONSUMERS EXPRESS 
THEIR FRUSTRATIONS
  
09/20/2000 
Foster Electric Report 
Page 2 
(c) Copyright 2000, Foster Associates, Inc. 
Two days of hearings in San Diego, Calif. on the causes of this summer's 
significant electricity price increases in Southern California and other 
problems with California's competitive markets revealed much hand wringing 
and finger pointing, but the answer to the question of whether and how the 
market should be fixed proved elusive. Nevertheless, all four FERC 
Commissioners attending the hearings agreed that the Commission needs to be 
part of the solution. 
Commenting on his impressions of the discussions earlier in the week, 
Chairman James Hoecker conceded at the Commission's regular Sept. 14 meeting 
that "it will not be sufficient simply to sprinkle deregulation dust on the 
old monopoly cost-of-service environment." There will be no "magical" 
solution to the problems, he added. The causes are complex and involve both 
wholesale and retail service and state and federal regulatory 
responsibilities. 
Nevertheless, Hoecker said that FERC now has a better understanding of the 
plight of the inhabitants of Southern California and is cognizant of the 
sentiment of everyone that the Commission "should not study the issue to 
death." Accordingly, he said that FERC would work with the California Public 
Utilities Commission (CPUC), the state attorney general's office and the 
governor to do what is necessary with respect to wholesale electric market 
design and to maintain California as an attractive market for investment. 
"High prices, market uncertainty, and a long transition to competition, in my 
view, are not sustainable," Hoecker added, but he discouraged the apparently 
spreading view of some parties that "this is the beginning of the end for 
competitive electricity markets. I personally reject that notion not just as 
a matter of policy but as a practical matter." He predicted that fixing the 
problems will simply take a lot of hard work. 
The other commissioners similarly proclaimed their continuing commitment to 
the development of competitive electricity markets. Commissioner Linda 
Breathitt said incentives exist to act as soon as possible. Proclaiming that 
wholesale prices in California markets have not been just and reasonable, 
Commissioner William Massey said that authorities should focus on how to 
provide short-term relief while exploring the requisite long-term changes to 
the market structure. Commissioner Curt Hebert Jr. stressed the need to 
regard the implications on a wider scope beyond California. California's 
symptoms reflect a "systemic problem" that can be rectified, not a 
competitive problem per se, Hebert insisted. 
The first San Diego hearing was convened by the House Commerce energy and 
power subcommittee on Sept. 11, and California's House members appearing were 
quick to argue that generators were the main culprits behind prices that were 
as much as three times what they were last year. The generators "are playing 
games," asserted Rep. Bob Filner (D-Calif.). "They are robbing people of 
their livelihoods, even threatening to murder people's businesses. That's 
criminal to me." 
Besides Filner, other House members attending the hearing were all 
Republicans: subcommittee chairman Joe Barton (Texas), Brian Bilbray 
(Calif.), Randy Cunnigham (Calif.), Duncan Hunter (Calif.), Ron Packard 
(Calif.) and John Shadegg (Ariz.) 
California Representatives Filner, Hunter and Bilbray all called on FERC to 
roll back the wholesale rates being charged to San Diego's electricity 
consumers. Bilbray and Hunter also said they would support a bill (H.R. 5131) 
introduced by Filner (see related article, this REPORT) that would set the 
price for wholesale power sold in the Western Systems Coordinating Council 
region after June 1, 2000, at no more than the average price for the 
preceding three years, and would require refunds to ultimate consumers. 
While skeptical about the need to order refunds, Hoecker said that the 
Commission would take a new look at the issue. His preliminary view is that 
California's high prices result primarily from a critical imbalance of supply 
and demand, exacerbated by the wholesale market rules and structure. Once 
again, Hoecker called for enactment of federal restructuring legislation to 
reduce the uncertainty associated with deregulation, which may be inhibiting 
investment in new generation and transmission capacity. "Such legislation 
should address the need for comparable and open access to transmission 
facilities, regional transmission organizations, mandatory reliability rules, 
and tools for remedying market power," he told the panel. Currently, Hoecker 
said that California's market woes reveal FERC's lack of the necessary tools 
to address market power effectively. 
George Sladoje, president and CEO of the California Power Exchange (CA-PX), 
said one of the main culprits in California's electric market woes was 
generators abandoning the CA-PX's day-ahead market in favor of the California 
Independent System Operator's (CA-ISO's) more lucrative real-time market. 
"The shift of demand from the day-ahead market to the real-time market 
exacerbated price volatility and contributed to the crisis atmosphere, and it 
has been the most dominant cause of the significant supply reduction in the 
day-ahead market," Sladoje said in written testimony. He added that prices in 
markets outside California were more attractive to generators seeking 
long-term contracts, leaving California buyers at the mercy of the real-time 
markets in the face of increased demand and decreased supply. 
"To give some perspective to this condition, at times this summer the CA-ISO 
real-time market expanded to include as much as 20-30 percent of the total 
energy volumes, although it was designed as a balancing market that would 
handle no more than about 2 percent," Sladoje added. 
In defense of the generators, Jan Smutny-Jones, executive director of the 
Independent Energy Producers, blamed the problems on the lack of retail 
competition combined with a shortfall in generation. Executives from Enron 
Corp. and Reliant Energy faulted the state for requiring California's three 
investor-owned utilities to purchase all their electricity from the PX and 
for limiting their ability to hedge price risks by entering into long-term 
fixed-price contracts. 
On Sept. 12 FERC held a hearing of its own in San Diego as part of its 
ongoing investigation (EL00-95) into California's wholesale electricity 
markets (see REPORT No.199, pg.3). To open the hearing, Hoecker acknowledged 
that "San Diego customers are hurting. Competition is about choice, and these 
folks don't have choice." However, he also cautioned that federal 
intervention is at least six weeks away because he is reluctant to act before 
a Commission staff report on California's electricity market is completed on 
Nov. 1. 
"The Commission will correct any market flaws or unlawful behaviors to the 
extent it has authority to do so," Hoecker said in prepared testimony for the 
House hearing held a day earlier. "However, the Commission is still 
investigating these markets. When we have a sufficient record of market 
conditions, the Commission will take further action to address problems to 
the full extent of our jurisdiction." 
Hoecker's written testimony also lamented that FERC may lack the tools it 
needs to address market power. While FERC can attach market power mitigation 
measures to approvals of utilities' mergers or other corporate transactions, 
he noted that this remedy does not address market power already built into 
current commercial and operational arrangements. While the Commission also 
can deny or revoke authorization for market-based wholesale rates, reimposing 
cost-based rates would do "little or nothing to promote efficiency or 
competition," Hoecker stated. "And, in California where generation plants 
have recently been sold at well above book value, cost-based rates may not 
represent a real reduction." 
Commissioner Massey, however, believes that FERC has enough information to 
act now to mitigate what he believes are unjust and unreasonable wholesale 
power rates being charged in California. "Based on the records of proceedings 
at the Commission this summer, I believe that there are sufficient 
indications that California wholesale markets are not producing prices that 
are just and reasonable," Massey insisted in his written testimony. "For 
example, California wholesale electricity costs for June 29 of this year were 
seven times what they were for the same date in 1999 ($340 million vs. $45 
million) even though energy usage was only about 3 percent more. During the 
month of June 2000, the total cost of electricity (energy and ancillary 
services combined) charged to the California market was nearly half of 
California's total electricity cost for all of 1999. . . . I would also note 
that the California Public Utilities Commission states that every analysis of 
the California markets since their opening has found substantial exercises of 
market power. I believe that there are serious flaws in the California 
wholesale markets." 
"I am concerned that this summer's events are causing a crisis of confidence 
in California wholesale electricity markets that threaten to erode the 
political consensus necessary to sustain a market-based approach to 
regulation, not just in California but across the country," Massey added in 
his often-repeated concerns. "The Commission must act forcefully and 
decisively to reassure market participants, policymakers and consumers that 
jurisdictional wholesale markets will produce consumer benefits and just and 
reasonable rates." 
The Commission's strongest advocate for open and free electricity markets, 
Commissioner Hebert's written testimony cautioned against labeling the 
current situation as simply a "California" or "summer of 2000" problem. 
"Rather, the problems that are now confronting Southern California represent 
a manifestation of larger, deeper problems that may confront other portions 
of the country in later months and years," he insisted. The problem, Hebert 
acknowledged, is that easy fixes do not exist. 
According to Hebert, "Rebates, refunds, and emergency releases may offer some 
relief right now. However, these short-term bandages do nothing to mask the 
larger problem that surely will reemerge next summer and future summers until 
something is done to address the true, underlying nature of the problem. At 
bottom, the situation in Southern California demonstrates that the federal 
government -- in particular, FERC -- can and should do much more to promote 
energy supply, energy delivery, and utility innovation. . . . There is no 
comprehensive energy strategy. Decisions are made on an expedient, ad hoc 
basis, with little regard for long-term impacts. And policies made in one 
energy sector (electricity, natural gas, oil, etc.) fail to take into account 
their impact on other sectors. What is needed is a new form of thinking. Most 
regulators claim to support competition, but their decisions belie their 
stated intentions. What regulators need to do is to demonstrate the courage 
of their convictions by allowing competition actually to operate -- by 
trusting that markets will make appropriate allocative decisions. Regulatory 
policies that claim to help consumers by inhibiting the operation of market 
forces -- such as through price controls -- actually work to their 
detriment." 
Hebert's also pointed his finger at (1) SDG&E for failing to employ adequate 
risk management tools, (2) the CA-ISO "for lacking the incentives and 
accountability to make difficult decisions necessary for the transition to 
competition" while compromising its independence by bowing to political 
pressure, (3) the CPUC for policies "that fail to allow for the timely siting 
and construction of badly-needed generation" and for ignoring 
performance-based incentives, and (4) FERC for "sending inconsistent signals 
to energy suppliers" and granting too much deference to the CA-ISO, 
Finally, Commissioner Breathitt's prepared testimony stressed the need for 
federal and state officials to work together in exploring solutions since 
both have jurisdiction over different aspects of California's electricity 
markets.