FERC refund proposal worries California energy merchants

Large energy merchants that own generation in California reacted positively to the Federal Energy Regulatory Commission proposed order today that would restructure the California power markets. Pleased that after a painstaking 3-month examination of the power markets, no market abuse by suppliers was found in California, suppliers agreed with FERC that changes in the California Power Exchange and the California Independent System Operator�s markets are warranted.


Ann de Rouffignac
OGJ Online

Large energy merchants that own generation in California reacted positively to the Federal Energy Regulatory Commission proposed order today that would restructure the California power markets.

Pleased that after a painstaking 3-month examination of the power markets, no market abuse by suppliers was found in California, suppliers agreed with FERC that changes in the California Power Exchange (PX) and the California Independent System Operator�s (ISO) markets are warranted.

�We agree that the buy/sell requirement in the PX (California Power Exchange) should be eliminated,� says John Stout, senior vice- president, asset commercialization at Reliant Energy.

If the requirement to do business with the California PX is eliminated, buyers and sellers can arrange longer term bilateral power contracts, hedging against future price volatility and locking in some supply at predictable prices. It also reduces the burden on the real time markets where power can be more expensive.

Tim Thuston, managing director of government relations for Williams, another large energy merchant, was also pleased with FERC�s decision to �set free� the large investor-owned utilities to buy outside the California PX.

Stout also agreed that the board of the California PX and the ISO should be independent from the stakeholders in the industry. In its order, FERC proposed independent non-stakeholder boards for the ISO and California PX.

�It had gotten way too political in that state for a stakeholder board to work,� Stout says.

Stout indicated FERC�s proposed modifications to the single price auction in California presented few problems. FERC proposes the auction be changed so that all sales below $150 Mw-hr will receive the market clearing price and all sales above $150 Mw-hr will only get the price bid.

�The bid/ask market or the single price auction doesn�t matter one way or another to us,� Stout said. �Reliant can work in either structure.�

Representatives of Dynegy Inc. also noted that changes to the single price auction are not a problem. Bids could still be made above $150 Mw-hr. That means the rate cap structure approved by the ISO board will no longer apply.

But the $150-plus bids will be subject to increased FERC scrutiny. Sellers will have to submit detailed information about costs and opportunity costs in other markets to justify higher bids. FERC will then decide whether bids above $150 are fair.

�If they find these rates are excessive, they could order refunds,� says Kenneth Randolph, Dynegy�s senior vice-president and general counsel. �This could leave a cloud hanging over the entire industry.�

Thuston said the possibility FERC could order refunds after a transaction is completed is of �great concern� to Williams, too.

Reliant�s Stout said the possibility a company could be ordered to make refunds for the next 2 years creates too much uncertainty.

�That creates regulatory uncertainty affecting the financing of any new power projects in the state,� he says.

Power plants are financed, in part, on how much money the owner/operator expects to get for power sold in a particular market. If that price can�t be estimated because of regulatory uncertainty, the economics of building such a plant become suspect.

�We are concerned that this will affect getting additional supply on the ground,� he says.

These large energy companies said they are still reviewing the 100 page plus order and will file formal comments during the comment period that ends on Nov. 22.

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