FERC Restructures California Power Market

Responding to a California power market gone haywire and teetering on the 
brink of operational and financial disaster, FERC Friday issued a series of 
remedial measures, virtually stripping the Cal-PX and Cal-ISO of their 
control of the market and calling market stakeholders together to negotiate 
bilateral forward contracts. 

The Commission's main action, effective with the issuance of the order after 
the Friday afternoon meeting, removes the requirement that California 
utilities buy and sell exclusively through the California Power Exchange 
(Cal-PX) and clears the way for bi-lateral contracts in the forward market. 
FERC scheduled a settlement conference for Dec. 19 in Washington of parties 
in the state's power market to negotiate those contracts. 

"California does [not] have the benefit of a competitive market," Chairman 
James Hoecker said, noting he had heard the state's power market called 
"crisis by design." The design was "an unworkable state law, the product of 
command and control that described in detail" exactly how the market should 
function. "It wasn't competition," Hoecker said. "It's time to get serious 
about saving the future of competitive markets...Competition did not fail in 
principle at either the wholesale or retail level because it was never 
well-conceived or tried. This version of competition was a disaster." 

Commissioner William Massey defended the Federal Energy Regulatory 
Commission's backing away from price caps. "Rather than cap the spot market 
created by the state of California, the order would simply shrink its size 
and diminish its influence." This will "give back participants' ability to 
find the right price; This ability is what California has taken away from 
that market." 

Massey said the action would allow bilateral transactions, support forward 
contracts, and allow the parties to manage risk. He urged the California 
Public Utilities Commission to "step up to its responsibilities" in 
supporting the FERC-directed activities. 

Massey said the transfer of wealth in what he described as the "apocalypse" 
in California "is absolutely staggering. The two largest utilities are 
virtually bankrupt." He predicted a court, acting on accepted law and 
precedent, would eventually rule the utilities are entitled to recover the 
costs from customers, spreading the costs out over the entire state. 

PG&E Corp. officials lambasted the Commission's actions, saying they left 
California's electric customers "exposed to price gouging and future electric 
supply reliability uncertainty." 

"The California wholesale market is broken. And we are extremely disappointed 
by the insufficiency of today's FERC order," PG&E officials said in a 
statement. "The remedies outlined in the order do not go nearly far enough to 
provide a solution that ensures reliability of the state's electric supply 
and equally importantly, provides relief from future price gouging," the 
Northern California utility company said. PG&E said it was particularly 
disappointed that FERC did not call for retroactive price refunds for 
California electric customers, as was requested by Gov. Gray Davis. The 
utility also said it was "especially troubled" that FERC shortened the 
timeframe for the electric price cap from the end of 2002 to April 2001, 
"leaving customers exposed during the high-demand summer season." 

Sen Dianne Feinstein, (D-CA), said FERC's action was unacceptable. "Rome is 
burning, our utilities are close to bankruptcy, Californians are facing major 
blackouts, and the Commission is fiddling." 

Hoecker said similar competitive problems in states in the Pacific Northwest 
have led to pleas from governors and others for regional price caps. But he 
pointed to the fact that FERC is severely limited in what it can do in that 
region. For one, it lacks authority over the Bonneville Power Authority and 
other federal operations there, which make up a major portion of the market. 
Further, there is no Northwest spot market that can be capped in the way caps 
operate in California. There also would be problems with the many purchasers 
who already had hedged or protected themselves in some way. Hoecker strongly 
urged Energy Secretary Bill Richardson to convene a conference to try to 
identify regional problems, and offered his help in this. 

Commissioners Curt Hebert and Massey said they would issue concurring 
opinions. Hoecker said he will submit a concurring opinion next week on items 
such as RTOs that are beyond the scope of the order. The Commission's 
actions, which went beyond recommendations it had made earlier (see Daily 
GPI, Nov. 2), came at an emergency meeting following a week of continuous 
power alerts and emergency measures to avoid rolling blackouts in the state. 

The Commission's reforms call for: 

 No retroactive refunds for California customers; 

 Elimination of the requirement that California's three investor-owned 
utilities --- Pacific Gas and Electric, San Diego Gas and Electric and 
Southern California Edison --- sell all of their power into the Cal-PX, and 
buy all of their power from the Cal-PX. This took effect Friday; 

 Return 25,000 MW of generation to state regulation; 

 Termination of the Cal-PX wholesale rate schedule effective the close of the 
trading day on April 30, 2001; 

 Create a benchmark price for wholesale bilateral contracts to assess prices 
of five-year energy supply contracts; 

 Create penalties for underscheduling power loads; 

 A requirement that market participants schedule 95% of their load prior to 
real time. Violators will incur penalties for scheduling deviations exceeding 
the greater of 10 MW or 5% of their hourly load; 

 Begin market monitoring and price mitigation for the Cal-ISO and PX spot 
markets. FERC will hold a technical conference to develop a monitoring an 
mitigation program. A proposed plan is to be submitted by March 1 so that the 
measure can be in place by May 1; 

 A single-priced auction to be used only for bids at or below $150/MW. Bids 
above $150/MW will not set the market clearing price, although they will be 
subject to FERC reporting requirements; 

 Replacing the current Cal-ISO stakeholder governing board with a 
non-stakeholder board. On Jan. 29, 2001, the Cal-ISO governing board members 
will be required to turn over their decision-making power and operating 
control to the management of the Cal-ISO. The members will be permitted to 
function in an advisory capacity until the new board is selected. FERC to 
discuss with California representatives a process for selecting new Cal-ISO 
board members; and 

 Modify interconnection procedures. The ISO and utilities must file 
generation interconnection procedures. 


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