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December 15, 2000 (SF Chronicle)
Power Board's Industry Ties May Be Cut/Federal regulators consider making 
deregulation's creation independent
Susan Sward, David Lazarus


   As power prices skyrocket and California reels from the threat of
blackouts, the agency charged with overseeing the state's power grid has
come under increasing attack, and federal regulators are poised to order
sweeping changes in its governing board.
   Ever since the Legislature created the California Independent System
Operator four years ago, critics have lambasted the agency, saying it is
dominated by the power industry and does not have ratepayers' interests at
heart.
   Criticism of the ISO has grown as electricity reserves have dwindled and
as the agency has initiated statewide energy alerts that have required
hundreds of businesses to cut back their operations.
   "There are people on the ISO governing board who have a direct financial
interest in the policies they set," said Severin Borenstein, a professor
of business administration and public policy at the University of
California at Berkeley and the director of the University of California
Energy Institute.
   Today, the Federal Energy Regulatory Commission is expected to issue a
ruling that would remake the ISO's 26-member board, which includes
representatives of three investor-owned utilities, four municipal
utilities and two power generators.
   From its high-tech headquarters in Folsom -- reminiscent of NASA's mission
control center -- the nonprofit ISO essentially acts as traffic cop for a
power system that serves three-quarters of the state.
   Responsible for assuring a stable source of electricity, the ISO has the
authority to initiate emergency alerts and, if need be, rolling blackouts
if supplies drop to near nothing. By law, the utilities and power
generators must comply with ISO directives.
   Last month, federal regulators proposed an order calling for the ISO board
to be replaced by seven independent members. The new board would be
selected by the current ISO before it was replaced.
   Striving to restore order to the state's turbulent electricity market, the
commission said an overhaul of the ISO's management would be an important
first step toward easing the burden on consumers. CREATURE OF DEREGULATION
   The ISO was created as part of the Legislature's deregulation of the
state's electricity market in 1996. The Legislature set up the ISO as a
"stakeholder board" with designated seats for participants in the energy
marketplace.
   The theory was that those involved in the industry would be best able to
guarantee reliable electricity for the Bay Area and the other ISO-served
areas in California.
   "It was designed to be as neutral as possible," said Michael Shames,
executive director of the Utility Consumers' Action Network in San Diego.
"If anything, it's turned out to be far too cozy with power generators."
   State Sen. Debra Bowen, D-Marina Del Rey, said lawmakers were told that
the deregulation blueprint they adopted in 1996 was a better alternative
than more sweeping proposals being considered by the state Public
Utilities Commission.
   Lawmakers were reassured at the time that the deregulation plan, which was
intended to lower power prices by increasing competition, had the full
backing of utilities, including Pacific Gas and Electric Co., power
generators and large users of electricity.
   "You have to remember that the political climate was different then," said
Bowen, the author of a pending measure replacing the existing ISO board
with one appointed by the governor and independent of the industry.
   "We had a Republican Assembly and a Republican governor (Pete Wilson) with
(his) appointees on the PUC with a free market point of view," Bowen said.
"The bargaining position of the ratepayers and consumer groups was not
strong." PRIVATE COMPANIES' LEVERAGE
   Doug Heller, assistant director of the Foundation for Consumer and
Taxpayer Rights, said the Legislature set up the ISO the way it did
because "it and the regulators were so transfixed with the idea of the
free market that they ignored the tremendous leverage they were handing
over to the private energy companies."
   He added, "Because the ISO has a mandate to keep the lights on and procure
power when the utilities are short, this energy industry-dominated board
has used its mandate as justification for gouging consumers."
   If the prices currently being paid for electricity are sustained over
time, Heller said ratepayers would have an average monthly bill of $620
and a small business paying a $1,000 monthly electricity tab could see its
bill jump to $10,000 based on current energy market prices.
   Federal regulators almost certainly will not let this happen. They are
expected to announce measures today intended to keep wholesale prices
stable and thus protect users from sharp increases in their power bills.
   The ISO is currently chaired by Jan Smutny-Jones, executive director of
the Independent Energy Producers Association, a trade association whose
members generate about 24,000 megawatts of power in California.
   The board's members include representatives from two power generators,
Dynegy Inc. and an affiliate of Florida Power and Light; the state's three
investor-owned utilities, PG&E, Southern California Edison and San Diego
Gas and Electric; and four municipal utilities serving Los Angeles,
Sacramento, Silicon Valley and several Southern California communities.
   UC's Borenstein said the ISO board should be constituted along the lines
of New England's power agency where "you go out and find independent
experts in power, finance and economics. New England has had its ups and
downs, but I think there is a trust the New England board is acting in the
best interests of consumers." POWER PRICING GATEKEEPER
   Mike Florio, an attorney for The Utility Reform Network in San Francisco
and a member of the ISO board, said that although the composition of the
ISO board is only one element of the California energy crisis, the ISO "is
at the crux of the matter because it establishes and administers the state
market rules that determine how pricing gets done.
   "The ISO has been a law to itself -- with its attitude being: 'We keep the
lights on, we know what's going on and others should butt out,' " he said.
   If federal regulators order an overhaul of the ISO today, "that may just
be the beginning of the battle," Florio said. "If the changes they order
don't offer customers relief from the extremely high prices, TURN and
others will call for the state to buy the transmission system from the
utilities as a means of wrestling back control from FERC."
   For his part, the consumer network's Shames is proposing a merger of the
ISO and the California Power Exchange, which coordinates the wholesale
market, thereby creating a "superagency" with full powers of oversight and
enforcement.
   Yesterday, the idea of making the ISO board independent picked up some
utility support as well. PG&E, which serves millions of customers in
Northern and Central California, issued a statement that "to restore
public confidence, we agree with state and federal officials that the ISO
board needs to be independent."
   In any case, the ISO is not without its defenders. Barbara Barkovich, an
ISO board member who is a San Rafael consultant to large industrial
customers, said some of the criticism of the ISO has been unfair.
   "There are larger market forces at work here: Clearly, we have a tight
supply situation compared to demand -- which means there will always be
upward pressure on prices," Barkovich said. "We have had a situation where
prices out of state have recently been very high, meaning when anyone is
selling, they will go where prices are the highest." POWERFULLY NOBLE
CAUSE
   For its part, she said, the ISO "has seen its role as doing everything it
could to keep the lights on rather than have blackouts."
   Others say the ISO simply does not have sufficient enforcement powers to
make its orders stick in a volatile energy market.
   "The ISO is a flawed institution, but it is not responsible for the
shortages," said Shames of the Utility Consumers' Action Network.
   Such assertions do not halt the drive to reform the ISO's makeup.
   Assemblyman Fred Keeley, D-Monterey, is the author of one of several bills
now pending in the Legislature that would give Gov. Gray Davis authority
to appoint both a new ISO and a revamped Power Exchange.
   But he cautioned that if an ISO restructuring is all that happens, "We
might as well do nothing. It is only one element of the solution." MORE
REFORMS NEEDED
   Keeley said that for California to work through its energy crisis, several
major reforms must be put in place, including energy conservation moves,
as the state's population climbs by as much as 600,000 a year.
   One area crying out for attention, Keeley said, "is the demand side of the
market. When California found itself in an energy crisis in the 1970s, it
took good action on solar, renewable sources of energy, pricing and tax
actions in the law and do on."
   But he said that many of those changes have been tossed out or whittled
away in the intervening decades.
   The Legislature also needs to look at the possibility of "the public
having some generation assets under its control -- for example, the
hydroelectric assets PG&E now has up for sale," Keeley said.
   "PG&E's assets on Northern California rivers is the largest group of
hydroelectric assets under one ownership in the state," he said. "Public
ownership of these hydroelectric assets is preferable to private ownership
because those assets in public ownership would mean lower rates for
consumers."
   Whatever course the Federal Energy Regulatory Commission and state
lawmakers take, the stakes are undeniably high.
   "If this conflict is allowed to continue," Bowen wrote FERC Chairman James
Hoecker last month, ". . . then we have failed our duty to Californians."

California Power ShuffleHere is how California's electricity distribution
system is set up and what steps the regulatory body can take in times of
extreme need..ISO statsVolume: 164 billion kilowatt hours a year Size:
124,000 sq. miles, or 75 percent of state.Day-by-day shortage The ISO
forecasts electricity usage throughout the state and monitors actual peak
usage..Stages of emergencyThe stages of electrical power emergencies in
California:Stage 1: Declared when the state's operating reserves of energy
dip below 7 percent. All power consumers are asked to conserve
energy.Stage 2: Declared when operating reserves fall below 5 percent.
Customers who have gotten lower rates for agreeing to go off-line when a
power crunch hits are ordered to reduce or shut off their power.Stage 3:
Declared when operating reserves fall below 1.5 percent. Rotating
blackouts could result, with power to different areas temporarily cut
off..COMPANIES THAT OPERATE WITHIN THE ISO:Pacific Gas & ElectricSouthern
California EdisonSan Diego Gas & Electric.Independent System OperatorA
not-for-profit corporation that ensures a competitive market for
electricity and controls the integrity of the state's strained power
grid..Remedies for a Stage 3 alertThe ISO can order the state to conserve
power during a Stage 3 alert by:Asking large facilities, such as a mine or
water pump, to shut down for a day to lessen demand. .Depriving some areas
of power in order to maintain others by initiating rotating blackouts or
brownouts -- temporary sags in power..Source: California Independent
System OperatorAssociated Press Graphic
   Chronicle research librarian Johnny Miller contributed to this report. /
Email Susan Sward at ssward@sfchronicle.com and David Lazarus at
dlazarus@sfchronicle.com.
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Copyright 2000 SF Chronicle