Current State of Affairs in California's Wholesale Electric Markets
January 2001
Wholesale power prices and resulting retail electricity costs in the California markets have increased significantly. Local California utilities may face bankruptcy and the reliability of power supply is an issue causing concern throughout the western states. Indeed, on January 16, Southern California Edison Company (SoCalEd) stated that it would suspend payments on two bond issues and would default on a $215 million payment to the California Power Exchange. Moreover, on January 12, the Federal Energy Regulatory Commission (FERC) approved Pacific Gas & Electric Company's (PG&E) intra-corporate reorganization in an attempt to enhance its credit rating. The following briefly discusses recent regulatory actions to deal with the crisis.
On November 1, 2000, FERC issued an order proposing a series of remedial steps aimed at resolving problems affecting bulk power markets and wholesale energy prices in California. On, December 15, 2000, FERC released an Order announcing the remedies it has adopted, including a "soft cap" on wholesale power prices. FERC also continues to meet with industry players to discuss forward contract power supply opportunities for local utilities. These actions coincided with other regulatory actions taking place at the federal and state levels.
On December 14, 2000, the Department of Energy (DOE) issued an Emergency Order requiring utilities with surplus generation to sell that generation into the California wholesale power market, in an effort to avoid rolling blackouts throughout the state. That Emergency Order was extended on December 27, 2000, and again on January 5, 2001. In addition, the Public Utilities Commission of the State of California (CPUC) issued an Interim Opinion concerning emergency requests by SoCalEd and PG&E authorizing the utilities to increase their retail rates.
Finally, Governor Gray Davis and the California legislature have been working to develop solutions to California's energy issues. Governor Davis has been negotiating, with the help of the White House and DOE, with the California legislature and the utilities to help the utilities avoid bankruptcy. In addition, in Governor Davis' January 8, 2001 State of the State address, he focused on the energy situation and made a number of proposals to deal with California's electricity issues.
The following provides an overview of the FERC Order, the DOE Emergency Orders and the CPUC Interim Opinion. It also highlights the Governor's efforts to achieve resolution of this energy "crisis" in California.
FERC December 15 Order
Citing its interest in "protecting consumers, ensuring creditworthiness of market participants, and moving the Western markets toward the kind of rules that will sustain the electric industry in the long run," FERC adopted remedies in its California Markets Proceeding designed to alleviate California electric price fluctuations and to ensure that sellers have incentives to offer electricity and construct new generation and transmission in California. Specifically, FERC adopted several remedial measures including the following:
- Freed Investor Owned Utilities from the Mandatory PX Buy-Sell Requirement: Effective December 15, 2000, the three California Investor Owned Utilities (IOUs) are no longer required to sell all of their generation into, and buy all their generation from, the California Power Exchange (PX). Instead, IOUs can move their purchase power needs to bilateral long-term contracts and adopt a balanced portfolio of contracts to mitigate cost exposure. FERC asks the State of California to take measures to remove its comparable requirement that IOUs buy power through the PX and to provide IOUs with prudence benchmarks for bilateral purchases. As a result of FERC’s remedy, IOUs can satisfy their load requirements by selling at retail the 25,000 MW of generation that the IOUs own or control through contracts. These sales may be regulated by California, including on a cost-of-service basis or subject to a cost cap. Finally, effective the close of the April 30, 2001 trading day, the PX's wholesale rate schedules will be terminated and it will no longer operate as a mandatory power exchange.
- Established a Prudence Benchmark for Wholesale Bilateral Contracts: FERC will use a $74/MWh benchmark to assess complaints questioning whether long-term contract prices negotiated under current market conditions are just and reasonable. Currently underway at FERC are ongoing settlement conferences, convened by the Chief Administrative Law Judge, to discuss and agree to ways of facilitating forward contracting by California utilities. Participants include the California IOUs, generators who supply California, marketers, the California ISO, the Office of Governor Davis and the CPUC. FERC also has directed all sellers with market-based rate authority to announce on a confidential basis round-the-clock long-term products in annual increments between two and five years that they are willing to offer in California. In turn, the IOUs have been required to provide their demand for long-term power needs. FERC will use this data to assess the supply and prices in the forward markets and to corroborate and/or adjust the $74/MWh benchmark.
- Set Underscheduling Procedures and Penalties: Market participants must schedule 95 percent of their load prior to real-time. Deviations in scheduling in excess of five percent of an entity's hourly load requirements will be subject to a penalty, with disbursement of penalty revenues to all load that scheduled accurately.
- Announced Market Monitoring and Price Mitigation Plans: A technical conference will be initiated to develop a monitoring and mitigation program comprising price thresholds and screens and specific mitigation measures. A proposed plan must be submitted to FERC by March 1, 2001. FERC will solicit comments on the proposed plan and intends to implement final procedures by May 1, 2001. In the interim, FERC adopted a $150/MW breakpoint that it will use to monitor pricing. Sellers bidding at or below the breakpoint will receive the market-clearing price. Sellers bidding above the breakpoint will receive their actual bids, but this price will not be the market-clearing price. Moreover, such sellers will be subject to reporting and monitoring requirements that will give FERC an opportunity to investigate whether market power has been exercised. Unless a seller is notified that FERC is investigating a particular transaction, refund potential on a transaction will end 60 days after the filing date of the report disclosing the transaction.
- Approved the Formation of an Independent ISO Governing Board: The current ISO stakeholder board must be replaced with a non-stakeholder board. On January 29, 2001, the ISO Governing Board members will turn over decision-making power and operating control to ISO management. The stakeholder board can act as an advisory committee that provides input to ISO management. FERC will establish a mechanism for involving state officials in the new board selection process. If procedures are not agreed upon by April 27, 2001, the new ISO board will be selected using the procedures set forth in FERC’s November 1 Order.
- Adopted Refund Conditions: FERC will condition market-based rates on sellers remaining subject to potential refund liability through December 31, 2002 as a way of ensuring just and reasonable rates while measures are implemented to stabilize the California markets. FERC declined to clarify what further actions it might take with regards to imposing refunds for past transactions.
- Announced a Technical Conference to Explore Additional Long-Term Solutions: The technical conference will address: (1) the adoption of security-constrained unit commitment dispatch; (2) the use of simultaneous rather than sequential auctions; (3) the creation of an installed capacity market; (4) the establishment of reserve requirements; and (5) demand-side response programs.
In response to the FERC Order, numerous parties have filed emergency rehearing requests and others intend to file requests for rehearing by the due date for such pleadings of January 16, 2001. In addition, SoCalEd filed a Petition for Writ of Mandamus with the U.S. Court of Appeals for the D.C. Circuit on December 26, 2000. A similar petition has been filed by the PX. On January 5, 2001, the D.C. Circuit denied SoCalEd's Petition, preserving SoCalEd’s right to argue the merits of its position before FERC on rehearing of the December 15 Order.
DOE Emergency Orders
On December 14, in response to potential Stage Three emergency within the CAISO-controlled transmission grid and the possibility of rolling blackouts, the Secretary of Energy issued an Emergency Order requiring utilities with surplus generation supplies capable of serving the California market to provide energy as requested by the ISO. This authority is vested in the Secretary of Energy pursuant to Section 202(c) of the Federal Power Act. The Emergency Order provides that the terms and conditions of service shall be agreed to by the parties, or determined by the Secretary of Energy in the event that no agreement is reached. The Secretary deferred to FERC to determine the rate that suppliers will be paid for this energy. This initial Emergency Order was to be in effect until 12:00 a.m. PST, December 21, 2000.
On December 20, 2000, the Secretary issued the first of three extensions to the Emergency Order. The following extensions occurred on December 27, 2000, and January 5, 2001. The latest extension is set to expire at 12:00 a.m. PST, January 11, 2001. However, the Secretary has extended the Emergency Order from January 5 - 11, 2001 under two new conditions. First, by January 9, 2001, the State of California must certify that it will implement actions to reduce peak electricity demand by 5 percent by January 15, 2001. Second, the ISO is prohibited from purchasing electricity under this Order in excess of $64/MWh (contrast this with FERC’s $74/MWh prudence benchmark). If parties cannot agree to a price for supplies, FERC will determine the just and reasonable price in a public proceeding.
CPUC Interim Opinion
In response to FERC's December 15 Order denying the IOUs retroactive rate relief, the IOUs filed emergency requests for rate increases to retail customers. In a separate proceeding, the CPUC already is reviewing other issues, such as when to end the retail rate freeze, whether to order additional generation divestiture and whether to require the IOUs' retained generation to be used to serve native load customers. On December 27, the CPUC began its determination of whether to permit the IOUs to increase their retail rates, in order to pass through some of the added costs that the IOUs are paying for power.
On January 4, 2001, the CPUC issued an Interim Opinion regarding the rate increase issue. Specifically, the CPUC implemented a surcharge per customer of one cent per kilowatt-hour, applied on a usage basis. This surcharge will result in a rate increase of approximately 9 percent for residential customers, 7 percent for small business customers, 12 percent for medium-sized commercial customers and 15 percent for large commercial and industrial customers. The surcharge only will apply for 90 days from the date of the Interim Opinion. During that 90-day interim period, the CPUC will conduct further proceedings and investigations concerning the rates that the IOUs will be permitted to charge on a going-forward basis. Certain IOUs have reacted that these increases are not enough for them to remain solvent, secure credit and purchase power.
Actions by the California Government
Since FERC issued its November 1, 2000 Order Proposing Remedies for the California bulk power markets, Governor Gray Davis has put the issue front and center on his agenda. Specifically, Governor Davis has lobbied Congress, the White House, the DOE, and FERC to determine if there is a federal solution to the situation. In addition, the Governor has worked with the California State legislature on various proposals to increase supply and manage the bulk power market. The development, structure and failings of the California retail "competitive" market are not addressed in this "On the Subject."
On January 8, 2001, in his State of the State address, the Governor called California's experiment in electricity deregulation "a colossal and dangerous failure. " To address this "failure," the Governor proposed an aggressive, multifaceted plan to repair the system. As a cornerstone of the plan, the Governor set aside $1 billion in his budget to help stabilize supply and the future price of electricity. The Governor also urged the State Legislature, which he had called into special session, to immediately send him legislation to accomplish the following:
- Restructure the governing boards of the ISO and PX to replace advocates for the energy companies with advocates for the public;
- Overhaul the bidding process for electricity, which currently guarantees that each generator is paid according to the highest bid;
- Streamline the process for utilities to enter into low-cost, long-term contracts for electricity and then apply pressure to the out-of-state generators to supply that power;
- Provide state regulatory agencies with mandatory authority to order any functioning generating facility down for "unscheduled maintenance" to go back on line;
- Give the Public Utilities Commission 50 new inspectors to monitor -- and stand guard if necessary -- at any facility suspected of deliberately withholding power from the grid;
- Make it a criminal act to deliberately withhold power from the grid -- resulting in imminent threat to public health or safety;
- Expand the authority available to the Governor under a state of emergency in the event of imminent power outages; and
- Provide $4 million to the state Attorney General to investigate and prosecute possible racketeering, market manipulation, price fixing and other potential violations by merchant generators.
In addition, the plan includes:
- A requirement that California's utilities -- the IOUs and the state's municipal utilities -- sell surplus generation to California's consumers, essentially prohibiting the export of generation from California.
- A $250-million investment in conservation to reduce the price of electricity, avoid shortages and lower energy bills;
- Low-interest financing for new peaking facilities and the "re-powering" of existing plants, in exchange for a commitment from the generator owner to commit the plant's output to serve California at reasonable rates;
- Expediting the siting and development process for new generation, including the use of state lands for the siting of new generation plants; and
- Establishing, through either a Joint Powers Authority between the state and its 30 municipal utilities or a California public power authority, a state entity that can buy and build new power plants.
Since the State of the State address, the Clinton administration has been hosting ongoing negotiations between high-level administration officials, FERC and all of the major participants in the California bulk power market to develop a resolution to the state's electricity problems. To date, no resolution has been announced.
