Message-ID: <19294785.1075859820902.JavaMail.evans@thyme> Date: Mon, 18 Dec 2000 03:43:00 -0800 (PST) From: issuealert@scientech.com Subject: FERC Approves Contentious Order on California Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: "IssueAlert" X-To: X-cc: X-bcc: X-Folder: \Mark_Haedicke_Jun2001\Notes Folders\California X-Origin: Haedicke-M X-FileName: mhaedic.nsf http://www.consultrci.com ************************************************************************ Dear IssueAlert Subscriber, Visit our InfoStore to subscribe to SourceBook Weekly and get your=20 PowerHitters Interviews. Get a free synopsis of the past week's news in IssuesWatch at: http://www.consultrci.com/web/infostore.nsf/Products/IssuesWatch Jane Pelz Director of Marketing Communications SCIENTECH, Inc. December 18, 2000 SourceBook Weekly Issue titles are below *********************************************************************** Utilities and Bandwidth: The Past, or the Future? http://www.consultrci.com/web/rciweb.nsf/Web+Pages/SBEntrance.html *********************************************************************** Alternative Energy IPOs: Hot Now, But for How Long? http://www.consultrci.com/web/rciweb.nsf/Web+Pages/SBEntrance.html *********************************************************************** Real-Time Metering: Can It Make a Difference in the Competitive Bottom Line? http://www.consultrci.com/web/rciweb.nsf/Web+Pages/SBEntrance.html *********************************************************************** Light Amid the Darkness: Pennsylvania Viewed as Most Successful Competitive Market http://www.consultrci.com/web/rciweb.nsf/Web+Pages/SBEntrance.html *********************************************************************** =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH IssueAlert, December 18, 2000 FERC Approves Contentious Order on California By: Will McNamara, Director, Electric Industry Analysis =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D The Federal Energy Regulatory Commission (FERC) last Friday unanimously approved a comprehensive order on ways to fix California's troubled=20 marketplace. Though some, including Commissioner Curt H,bert, hoped this order would be the final word, FERC signaled that more work has to be done to reach market consensus on several issues, including a new market structure for the state. ANALYSIS: Although some ongoing and larger issues remain, this order does bring closure to FERC's proposed ruling from last month, which had outlined several key remedies to repair what has roundly been called a flawed system in California. FERC previously had determined that the dysfunctional market structure in the state had caused "unjust and unreasonable rates" for=20 utilities that must purchase power on the wholesale market, and end-use customers such as those in San Diego who no longer are protected by a rate freeze. With a couple of important exceptions, the Commission essentially gave a rubber stamp of approval to its proposed order that was issued on Nov. 1, after receiving input from participants throughout the energy industry. As expected, FERC adopted its "soft" rate cap of $150/MWh. In real terms, this means that bids above this amount cannot set the market clearing price that is paid to other bidders for power on the wholesale market. The rate cap is referred to as "soft" because sellers may bid above this level and receive their bid if they are dispatched, but anything higher than $150/MWh will not set the price that all other generators will receive. Any generato= r setting a bid above $150/MWh must report their bid to the Commission, and presumably fall under intense scrutiny. FERC also officially adopted a policy that removes restrictions against bilateral contracts in California and de-emphasizes spot-market activity. Moving forward, buyers and sellers in the California market no longer have to sell into and buy from the California PX. Instead, long-term contra= cts may be established between power distribution utilities and power sellers. Specifically, FERC set into place a $74/MWh "target price" for forward contracts. This represented a new policy on the part of the Commission that had not previously been outlined in its proposed order, and was the source of a great deal of contention within FERC. Commissioner Linda Breath= itt offered that the $74/MWh target price could possibly set the "standard for reasonableness." However, unlike the $150/MWh rate cap for transactions on the open market, prices below the target price of $74/MWh will likely be accepted without the same level of scrutiny from FERC. Higher prices may be subject to review. A month ago, FERC had proposed establishing independent (non-stakeholder) boards for the California Independent System Operator (ISO) and the PX. This turned out to be more easily said than done, and was one of the earlie= r proposals from which FERC retreated in its final order. Essentially FERC had wanted to replace existing members of the respective boards with new members not associated with the energy industry. However, the word is out that California Governor Gray Davis had put pressure on FERC to not adopt this policy because the governor himself wants to be able to choose new members for the boards that will be "more sensitive to the needs of Califor= nia consumers." In the end, FERC decided that a new governing structure for both the ISO and PX would be put into place by April of next year, and would be established with the cooperation of the governor and other state officials. Until that time, the current board members will continue to act in an advisory capacity. Signaling that FERC's final order will by no means close the book on the problems we are seeing in California, Southern California Edison (SCE) immediately responded with "deep disappointment" to the Commission's order. Specifically, SCE claims that the order will do nothing to protect Californ= ia consumers from the unjust and unreasonable wholesale electricity prices that FERC already agreed were in existence in the state. SCE previously had urged FERC to adopt cost-based pricing rules, meaning that each power seller would be able to bid into the market at variable operating costs. FERC had taken this cost-based approach with the initial operation of the restructured PJM pool, which appears to be working rather well in that area. However, FERC did not adopt this approach for California, and SCE contends that since November the soft rate cap of $150/MWh has been in place and rates have continued to skyrocket. Reportedly, prices last week in California reached as high as $1,400/MWh, compared to an average of $31/MWh, which SCE claims was the price that it charged for power from its own plants during the month of December in previous years. Thus, SCE contends that FERC has not fulfilled its regulato= ry obligation to repair the system in California, and as a result a severe operational crisis in the state now appears inevitable. Again, as we saw with the proposed order, dissension ran high within the FERC itself. Commissioner H,bert reportedly felt that the final order was "too timid" and that it did not do enough to solve the problems in Californ= ia. FERC Chairman James Hoecker appeared to be open to region-wide rate caps, which H,bert strongly opposed and said could never receive approval from the Commission. H,bert's consistent position has been that FERC is=20 over-extending its reach to mitigate prices, something he believes the Commission is=20 ill-equipped to do. H,bert, who by the way is rumored to become the next FERC chair, dislikes any kind of rate cap and prefers instead to let market participant= s manage their own exposure to price risk. As I had discussed when I outlined the proposed order back in November (see IssueAlert from Nov. 2 on www.consultrci.com), I questioned whether or not FERC could reach any long-term solutions to California's problems. The lack of consensus regarding how to fix California's dysfunctional marke= t=01* not only within the Commission, but throughout the industry as a whole=01*only seems to be growing. FERC set out with the clear goal of bringing down energy prices for consumers, but it is still questionable if this final order can accomplish that objective. As SCE notes, the soft price cap has done nothing to keep prices down in the state, and concerns about power supply in California continue to increase. In fact, nearly every day during this month the California ISO has issued a stage one or two emergency warni= ng, indicating that operating reserves of power in the state are falling to alarming lows. Consequently, although this order attempted to reach resolution, it still seems like there is little chance that we will see the end of the debate over California any time soon. Perhaps the best feature of this order is the removal of the requirement that buyers must obtain their power through the California PX. The three California investor-owned utilities (PG&E, SCE and SDG&E) represent 80 percent of the buying market in the state. Through establishing bilateral contracts, they will have a new way to=20 negotiate the prices they pay for power, which could ultimately bring some stabilizat= ion to the market in the state. However, if California is indeed headed for even worse problems than it has faced thus far, it will quickly become apparent whether or not FERC's order does anything to abate the crisis. Quite possibly, the next course of action could be taking the California issues to federal court for=20 resolution, which=01*much like our recent presidential election=01*could mean months (o= r years) of further negotiations. =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. 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