Posted on 03/09/2002 12:18:02 PM PST by snopercod
Washington (Inside FERC)--30Apr2001
Following an unusual, lengthy delay in its meeting schedule and a somewhat testy debate at the table, the commission last week voted 2-1 to adopt a market mitigation plan for the California real-time bulk power market. After the regular agenda meeting was postponed three times, the majority agreed Wednesday evening that the plan's use of a market-based approach would protect consumers while encouraging investment in new supply and transmission.
Dissenting in strong terms, Commissioner William Massey contended that the majority was forcing the commission to shirk its responsibility to ensure just and reasonable rates.
The centerpiece of the market mitigation and monitoring plan (EL01-95, et al.) is a single-priced auction during periods when reserves are short. Bids in the auction that are higher than predetermined proxy prices could not clear the market. Those bids would be accepted, but suppliers would have to justify them each month.
The April 26 order also calls for a Federal Power Act section 206 investigation of real-time transactions in markets throughout the Western Systems Coordinating Council region when its reserves drop to 7%.
Implementation of the plan would be halted if California Independent System Operator Corp. and the state's three largest investor-owned utilities fail to submit a regional transmission organization plan by June 1. The mitigation plan also contains a sunset provision to put California "on notice that they need to work right now" to improve supply and delivery, said Chairman Curt Hebert Jr.
The plan follows a series of actions by FERC to address the problem, including the Dec. 15 power market remedies order, an order aimed at increasing supply in the West and speedy approval of an emergency expansion by Kern River Gas Transmission Co. to serve California, Hebert noted.
"This commission cannot help you, if you will not help yourself. File an RTO [plan]. We hear your arguments that it's a natural market, that it's a regional problem," Hebert exhorted the state. FERC's mitigation plan "obligates" Cal-ISO and the utilities to "undertake real reform to promote a regional solution," Hebert insisted.
But Massey found the order deficient on several fronts. To begin with, he took exception to the fact that the mitigation would only be in effect during reserve deficiency alerts - Stages 1, 2 and 3 - called by Cal-ISO. "This agency is statutorily required to ensure just and reasonable prices at all times and this standard in federal law is not limited to stage-alert hours," he said. Dissension over the mitigation plan broke down along similar lines among market participants in response to the mitigation plan that staff recommended in March.
Massey contended that market mitigation is needed for two years, not the one year or less set by the majority, and also questioned the wisdom of tying enforcement of the market mitigation scheme to an RTO filing. "The entire order literally turns into a pumpkin," Massey complained. "This makes no sense to me" because an RTO plan "has no relevance to price mitigation over the next year."
He also expressed disappointment that the section 206 investigation would be limited to transactions of 24 hours or less undertaken when the WSCC reserve margin drops to 7% or below. Many high prices in Washington and Oregon come from transactions with terms exceeding 24 hours, Massey maintained.
Yet Commissioner Linda Breathitt applauded the investigation, noting that it should establish a record for FERC to use in deciding whether to expand price mitigation across the region. The California mitigation plan "strikes the appropriate balance between the interests of consumers and of suppliers of energy in California," she said.
The plan will "mitigate the dysfunctional market without delaying needed investment in generation, transmission and demand-response mechanisms," she added. Breathitt, who agreed with Hebert that the mitigation should be market-based, warned that it would be dangerous to oversimplify the crisis as well as FERC's response to it. "That danger is in the misconception that the issue today is simply whether or not price mitigation in California should occur," she said. "The real issues have been about what form price mitigation should take."
The market monitoring and mitigation plan, scheduled to take effect May 29, will replace the $150/Mwh soft cap. Currently, bids above the $150/Mwh soft cap are subject to review and refund. FERC previously opted to review bids that were struck during Stage 3 alerts in California. Those bids were then placed against a universal proxy price, and a series of monthly refund orders called into question bids above the proxy.
To gauge the effectiveness of the new system, FERC directed Cal-ISO to submit a report by Sept. 14, followed by quarterly reports, on the results. Public comments on the reports will then be sought by the commission.
FERC also requested comment on whether all nonhydroelectric generators throughout the West should be subject to price mitigation during a power shortage. And the commission asked for comment within 30 days on whether Cal-ISO should apply a surcharge on power sales to recover unpaid bills.
As for implementation of the mitigation plan, FERC ordered Cal-ISO to calculate a proxy price for each generator by plugging its costs from the day before into a confidential formula based on the efficiency of a plant. The plan requires all plants in California with Cal-ISO participating generator agreements and all nonjurisdictional generators that make sales through Cal-ISO or that use Cal-ISO's interstate transmission grid to offer all available power in real time during all hours. Hydroelectric generators are exempt from the requirement.
However, to protect other Western states, generators outside California would not be required to bid into California when the WSCC reserve margin drops to 7%.
The plan sets some conditions on sellers' market-based rate authority to guard against anticompetitive bidding behavior. Bids that vary in certain ways will be subject to increased scrutiny and refund. One example of questionable bidding behavior given by the order is a "hockey stick" bid, which is made when the last megawatts bid from a unit are bid "at an excessively high price" compared with bids for other capacity from the unit.
Other "prohibited" bids are any that "vary over time in a manner that appears unrelated to" changes in the plant's performance or supply costs, the commission continued. Another example is bids that appear to respond to public announcements of shortages or outages.
Massey criticized the conditions on market-based rate authority, contending that refund liability "has been substantially limited" compared with the current system.
On the demand side, load-serving entities are required by the plan to submit bids at which they would agree to curtail load during specified hours. That should calm price volatility, Breathitt commented. "When demand responds to price, suppliers have more incentive to keep bids close to their marginal cost because high bids are more likely to reduce the bidders' energy sale," she said.
Cal-ISO was ordered to submit weekly data on scheduling, plant outages and bids to assist FERC in monitoring real-time prices. The commission also called for Cal-ISO to propose a means for coordinating outages.
During a tense discussion, Massey argued there was no evidence that unjust and unreasonable prices were limited to periods of reserve shortfalls, touting a Cal-ISO study that found economic withholding at all times and overcharges from May 2000 through February.
"We are now 11 months into the California calamity. It has had a breathtaking and staggering effect on the Western economy and there is no end in sight. Now is not the time for half-a-loaf solutions," Massey said. Warning that the crisis will get worse, he catalogued examples of related "economic carnage" in the Pacific Northwest.
Massey expressed regret for voting for the Dec. 15 order because "it did not contain effective price relief." The ensuing refund orders have been "paltry and . . . arbitrary."
The proxy price, like that of prior refund orders, is largely based on expensive gas used by power generators, said the commissioner. Massey questioned the reasonableness of using gas costs in the proxy before ensuring that gas prices are fair. He noted that under the refund order for questionable February bids, about $350 out of the $430/Mwh proxy used at that time was attributed to the cost of gas.
FERC should "take all available action to mitigate" the large differential between the cost of gas and that of transporting it into California, Massey said. "We must take a second look at whether lifting the price cap for secondary-market pipeline capacity . . . was actually in the public interest," he said.
Hebert addressed the disagreement while sitting alone at the commission table waiting for Massey and Breathitt to start the meeting. Asked what caused the delay, he said "it wasn't my fault." Joking that his colleagues were to blame, he quickly added, "We've worked hard."
After the meeting, the chairman told reporters that he "would have loved" a 3-0 vote. He characterized elements of the order as consistent with views expressed previously by Massey but added that "obviously, Commissioner Breathitt and I see more eye to eye on market solutions.
"I disagree with Commissioner Massey - as he disagrees with me - that anything cost-based will provide any solutions. It gets California and the West into further problems, further trouble. This plan ended up pretty much where I thought we'd end up," Hebert said.
Although Hebert boasted at the press briefing that the plan "is about as free market as it gets when it comes to price mitigation," proponents of price caps or cost-based regulation are unlikely to fully embrace the order. Rep. Peter DeFazio, D-Ore., standing in a darkened FERC hallway after the meeting, denounced the plan as political posturing by the Bush administration.
"They have to appear to be doing something," he said. But the plan is too narrow and will not provide any relief outside California, he complained to reporters. For instance, the scope of the section 206 investigation struck DeFazio as designed to miss abuse.
The congressman said he expected a broader mitigation plan and deeper investigation, led by Massey with the support of Breathitt. "Then, suddenly, after a day of closed-door consultations, which would violate open-meeting laws anywhere else in the United States, Mr. Hebert manipulated her into supporting his position," DeFazio charged.
As for demands from some Westerners for stronger controls, including price caps, Hebert pointed out during the meeting that prior commission orders in the proceeding gave no hint that FERC would consider caps. And calls for caps were not echoed by eight of the 11 governors in the region, Hebert stressed. "They don't want price caps and that means something to this commission," he said.
Though FERC is not considering price caps, Keith Bailey, chairman, president and chief executive officer of The Williams Cos. Inc., volunteered Wednesday ahead of the commission meeting that his company would support short-term regional price controls to help California and other Western states combat high wholesale power prices because it "is the right thing to do."
A similar offer was made in early April by Randall Harrison, senior vice president and chief executive officer of Mirant Americas Inc.'s West Region. Harrison indicated that his company could support a short-term cap if FERC deemed one necessary to curb "extreme" price volatility .
Bailey said he could only get behind temporary price controls to temper the "extraordinary situation." Applying a market brake for too long would be "counterproductive to creating adequate energy supply and efficient pricing," he said in a statement. But Williams would be willing to "create some breathing room over the next year or so to allow the current emergency supply initiatives to have a meaningful impact."
He suggested that regional price controls be used during emergency periods and that mitigation end on a certain date. The cap must be designed to allow suppliers full recovery of costs and a return "commensurate with risk." Earlier this year, Bailey defended high power prices in Senate testimony, relating that high costs in the gas and NOx emission credit markets drove up power production costs and that those costs would be passed through to customers in a traditional regulatory regime.
Separately, FERC informed wholesale power trader Merrill Lynch Capital Services Inc. on April 23 that it, and not California-based Automated Power Exchange Inc., was responsible for more than $1.6 million in potential overcharges for power it sold into California during Stage 3 emergencies in January.
APX was among 13 suppliers and traders identified by FERC in a March 9 order that called on them to refund a total of $69 million or justify the prices they charged during Stage 3 alerts. APX, however, told FERC March 23 that because it submitted bids to the California Power Exchange Corp. day-ahead market "for the account of others," it was not responsible for any potential refunds.
After APX officials told FERC that the 30 transactions tagged to the exchange in the order were submitted on behalf of Merrill Lynch, the commission put the onus on Merrill Lynch, instructing the trader to either refund the money identified as overcharges or supply further justification for the prices within five days of receiving the letter.
'I kept the lights on,' Davis says in a rail against critics
However, to protect other Western states, generators outside California would not be required to bid into California when the WSCC reserve margin drops to 7%.
Wow, Double Wow. I wonder if the standard press realizes that FERC has put put California on notice and told the Gov and Legislature to make some changes by summer or nobody is going to bail you out. If the Gov and Legislature don't get it, I know for sure that the Bond rating agencies will tumble to the fact that the revenue streams in support of any bonds may get diverted to power purchases or blackouts and harm to an economic recovery.
So the Gov and Legislature must do certain things they don't want to do prior to June 1 or else. Lets see they need to pass a budget prior to the end of June. They need to issue power bond and get all the contracts lined up by May at the absolute latest if they want cash in the general fund prior to the end of this fiscal year. They are going to have to eat a lot of crow between now and June!
Ouch! FERC must be really upset!
The June deadline was for California to join an RTO, which they never did. Last April 30th (the last day on which to comply with the FERC order) California claimed that their Cal-ISO was an RTO (which it's not and never could be due to lack of independence).
FERC let them slide on this one too, as well as the "underscheduling" penalties. FERC is looking to me like a paper tiger.
P.S. This platts.com website is new to me, and looks pretty good at first blush.
As we FReepers have know for a long time, generators must either shut down when they reach their "emission limits", buy "emission credits" at exorbitant prices, or pay fines of $7.50 per pound of NOx and $1.20 per pound of CO.
Talk about taking on a herculean task!!! (grin)
I think they can also buy emissions credits from other entities--cheaper than paying the fines. From what I've read, the emissions buying market is big business in CA.
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