FERC order shifts California away from spot market

Dec. 16, 2000--The bulk of California electricity transactions would be shifted into the forward markets from the spot market, under a series of reforms the Federal Energy Regulatory Commission (FERC) adopted Friday to correct flaws in the state's wholesale power market.

The order is intended to help guide the California market "toward swift self-correction," Chairman James Hoecker said during the Friday afternoon meeting, and he noted action by the California Public Utilities Commission (PUC) will be "critical" to restoring the health of the California market.

The major points of the order, first outlined at a Nov. 1 hearing, include:

• Southern California Edison Co., a unit of Edison International, and Pacific Gas and Electric Co., a unit of PG&E Corp., would be able to utilize directly the 25,000 MW of generation they still own or control. As of Dec. 15, the generation which the state had required to be sold at wholesale into the California Power Exchange may be sold directly at retail by the investor-owned utilities (IOU), subject to California regulators. If the PUC so chooses, the utilities can return to selling the electricity under cost-of-service regulations.

• California investor-owned utilities will no longer have to schedule all power purchases through the California Power Exchange (PX) as of April 30, 2001. The order releases 40,000 MW from mandatory exposure to the spot market and allows IOUs to engage in bilateral contracts of 2 years or more.

• The order calls for a $74/MWh benchmark price for bilateral contracts. The commission will use the benchmark price to assess complaints regarding "justness and reasonableness" of long-term contract prices.

• Buyers must preschedule at least 95% of their load with the California Independent System Operator (ISO) or be subject to penalties. Under the existing market structure, the ISO is forced into buying 4,000-5,000 MWh of power at the last minute, helping to drive up prices.

• By Jan. 29, 2001, the so-called stakeholder board of the ISO must cede control to ISO management, although board members may serve in an advisory capacity until April 27, 2001. FERC said it will work with California authorities in establishing guidelines for future board membership.

• The order calls for a $150/MWh "break point" bid price effective until April 30, 2001. Bids above $150/MWh will be permitted, but they will not be used to set the market clearing price. While bids above $150/MWh will be subject to FERC scrutiny, if a seller doesn't hear from the agency for 60 days, he is no longer subject to a refund order. The preliminary order issued Nov. 1 did not contain review limitation, generating widespread alarm among independent power plant owners.

• FERC called for a technical conference to establish new operating rules for the ISO, including introducing transactions such as locational marginal pricing. Commissioner William Massey said he would like the new rules to "look like PJM's."

As FERC commissioners noted, the order does not address the question of retroactive refunds to customers for high prices this summer as advocated by Gov. Gray Davis, some California utilities, and consumer organizations nor does it call for a cap on electricity prices throughout the western US as proposed by a number of California politicians.

Addressing the question of regional price caps, Hoecker pointed out, FERC has no authority over the Bonneville Power Administration or other public entities in the Pacific Northwest. He noted there is no spot market outside California to cap. Such a proposal could interfere with bilateral contracts, he said.

While the order found no specific instances of the exercise of market power, Massey contended such abuses exist and said he continues to be disappointed with the findings.

"I would have preferred to open an investigation into the entire western interconnection," he said. Massey said he also would have preferred a hard cap on prices rather than the so-called soft price adopted by the commission.

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