THE WALL STREET JOURNAL / CALIFORNIA 

Critics Seek
More Control
Over ISO 
By Marc Lifsher 

08/09/2000 
The Wall Street Journal 
Page CA1 
(Copyright (c) 2000, Dow Jones & Company, Inc.) 
Some people want the California Independent System Operator to be a lot less 
independent. 
The Folsom-based nonprofit corporation, which acts as the traffic cop for the 
state's electricity grid, has been a lightning rod for criticism during this 
summer's power crisis. Though generally praised for keeping lights on in the 
face of severe shortages of electricity, the ISO has come under fire for 
failing to move more quickly to lower the maximum price it will pay 
generators for emergency power to meet demand and prevent blackouts. 
Pressure on the ISO has eased considerably since last week, when its 
governing board voted to lower the cap on such same-day, emergency purchases 
-- the only type of pricing it has the power to affect directly -- to $250 a 
megawatt hour from $500. But the heat hasn't been turned off completely. Some 
lawmakers still are calling for changes in the 26-member ISO board, which 
includes people nominated by power generators, utilities, middlemen, and 
commercial and residential customers, among others. The critics want to 
streamline the board and make it more accountable to the state's elected 
officials. 
The ISO was created by the state's 1996 utility-deregulation act to transmit 
electricity smoothly between generators and utilities. Lawmakers devised the 
independent board as a way to give the various "stakeholders" -- generators, 
utilities, middlemen, customers and environmentalists -- a say in how energy 
is supplied. Members serve for up to three years. 
"It's inappropriate for the ISO governing board to vote on issues that 
benefit them financially," says Sen. Dede Alpert, a Coronado Democrat. She 
questions the wisdom of allowing out-of-state energy sellers and marketers to 
sit on the ISO board and vote on emergency prices, especially when they have 
an interest in keeping those prices high. 
Sen. Alpert spent much of the Legislature's recent summer recess fielding 
complaints about high electricity costs from her constituents, customers of 
San Diego Gas & Electric Co., a unit of San Diego-based Sempra Energy. Last 
summer, SDG&E became the first investor-owned utility in the state to have 
price regulations fully lifted. This summer, its rates have doubled, as high 
temperatures and power shortages have swept the West. 
In response to a series of price spikes in Southern California and the wider 
contention that skyrocketing prices indicate the failure of deregulation, 
state lawmakers have scheduled a joint hearing tomorrow in Sacramento. High 
on the agenda: possible changes in the ISO's governing structure and scrutiny 
of the way it handles power statewide on hot days. Critics say emergency 
purchases should be no more than 5% of electric-power sales, but were as high 
as 33% of the market on hot days earlier this summer. 
Key legislative leaders -- including Sen. Steve Peace, an El Cajon Democrat 
who was the architect of the 1996 deregulation law -- would like to make the 
ISO more accountable to state elected officials. 
Possible changes include preventing industry representatives with conflicts 
from sitting on the ISO board, as well as abolishing the ISO entirely and 
shifting its responsibilities back to state utilities, under the supervision 
of the state Public Utilities Commission. Until 1996, the PUC regulated all 
electric utility rates and services. 
ISO board members say legislative critics are unfairly focusing anger over 
the price spikes on the ISO, which has only a limited ability to set prices. 
Most electricity isn't sold through the same-day, emergency market -- but 
through long-term contracts between sellers and utilities, or at least a day 
in advance through the California Power Exchange, which is a nonprofit 
corporation established by the 1996 law to serve as a trading floor. 
"We need to create a government structure that is not susceptible to pressure 
from one state senator or anyone else," to keep prices artificially low, says 
ISO Chairman Jan Smutney-Jones, who represents the Independent Energy 
Producers Association, the trade group for non-utility power generators. He 
dismisses criticism of the board's out-of-state members. There needs to be 
"an independent, interstate board" because energy is transmitted across state 
lines, he says. Two Houston-based power sellers on the board, Dynegy Corp. 
and Enron Corp., deny any conflict. Chuck Watson, Dynegy's chairman and chief 
executive, blames state officials for expanding the ISO's role to include 
monitoring prices. "If there's any finger-pointing," Mr. Watson says, "they 
probably should start with the big finger pointed right at them." 
Substantial restructuring of ISO governance could prove difficult. The state, 
through the governor-appointed Electricity Oversight Board, has limited power 
to make changes. Past efforts by the Oversight Board to exert control didn't 
go far. 
Last year, state lawmakers tried to give the Oversight Board the power to 
confirm or reject ISO board members to make them accountable to state 
officials. (Nominees had previously gone on automatically.) The effort was 
opposed by officials of the Federal Energy Regulatory Commission in 
Washington, D.C., which argued that the state couldn't have veto power over 
the nominees of out-of-state power producers. In a compromise, California 
officials were given authority to veto half the board -- those nominated by 
residential, industrial, commercial and agricultural power-users. 
The federal energy commission has final regulatory authority over the ISO and 
has viewed state attempts to meddle with the agency as an unconstitutional 
attempt to hinder interstate commerce. 
Any proposed changes in ISO's governing structure "would be looked at very 
closely by FERC," says ISO attorney Richard Jacobs. 
This summer, the ISO board displayed an independence that was annoying to 
state lawmakers. In June, Sen. Peace called on the board to lower its price 
cap for emergency purchases, from $750 a megawatt hour (roughly the amount of 
electricity needed to power 1,000 homes) to $250. The board responded by 
lowering the cap to $500 a megawatt hour. A second attempt to lower the cap 
to $250 failed to get a majority vote. 
The reason? The three private power-seller representatives, including the 
Independent Energy Producers Association, were joined by those representing 
agricultural, industrial and commercial users in opposing a lowering of the 
cap. 
Then, the pressure on the ISO board really intensified. Gov. Gray Davis 
weighed in, by sending the ISO board a letter asking it to lower the cap "to 
the lowest possible level." Energy Secretary Bill Richardson ordered the 
representative of federal-public-power sellers to change his vote from no to 
yes. A consumer representative from the League of Women Voters also moved to 
the "aye" column, allowing the cap to be lowered to $250. 
Lowering the cap removes some of the rate pressure on residential and 
commercial consumers in San Diego -- and takes some of the heat off the ISO 
board. But not entirely: A Public Utilities Commission report on the state's 
electricity market that was sent to the governor after the vote said that the 
members of the ISO and the Power Exchange boards "can have serious conflicts 
of interest" and that both organization aren't "accountable to the state or 
its consumers." 
An ISO spokesman said the board is in the process of producing a formal 
response to the report and it declined to comment. A spokesman for the Power 
Exchange said that it has followed the law regarding conflicts and that it 
does protect consumers. 
---