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SCIENTECH IssueAlert, October 30, 2000
SCE, California ISO Propose Market Stabilization Plans; FERC to Meet This
Week
By: Will McNamara, Director, Electric Industry Analysis
===============================================================

Southern California Edison (SCE) filed a four-point plan calling on the
California Public Utilities Commission (CPUC) to act by year's end to settle
the financial uncertainty threatening state consumers and utilities resulting
from California's dysfunctional electricity market. This follows a separate
measure filed by the California ISO with the Federal Energy Regulatory
Commission (FERC) that attempts to limit reliance on spot markets for energy
purchases. FERC is scheduled to meet on Nov. 1 to discuss the California
power market and remedies for the state's troubled move to deregulate retail
service, which caused drastic price spikes this summer.

ANALYSIS: This is the latest chapter in the ongoing saga surrounding 
California's
energy market. FERC's meeting on Wednesday of this week is being met with
a great deal of anticipation as many market participants hope that some
sort of regulatory decision will be made to repair the California market.

First, let's establish what SCE is proposing. SCE has petitioned the CPUC
to take four immediate steps: 1). Support market reform by providing utilities
with greater freedom to contract for longer-term supplies of power, completing
review of SCE's bilateral contract proposals, and rectifying market structure
problems that have become apparent; 2). Confirm that utilities will be
able to recover their reasonable procurement costs incurred on behalf of
customers; 3). Implement a post-rate-freeze rate stabilization plan instead
of the current approach that directs utilities to pass through volatile
wholesale power costs, and provide for a modest rate increase beginning
Jan. 1, 2001, to avoid larger future increases; and 4). End the uncertainty
about the disposition of remaining utility generation assets.

I think this can all be translated as follows. 1). SCE (and presumably
PG&E) want to overturn California's strong resistance against bilateral
contracts. Under California restructuring law, the local distribution company
must purchase power directly from the Power Exchange. Bilateral contracts
with generators are largely prohibited, meaning that currently in California
suppliers cannot establish direct contracts with utilities, as is allowed
in other states such as Texas. 2). SCE and PG&E are both in severe debt,
due to accumulated under-collection resulting from the disparity between
the high cost of wholesale power and rate freezes in their service 
territories.
SCE's debt is about $2.4 billion, while PG&E's debt could be as much as
$2.9 billion. Both utilities want to be able to charge customers for their
debt. 3). SCE and PG&E want to avoid the sky-high prices that San Diego
Gas & Electric had to charge its customers when they were exposed to 
market-based
prices this summer. SCE claims that its rate stabilization plan would increase
rates by less than 10 percent, keeping rates at 1996 levels when adjusted
for inflation. SCE will identify the term of this rate increase in a more
formal proposal to the CPUC, but believes that the less-than-10 percent
increase would be sufficient to recoup its $2.4 billion debt if it were
in place for four to five years. 4). AB1890 strongly encouraged that the
California IOUs divest their power plants, as part of the agreements for
stranded cost recovery. SCE sold 12 natural-gas plants, and presently has
two coal plants and its shares of one nuclear plant in Arizona in escrow.
The CPUC has dragged its heals on approving or disapproving the sale of
plants currently in escrow, and SCE is pushing the agency to finally decide
whether or not to allow pending sales to be completed.

The California ISO's proposal is more specific, but also geared toward
market stabilization. The Cal-ISO wants to implement a $100/MWh bid cap
(reduced from $250/MWh) on electricity purchases in the ISO's spot market.
However, the Cal-ISO's plan includes several exemptions, including those
generators that can prove they will lose money at the $100 rate, generators
that contract 70 percent of their supply to serve California customers,
and generators producing less than 50 MW (renewable power, imported power,
etc.) Thus, the current rate cap of $250/MWh would remain in place and
serve as the absolute rate cap for those suppliers who are exempt from
the $100 payment cap.

Further, the Cal-ISO wants to require that generators contract 70 percent
of their capacity in forward markets, and that users schedule at least
85 percent of their load in forward markets. The Cal-ISO contends that
California IOUs should be easily able to schedule 85 percent of their load
by entering into contracts with generators. The Cal-ISO wants to affix
a "real-time deficiency charge" on both generators and users that do not
use the forward markets. The Cal-ISO submitted its plan to FERC because
it want its proposals to be implemented not just in California, but on
a national basis.

Although the Cal-ISO is approaching the matter from a national perspective,
the lack of forward contracting has caused particular problems within its
own state. The lack of adequate forward contracting has placed a burden
on the Cal-ISO's Real-Time Market, which was designed to handle only 5
percent of the electricity traded in wholesale markets, but in fact is
handling about 20 to 30 percent. The Cal-ISO proposal seems to be taking
into account the problem of an out-of-sync wholesale/retail market by 
encouraging
generation to stay in the state.  Otherwise, capped generators may sell
power outside of California if the wholesale prices were to exceed $100
per megawatt hour in the neighboring states.  Should FERC approve this
national rate cap, however, it will be precedent setting and will signal
that the wholesale power market is not truly deregulated.

As noted, FERC plans to meet on Nov. 1 to examine the California market
in detail. FERC initiated a formal probe of the California market in late
August, with its investigation focused on the summer's price spikes, the
state's market structure including the Cal-ISO and the Power Exchange,
as well as market-based sellers in California. The meeting this week 
reportedly
will disclose findings from FERC's investigation and "consider proposed
remedies."

 SCE's proposal has been submitted to the CPUC for review and is not on
FERC's agenda for approval. However, it is likely that whatever FERC decides
will have a direct impact on how the CPUC rules on SCE's plan. In particular,
FERC will be examining the issue of market power, and whether or not any
generators active in the California market intentionally gamed the system
by withholding generation to drive up energy prices. And the problem is
by no means limited to what occurred in San Diego this summer. Even though
the summer demand season has now ended, wholesale prices remain high, a
problem that is exacerbated by concerns surrounding supplies of natural
gas across the country.
===============================================================
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Sincerely,

Will McNamara
Director, Electric Industry Analysis
wmcnamara@scientech.com
===============================================================
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wmcnamara@scientech.com
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