California's Peace calls for reregulation

Ann de Rouffignac
OGJ Online

State Sen. Steve Peace (D-El Cajon), the architect of deregulation in California, called for a return to �cost-based� regulated rates in that state until the tight supply of power is corrected. He also asked the Federal Energy Regulatory Commission to order refunds to customers and utilities based on the premise that the rates charged this summer in the deregulated market were �illegal.�

In an 11-page letter late last week to FERC Chairman James Hoecker, Peace blamed the entire debacle of this summer�s electricity crisis in California on the merchant energy companies possessing and exercising market power. He admitted tight supply of generation may be exacerbating the problem. But he claimed it is not the cause.

He advised FERC to look at the existence of two separate markets�that of the Independent System Operator (ISO) and the California Power Exchange (PX). Peace maintains that the market structure of these two separate entities allows �anti-competitive practices.�

Peace, who cannot run for reelection under term limitations, has received campaign contributions of $36,500 so far this year from Sempra Energy, the parent of San Diego Gas & Electric Co., according to an investigation by the San Diego Union-Tribune. In all, Peace has received about $100,000 from the three California utility holding companies, according to the San Diego Union-Tribune.

Customers of SDG&E were hit hard when the utility passed high wholesale power costs on to them. The Now under a rate freeze, the utility can no longer pass on all its wholesale costs to consumers and is facing hundreds of millions in unrecovered costs, if no relief is received. FERC is in the midst of an investigation of the high prices and short supply conditions California experienced this summer, the state�s first full summer of deregulation on the retail and wholesale side of the market. The results of the investigation are expected the first week of November.

Marketers influence
In his letter, Peace suggests FERC look at market power in the West as exercised by the marketers who participate in the California Power Exchange. He says that California accounts for 75% of the Western load that goes to the market. The ISO and the PX markets influence prices throughout the West. But the PX market-clearing price is set by only about 10,000 Mw, he says.

�Unlike other commodities, there is no stored stock and no substitute for electricity. Thus, buyers in a tight supply situation who must serve load or ensure reliability have no alternative than to pay the price demanded by those who have cornered the market,� he wrote.

Even though there are problems with the structure of the California Power Exchange, Peace warns eliminating it altogether for a wholesale market based exclusively on bilateral markets will cause problems. He says such a move would be disastrous as transactions would be engaged in �secret� and consumers would be denied any access to terms and conditions of each transaction.

Peace maintains that the tight supply was only the stepping off point for the market experience this summer and not the cause.

He says that there are no supply shortages just tight supplies. Marketers were able to withhold power from the market until the last minute in order to bid up the prices, he said

�The competition currently taking place in the wholesale electric market is more akin to that in the World Wrestling Federation,� he said. �A WWF bout has all the surface elements associated with competition. But the outcome is driven by a script rather than competition.�

Peace says the FERC�s responsibility is to assure that �people did not profit by manipulating either the market rules or the market itself.�

FERC should order refunds to retail customers and retail providers of electricity, he said.