California ISO says generators overcharged by $6.2 billion

By Ann de Rouffignac,
OGJ Online

HOUSTON, Mar. 22, 2001—The California Independent System Operator will allege suppliers overcharged consumers $6.2 billion for electricity since May 2000 in comments to be filed Thursday with the Federal Energy Regulatory Commission.

The ISO said it would file its estimate of market power abuses with FERC in response to a FERC staff proposal on market mitigation measures.

“They [FERC] are headed in the right direction. But they just are not going far enough,” said Charles Robinson, ISO general counsel in a conference call. “We are asking FERC to be more aggressive in looking at market power to keep in check prices this summer.”

The ISO faults FERC’s assumption 95% of the electricity will be purchased in the forward market. That’s erroneous, Robinson said. So far about 15% of the electricity is still being purchased on the spot market. In its calculations of overcharges, the federal agency has used as its basis prices charged during Stage 3 electricity emergencies. The ISO suggested market mitigation measures need to be applied at other times as well.

ISO executives said an analysis showed from May-February prices exceeded what the ISO estimated to be competitive market levels by $6.2 billion. The analysis was based on pricing behavior of 26 companies.

Reaction to the accusation was swift.

“At the root of this is a different view of markets,” said Raymond Niles, analyst with Solomon Smith Barney Inc. in New York.

“Markets clear. When there is a very high price, it means there is a shortage of supply or very high demand or both. Competitive means when forces of demand and supply determine prices.” Niles said the ISO must be applying some kind of cost-plus pricing model used under regulation.

Ignoring credit risk
The ISO and FERC also are ignoring the credit and political risks of doing business in California, Niles said. A risk premium must be added to prices.

“How do you quantify that? It’s like the spread between the interest rates on junk bonds versus treasuries,” he said.

Dynegy Inc. which owns generation in California said that a “credit premium” must be considered for the below investment grade purchasers of their power. Billions of dollars in debt, Southern California Edison Co. and Pacific Gas & Electric Co. continue to barely avoid bankruptcy.

“We have said all along that our bids were just and reasonable,” said Steve Stengel, spokesman for Dynegy.

The Western Power Trading Forum, representing independent marketers and generators, also questioned why California is not being looked at as a “market,” where prices are ultimately set by demand.

“If you didn’t want to pay the price, don’t purchase,” said Gary Ackerman, spokesman for the forum. “Why didn’t they just not purchase? They didn’t have an obligation to buy, if the prices were too high.”

Lowering bids for power would have decreased the market price until supply matched demand and the market cleared. Ackerman said generators will demonstrate to FERC their bids were justifiable.

“This is not much more than politically motivated economic analysis. It’s for the governor to deflect the blame of the miserable handling of the energy crisis. They have made themselves the laughing stock of the power business.”

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