California officials blast price cap order

By Ann de Rouffignac
OGJ Online

HOUSTON, Apr. 27--The Federal Energy Regulatory Commission's order to cap prices for California instate generators at cost infuriated the governor of California, confused energy suppliers, and worried utilities in other Western States.

The order issued late Wednesday capped prices for 1 year that generators could bid to supply the California real time market at marginal costs for each specific unit. The highest cost unit dispatched by the California Independent System Operator would set the market clearing price during times of electrical emergencies. At all other times bids will be subject to FERC and ISO scrutiny if the bids surpass marginal cost. But out-of-state generators could bid into the market at prices above the market clearing price.

California state officials who had been requesting more stringent caps for the market and for a longer period of time were upset by the order.

Reaction was swift from Gov. Gray Davis.

"FERC had a chance to bring meaningful relief to California's outrageous wholesale prices and they blew it. It makes no sense whatsoever to condition the 12 months relief proposed to California's willingness to join a regional organization," Davis said in a statement.

The California ISO is not interested in joining a region wide regional transmission organization if it means "losing control" over energy issues affecting Californians, said Michael Kahn, CEO in a conference call Friday.

Kahn said the ISO is still considering whether to litigate the order or not. The order is conditioned on the California ISO filing a plan for an RTO by June 1. The plans were supposed to have been filed with FERC in October of last year. But California ISO had so far not filed.

"The clock is ticking on a lot of things. It was unbelievable that FERC put a lot of new requirements on a staff that is already working day and night," he said.

Loretta Lynch, president of the California Public Utilities Commission, was even more vehement.

"I'm opposed to the FERC order. It's a band-aid that comes at a high price for Californians," she said.

Generators were still studying the order and most called by OGJ Online were still not sure how the order impacted their business.

However, one California market expert with a large merchant generator said he thought it would "dampen volatility" because when the supply of power is extremely scarce, generators won't be able to bid above their costs.

"At times of scarcity, if you can't show that your costs jumped you can't bid more than your costs or it will be called illegal," he said.

Out-of-state generators bidding into the California real time market can take the single market clearing price established by the highest cost dispatched instate generator or bid above that price. If they bid more and the ISO dispatches the power, then the out-of-state generator will be paid that price. But the higher price bid by the out of state generator won't set the market clearing price, according to the FERC order.

Generators are unsure how this bidding behavior will affect the price in the rest of the western power markets.

Jan Mitchell of PacifiCorp, a unit of Scottish Power UK plc, said the company was still "assessing" the impact of the order on the rest of the western markets and had no comment.

Dan Williams, spokesman for Seattle City Light Co. was a little more worried about the impact of the order on the Northwest.

"It doesn�t' look like a good deal for the Pacific Northwest," said Williams. "We still think it makes more sense to do a price cap for all the West than just for California."

Williams is worried that his utility will have to buy some power on the real time market later this summer and the prices could be worse.