California governor, utilities condemn FERC order

Federal regulatory efforts Friday to reorder the California electricity markets don't go far enough, state officials and utility executives complained. Gov. Gray is calling a special session of the state legislature. The Federal Energy Regulatory Commission acted Friday after the California grid operator scrambled for nearly 2 weeks to keep power flowing. In general, FERC ordered reforms that will force state utilities out of the high-priced spot market into less-volatile long-term contracts.

Dec 18th, 2000


Federal regulatory efforts Friday to reorder the California electricity markets don't go far enough, state officials and utility executives complained. But continuing discord over deregulation will likely bring Congress into the debate when lawmakers reconvene in January, industry officials and analysts predict.

The Federal Energy Regulatory Commission (FERC) acted Friday after the California grid operator scrambled for nearly 2 weeks to keep power flowing in the state. In general, FERC ordered reforms that will force state utilities out of the high-priced spot market into less-volatile long-term contracts.

After condemning the FERC for not imposing a regional hard cap on electricity prices, California Democratic Gov. Gray Davis said he will call a special session of the state legislature to deal with the crisis.

"Although we had hoped FERC would shoulder its responsibility, we have not stood by idly waiting for them to rescue California," Gray said in a statement. "FERC's failure to act in the interest of our consumers and businesses literally invites California to act to regain control over the energy market. Given this decision California now must move forward on both legal and legislative fronts to assure stabilization, generation, and conservation."

Davis said he will reserve $1 billion in the January 2001-02 budget for these purposes and will call the California Legislature into session to do the following:

� Replace the so-called stakeholders on the California Independent System Operator board.

� Re-establish the authority for the state to inspect private power plants to assure the coordination of maintenance and operating schedules.

� Provide low-interest financing for new peaking facilities or repowering old ones to make them cleaner and more efficient in return for committing their power to Californians at guaranteed low rates.

Gray also said he will ask the state attorney general to expand his investigation to include civil and criminal violations that may have occurred in relation to operations practices of the generators and the pricing of natural gas.

Criminal investigation
He said the investigation should include coordination with federal authorities to determine if violations of the Racketeering Influenced and Corrupt Organizations Act have occurred.

In its order Friday, FERC set a $150/Mw-hr so-called soft cap on wholesale electricity prices that will allow generators to bid into the market at higher prices subject to a 60-day FERC review. Prices peak at $1,400/Mw-hr last week after FERC lifted a price cap to boost supplies, compared to about $31/Mw-hr in past Decembers.

The FERC will also let the investor-owned utilities keep 12,000 Mw they generate rather than sell it on the California Power Exchange (PX), as required by the 1996 California restructuring law, if the California Public Utilities Commission (PUC) goes along with the change.

FERC commissioners said they will work with California authorities to replace the existing "stakeholder" board of the California Independent System Operator.

In a letter, Southern California Edison (SCE), a unit of Edison International, expressed "deep disappointment" with the FERC order, charging the commission's actions will do nothing to protect California from unjust and unreasonable wholesale electricity prices.

SCE had urged FERC to reregulate with cost-of-service prices, allowing each seller to bid into the market at its variable operating cost. FERC took this cost-based approach during the initial operation of the restructured PJM pool, covering the states of Pennsylvania, New Jersey, and Maryland. The California PUC is scheduled to meet Dec. 21 to take up the FERC order and to discuss financial remedies for the ailing utilities, including a proposed rate increase.

Mark Stultz, a spokesman for the Washington-based Electric Power Supply Association, which represents independent power companies, said the organization is relieved FERC imposed a 90-day limit on review of bids of more than $150/Mw-hr.

"The soft cap is a necessary evil under the current circumstances," he says. "But it is not something we favor because caps distort the market."

The California electric power crisis also insures Congress will take up the question of electricity restructuring in January, he says. While some members will advocate a go-slow approach to retail deregulation, Stultz says his members are hopeful "Congress will do something to streamline wholesale competition." A key component will include setting standard interconnection procedures.

The latest federal action suggests the timetable for resolution has been accelerated, says Banc of Americ securities analyst Danie Tulis.

"While it is unfortunate that the California situation has come to these crisis levels, in the long run, as with natural gas pipeline take-or-pay issues in the early 1990s, it often takes crisis situations to compel regulators to act quickly and decisively in order to address politically unpopular issues," Tulis says in comments on prospects for energy suppliers.

"In this case, we are encouraged that the California Public Commission is committed to the solvency of the state's utilities. As such, the fact that both federal and state governments have been forced to address this issue together suggests that a timetable for a longer-term resolution has been accelerated."

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