FERC questions California ISO claims of $6.2 billion in overcharges

By Ann de Rouffignac
OGJ Online

HOUSTON, Apr. 3�The Federal Energy Regulatory Commission requested additional data from the California Independent System Operator to back up allegations generators overcharged consumers $6.2 billion for electricity.

�These studies do not include any detailed support for the derivation of this amount,� the FERC staff said in a Mar. 30 letter to the California ISO. FERC said the ISO claims of overcharges from May 2000-February 2001 are not supported by an explanation of how the data were derived.

The ISO filed two preliminary reports and comments in late March concerning market power mitigation measures proposed by the FERC staff Dec. 15, 2000. They are scheduled to become effective May 1.

The ISO said it would file its own comprehensive market stabilization plan in April as a counterproposal to FERC�s proposal. But FERC said the ISO must submit its counterproposal and answer all questions about the $6.2 billion overcharge by Apr. 6 to give FERC staff time to consider the counterproposal before May 1.

One of the ISO�s reports used the concept of scarcity in an unusual way, FERC said, noting the report distinguished between price increases due to scarcity and price increases due to market power by classifying each hour either as an hour of potential scarcity or an hour of no potential scarcity.

The method leads to the ISO�s conclusion that scarcity pricing is legitimate in one hour but not another, a line of reasoning questioned by FERC.

Further, FERC asked the ISO to explain �why and how sellers and buyers in a market which is facing a severe, long-term capacity deficiency, like California, would be expected to incorporate scarcity into their price bids and offers only in a few isolated hours of an extensive period during which the capacity deficiency has yet to be remedied.�

FERC also questioned the ISO analysis of prices charged between 1998-2001. The ISO said the difference in prices, or the markup, measures the exercise of market power. The ISO analysts defined potential scarcity according to periods when supply and demand imbalances were most severe.

FERC demanded an explanation of how the ISO study could indicate �little or no market power during hours of scarcity but significant amounts of market power during hours of no scarcity.�

One of the ISO reports analyzed bidding behavior of 5 in-state suppliers and 16 out-of-state suppliers in the real time market. The report found no evidence physical withholding of power, but it concluded that by waiting to bid in real time generators drove up prices. The report alleged that from May-November 2000 suppliers earned an additional $500 million as a result of their bidding behavior.

�This is .002% of the $18.6 billion total energy costs during this period,� according to the FERC staff.

The ISO report also found all suppliers using the same bidding behavior were paid $1.2 billion more than competitive prices or 6.4% of total energy costs during the same period. FERC said it is not clear from the ISO analysis how much of the $l.2 billion was paid to each supplier, including municipal suppliers and utilities. The federal regulators asked for further documentation of the claims.