[Senate Hearing 107-116]
[From the U.S. Government Publishing Office]
S. Hrg. 107-116
WHOLESALE ELECTRICITY PRICES IN CALIFORNIA AND THE WESTERN UNITED
STATES
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HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
on
FERC'S APRIL 26, 2001, ORDER ADDRESSING WHOLESALE ELECTRICITY PRICES IN
CALIFORNIA AND THE WESTERN UNITED STATES
__________
MAY 3, 2001
Printed for the use of the
Committee on Energy and Natural Resources
U.S. GOVERNMENT PRINTING OFFICE
74-568 WASHINGTON : 2001
_______________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
COMMITTEE ON ENERGY AND NATURAL RESOURCES
FRANK H. MURKOWSKI, Alaska, Chairman
PETE V. DOMENICI, New Mexico JEFF BINGAMAN, New Mexico
DON NICKLES, Oklahoma DANIEL K. AKAKA, Hawaii
LARRY E. CRAIG, Idaho BYRON L. DORGAN, North Dakota
BEN NIGHTHORSE CAMPBELL, Colorado BOB GRAHAM, Florida
CRAIG THOMAS, Wyoming RON WYDEN, Oregon
RICHARD C. SHELBY, Alabama TIM JOHNSON, South Dakota
CONRAD BURNS, Montana MARY L. LANDRIEU, Louisiana
JON KYL, Arizona EVAN BAYH, Indiana
CHUCK HAGEL, Nebraska DIANNE FEINSTEIN, California
GORDON SMITH, Oregon CHARLES E. SCHUMER, New York
MARIA CANTWELL, Washington
Brian P. Malnak, Staff Director
David G. Dye, Chief Counsel
James P. Beirne, Deputy Chief Counsel
Robert M. Simon, Democratic Staff Director
Sam E. Fowler, Democratic Chief Counsel
Howard Useem, Senior Professional Staff Member
Leon Lowery, Democratic Professional Staff Member
C O N T E N T S
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STATEMENTS
Page
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 5
Breathitt, Linda K., Commissioner, Federal Energy Regulatory
Commission..................................................... 19
Campbell, Hon. Ben Nighthorse, U.S. Senator from Colorado........ 4
Cantwell, Hon. Maria, U.S. Senator from Washington............... 33
Dorgan, Hon. Byron L., U.S. Senator from North Dakota............ 35
Feinstein, Hon. Dianne, U.S. Senator from California............. 6
Hebert, Curt L., Jr., Chairman, Federal Energy Regulatory
Commission..................................................... 9
Massey, William L., Commissioner, Federal Energy Regulatory
Commission..................................................... 16
Murkowski, Hon. Frank H., U.S. Senator from Alaska............... 1
Smith, Hon. Gordon, U.S. Senator from Oregon..................... 4
APPENDIX
Responses to additional questions................................ 43
WHOLESALE ELECTRICITY PRICES IN CALIFORNIA AND THE WESTERN UNITED
STATES
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THURSDAY, MAY 3, 2001
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 2:31 p.m. in room
SD-366, Dirksen Senate Office Building, Hon. Frank H.
Murkowski, chairman, presiding.
OPENING STATEMENT OF HON. FRANK H. MURKOWSKI,
U.S. SENATOR FROM ALASKA
The Chairman. Good afternoon, ladies and gentlemen. I want
to thank you for coming. I notice that a good deal of interest
from interested parties within the beltway on the topic of this
hearing. It's an oversight hearing on FERC's April 26 order
addressing wholesale electric prices in California in the
Western United States.
The purpose of the hearing is to give us, the committee, an
opportunity to be educated. I use the word loosely because
sometimes our span of attention is a bit limited.
Anyway, this is your opportunity to educate us on FERC's
recent order regarding wholesale electric prices in California
and the Western United States.
Now, Senator Bingaman and I have had a number of
conversations on the procedure here, and I was of the opinion
that we had an order. And the order came out from FERC, and it
came out 2 to 1. But, nevertheless, it was an order. To me an
order stands as just that, an order.
As a consequence, I feel very strongly we should limit the
presentation to an explanation of the order by the chairman.
Senator Bingaman felt otherwise. He felt that since it was
disputed, we could learn more on the basis of the internal
evaluation of what went into the order, and I don't necessarily
dispute that. But I don't think it's in the intention of either
one of us to stage a debate here on who's right and who's
wrong. We respect the individual opinions of the commissioners,
as we should. They make their decisions based on what they
believe is best for the country, and we hold them accountable.
But, in any event, I did want to clarify, so there was no
misunderstanding, the discussion I had. And Senator Bingaman
obviously can speak on this as well from his point of view.
Now, I think it's fair to also annunciate that what we
understand is the intention to bring the spot California power
market under control for the summer was the charge of FERC.
Further, it was questionable whether this should go beyond
California into conditions in the rest of the west.
Maybe that's a broader obligation, but I'm certain that
there will be those who say FERC's order goes too far. Others
say it doesn't go far enough. But, nevertheless, we have an
order. And if we don't like the order, we have a legislative
alternative, or FERC can come up with another order.
Now, we have a difficult situation in California. I'm told
that in 1998 prices for energy in California ran about $9
billion. I was told in 2000 they ran about $28 billion. I'm
told this year they're going to run somewhere between $60 and
$70 billion.
Now, that will get anybody's attention, and the
justification for that may be supply and demand. Nevertheless,
FERC has an obligation to address, if you will, inconsistencies
associated with the marketplace.
Now, I'm not here to blame California, but I think we have
to be very candid in expressing, to the best of our ability and
understanding, that price spikes are not the cause of
California's problems. They're the symptoms of a deeper,
deeper, deeper problem that cannot be fixed by price controls.
In this connection, I don't think we can lose sight it was
California, to a large degree, that made a decision a long time
ago that it was cheaper to buy power outside the State than it
was to develop within the State of California adequate power
generation capabilities.
So a little history I think is in order as we go back and
recognize it was California that ordered its investor-owned
utilities to divest their fossil generation.
What did they do with that money? They gave it back to the
shareholders. A lot of criticism for that, but if you're going
to be ordered to divest and you divest your fixed assets, who
does it belong to other than the shareholders? It was
California that required its investor-owned utilities to drop
long-term contracts and instead require all of their power
supply from the volatile spot market.
It was California that decided to treat its investor-owned
utilities differently than it's public-owned utilities. The
investor owned didn't have an opportunity to opt out. And, of
course, the public-owned utilities basically did.
It was California that chose to create a dysfunctional
retail competition plan, forcing utilities to buy high and sell
low, which you can only do that so long before you go into
bankruptcy and we've seen that with PG&E.
Most importantly, it was California that chose to forgo
construction of new generation and transmission, instead
placing reliance on power-generated neighboring States to the
tune of about 25 percent of the power that's consumed in
California.
Now, you might not think those statements are
representative of a sympathetic chairman, but they are in my
sense of how you go about fixing it. You recognize you have a
problem. And you recognize truly what caused the problem, and
then fairly decide on what we can do to help. That's the spirit
we bring to this hearing today.
We have a problem in California, but FERC has been trying
to address through its April 26 order and other orders. Some
will criticize FERC and say where's FERC been? Well, I think
we've seen a change of administration, and we can go back, if
you want. But I don't think it serves a purpose and point the
finger why hadn't FERC done this earlier or something else
earlier.
Some don't think FERC has gone far enough. They're calling
for even more regulation by FERC. But more regulation doesn't
necessarily build new powerplants, new power lines, or new
transmission lines. Whether it be gas or electricity. Instead,
more regulation, in my opinion, will discourage investment,
further worsening California's problem.
I would implore those of us who are searching for an answer
to not be misled by the number of permits that are being issued
out of California. That's got nothing to do with the reality of
whether you're going to have more power generation. That power
generation is only going to come about if indeed the investment
community is satisfied that they can get a fair return on
investment and want to go into California and provide those
generating facilities. So that's one of the real concerns you
have to watch when you consider wholesale price caps.
We've seen what retail caps have done to California.
They've taken care, to some extent, of the consumer, and put
the burden on the taxpayer. And it's beyond me to try to
differentiate the difference between the taxpayer and the
consumer when it comes to the liability that the State of
California is picking up. But that's hindsight.
Ultimately, FERC's order is, in effect, an effort to try to
strike a balance between the need for dampening of prices and
the need for incentives to build new facilities. Whether it's
adequate or not, it's not my job to make that determination.
But the order dampens prices but does not eliminate market
pricing.
Now, it's rather interesting to note that within California
there's an extraordinary process going on now where utilities
are, in effect, making deals to settle disputes with the State
of California on pricing.
I assume many of you have read the New York Times article
yesterday, ``Power Concerns Offer California a Secret Deal.''
The Governor and Duke and a political intrigue associated with
it.
But I think it's important to point out one thing. The FERC
recently ordered generators to justify high prices in
California this year or pay $125 million in refunds. Those
companies, including Duke, rely on--Dinergy, Williams, et
cetera, deny any wrongdoing and so forth. To suggest FERC isn't
doing anything is a bit misleading as well.
For those of you that don't know what I'm talking about, I
suggest you take a look at the New York Times because it's an
extraordinary article, and you can read anything you want into
it, relative to the implications.
There's one thing I read into it. There is a process within
California addressing these alleged spike hikes. And how it
will come out, in any event, remains to be seen.
In any event, in the connection that I noted, I think we
should also reflect on a letter that we have by nine Western
Governors to the FERC Chairman Hebert, which reiterates their
opposition to price controls.
Just let me read the paragraph. ``Your resistance to the
considerable pressures to impose penny pies and pound-foolish
rate controls has served the long-term interest of our region
by allowing California to work its way out of this difficult
situation.
``Likewise, your recent actions to streamline electric
sales in the West have been valuable and appreciative.''
I want to commend the FERC Commissioners because we have
them all here. I look forward, after my colleagues speak, of
hearing an explanation on the FERC order, and I'm sure that the
members here will have many questions relative to the adequacy
or inadequacy of that. But I would hope that out of this we
could continue to build a case for real relief for California,
not perceived or cosmetic relief, because we can all go out of
this process feeling very good that we've done something.
But if capital doesn't go into California, and have a
market for the investment necessary, California isn't going to
get the relief it needs.
Senator Bingaman.
[A prepared statement from Senator Campbell and Senator
Smith follow:]
Prepared Statement of Hon. Ben Nighthorse Campbell, U.S. Senator
From Colorado
Thank you, Mr. Chairman. I would like to thank you for holding this
hearing regarding the ongoing problems in California and how the FERC
is going to deal with wholesale electricity prices. This should be an
interesting discussion on how we are going to proceed on the
electricity crisis in California, especially since it is affecting the
entire West.
I am skeptical of price caps and am leery of the these orders. Many
say they are likely a disincentive to investment in new generation.
This can be a dangerous course we are taking, especially since these
rules are limited. There is only so much the Federal Government can and
should do to affect local electric power issues.
Still, the long-term problem is the supply of electricity which is
smaller than the demand in the region. And, California and other
Western states have not built new power generation facilities
sufficient enough to alleviate the increasing demand for electricity.
The Western power grid is already overworked because of the energy
needs created by booming economies and population growth, but not just
in California. My home state of Colorado, along with other Western
states, has increased demand for electricity as well.
All of the proposals being offered to help address this power
crisis, regardless of the controversy, have to be considered so that
the problem can be solved.
I am approaching the California crisis debate very carefully so
that the best interests of my home state are taken into consideration.
I have some questions for the witnesses that I would like them to
address so that we can further explore this issue during the time for
questions.
Thank you, Mr. Chairman.
______
Prepared Statement of Hon. Gordon Smith, U.S. Senator From Oregon
Mr. Chairman, I appreciate your willingness to schedule this
hearing in such a timely manner on the April 26, 2001 Mitigation Order
issued by the Federal Energy Regulatory Commission concerning wholesale
electricity sales into California, and instituting an investigation of
public utility rates in wholesale Western energy markets. I want to
welcome the FERC Commissioners here today, and appreciate your
willingness to appear before the Committee to discuss this order.
You almost need a scorecard to keep track of the energy situation
on the West Coast. We are having a severe drought in the northwest,
blackouts in California, huge price spikes for electricity on the
entire West coast, and a utility bankruptcy that will keep lawyers
employed for years. And it's only May.
As you know, I am the principle cosponsor of S. 764, the Feinstein-
Smith bill to impose some form of price caps or price mitigation on the
entire Western energy market. I agreed to support price caps or price
mitigation at the wholesale level only on the condition that states,
particularly California, institute retail prices that allow utilities
to recover costs, and that send the right price signals to encourage
conservation.
Prices in the Northwest for spot power in April were 10 to 12 times
their historic levels. This is unsustainable for those living on fixed
incomes, for small businesses, for school districts and small towns.
And the situation is only going to get worse in the Northwest this
summer, and possibly into next winter as well. The flow of the Columbia
River at The Dalles was 40 percent of the historic average, taking
storage into account.
I am very concerned that this order will not do enough for
California, will not encourage conservation in California, and will
actually have unintended negative consequences for states like Oregon
when demand greatly exceeds supply this summer in the Western energy
market.
While I'm glad that the FERC is instituting an investigation of
public utility rates in wholesale Western energy markets, and am very
concerned that it has taken so long to get to this point. It is my
understanding that this means that--if FERC finds there are unjust and
unreasonable rates for spot sales in the Western energy market--the
earliest any customers outside of California could request refunds on
electricity prices will be for spot sales after July 11 of this year.
This is very disconcerting to me, and leaves utilities in the Northwest
with fewer avenues of relief for the high prices they have paid to
date. I will be pursuing this issue further in my line of questioning.
I think everyone realizes that the West is in for a long, hot
summer. In the Northwest, however, we're also concerned about making it
through next winter. Even if we have normal precipitation levels next
winter, our reservoirs won't refill until next spring when the snowpack
melts. We need to make certain that senior citizens, low-income
families, and small businesses can all survive, both physically and
economically.
I want to help lead a bipartisan solution that will restore some
stability to the Western energy market, and will avoid outrageous
prices for a commodity so necessary to public health and safety. I look
forward to hearing from the Commissioner today.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
Senator Bingaman. Thank you, Mr. Chairman, for holding the
hearing. Thank you for inviting all of the Commissioners. There
are really two broad questions I think we need to delve into.
One is what does this new order do? How is it going to work as
implemented?
The second big question is: is the order adequate to solve
the problem that needs to be solved and to carry out the
responsibilities of FERC under the Federal Power Act? Those
seem to me to be the essential questions. And I know there's a
difference of opinion on the commission, and I think it's
useful for the committee to understand that difference of
opinion.
I've supported Senator Feinstein Senator Smith's
legislative initiative to direct FERC to go ahead and carry out
what I believe is FERC's responsibility already to set just and
reasonable rates for wholesale power going into California. But
I am anxious to hear from the witnesses who understand the
issue better. And I hope that's the result of our hearing
today. Thank you very much.
The Chairman. My understanding we agreed there would be no
opening statements today other than yours and mine. Do you
mind?
Senator Feinstein. I'd like to have an opportunity to
answer the comments that you made, at some point, Mr. Chairman.
The Chairman. Go ahead.
STATEMENT OF HON. DIANNE FEINSTEIN, U.S. SENATOR
FROM CALIFORNIA
Senator Feinstein. Because I differ with them, and I would
like the opportunity.
Mr. Chairman, let me thank you, and I do appreciate it. And
I thank the ranking member for insisting that Commissioner
Massey be here as well.
Mr. Chairman, I don't think that anybody debates the fact
that the 1996 deregulation bill was badly flawed. As such, it
created a broken market. Deregulated on the wholesale end, left
regulated the retail end. Required 95 percent of the power to
be bought on the spot market. That's great if prices are low
and supply is great.
It wasn't. Prices jumped. Utilities had to pay the pay the
price. They couldn't recover it from the consumer, so they go
into--one goes into bankruptcy and one is close behind it.
The requirement that they divest of their generating
facilities perhaps was the first real indication of what was
going to come.
I was sitting right over there when John Bryson testified.
And I asked him this question: When you divested of your first
generating facility, what were you selling power at? He said
$30 a megawatt hour. I said when the generator that bought that
facility sold it back to you, what did they sell it back to you
at? He said $300 a megawatt hour. So right away the price
jumped.
Mr. Chairman, you said that you did not know whether
facilities were going to come on line. One of the things I
believe California has done right is fast tracked additional
supply. I'd like to add to the record 350--3,572 megawatts,
mainly peakers, half are peakers that will be on-line by the
end of the summer. And an additional 6,900 megawatts that will
be on-line from November 2001 to July of 2003. That's a total
of 10,495 megawatts, or enough power for almost 10\1/2\ million
households.
I would like to put that list in the record, if I may.*
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* The list has been retained in committee files.
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The Chairman. Without objection.
Senator Feinstein. Now, I would like to address myself to
the FERC order for just a moment, if I can. Because I find it
flawed on a number of accounts. The first is the order is
limited to only stage one, two, or three emergencies. And I
would suspect that stage one, two, or three emergencies, the
number of purchases are not great during that period of time.
All other areas are left out.
Behind me is a chart I showed to Chairman Hebert at our
last hearing. And I want to apply that chart to the FERC order.
I think it's interesting. The horizontal line is demand in 1999
and 2000. The black bars are prices in 1999 and the red bars
are prices in 2000. This is a Sunday, not a high use day. But a
Sunday in July 1999 and July 2000. You see the inordinate price
spike. Not at a peak time, not in a stage one, two, or three
emergency.
So the way I understand the FERC order, it would do nothing
to address the situation that most of the power is bought--is
not bought during a stage one, two, or three emergency but at
other times. This does nothing to deal with that spike.
The second point is the order does not address natural gas.
As far as I'm concerned, if FERC is not going to address
natural gas, you are not going to be able to help California.
The price of natural gas in southern California is still three
times higher than the rest of the country. California
transports natural gas from San Juan, New Mexico, where it
sells at less than $5 a decatherm. When it gets to California,
the price becomes $15, when the actual cap price of
transportation is 70 cents.
I do not see how you can address that crisis without
addressing natural gas. Order 637 from February 2000, the
Commission for a 2-year period, essentially abrogated its
responsibility to see that natural gas transportation costs
have been reasonable. This has been a disaster for California.
I just want quickly to indicate to you, so you don't think
this is esoteric, a couple of situations. Let me give you the
only sugar refinery on the west coast. Steam costs average
$450,000 a month for years. Since October 2000, the cost of our
steam has spiked to over $2 million a month, a 500 percent
increase. This is CNA sugar. They had a thousand employees.
They shut down in March. They're trying to get a bridge loan.
If they don't get a bridge loan, they go out of business
because of natural gas costs.
Atlas Pacific Corporation, as we've written to you
previously, our natural gas costs have gone up six fold.
$15,000 to $90,000 a month. We ask for help.
California steel industries, our historical gas bill was
$12 million annually. With the price gouging going on in
California, that bill will rise to $40 million or even $50
million this year.
For electricity we historically paid about $15 million a
year. That number will double this year due to increased retail
rates. They're in trouble.
The dairy coalition, the largest dairy State in the union,
between December 1999 and December 2000, the cost of gas to
dairy plants increased 4,000 percent. And loss average paper
and box, board mills, companies closing down, I would like to
put these in the record.
The Chairman. Without objection.
[The information referred to follows:]
California Dairy Coalition of
Concerned Energy Consumers,
Sacramento, CA, February 16, 2001.
Hon. Dianne Feinstein,
U.S. Senate, Hart Senate Office Building, Washington, DC.
Dear Senator Feinstein: On behalf of the California Dairy Coalition
of Concerned Energy Consumers, I would like to thank you for all of
your activities to date directed to resolving the energy crisis in
California.
The Dairy Coalition was formed recently due to the supply problems
and dramatic price increases seen for both electricity and natural gas
in California in late 2000. The Coalition represents all of the major
dairy producer co-operatives in California, as well as the major
proprietary processing companies.
As the number one-ranking dairy producing state in the nation, the
California dairy industry uses substantial quantities of natural gas to
run its processing plants. Between December 1999 and December 2000 the
cost of gas to dairy plants in California increased 4,000%. Our
paramount concern is the dramatic increase in the non-commodity portion
of the price of gas.
Again, the Dairy Coalition greatly appreciates your attention to
this critical issue.
Sincerely,
Jim Gomes,
Executive Vice President,
California Dairies, Inc.
Senator Feinstein. My point is this order does nothing
about natural gas. If you don't do something about
transportation costs of natural gas, if they're at $15,
electricity is going to sell for $300 to $500 dollars per
megawatt hour because of the cost of natural gas.
Your final point is your order lasts for only one year.
This is not enough time to get all the needed power on-line and
operating. I pointed out the additional megawatts. Mr.
Chairman, you pointed out how much California is paying for
power. What the State has asked for, and it has fallen on a
deaf ear back in Washington, is a period of price reliability
and price stability.
FERC has found the prices to be unjust and unreasonable.
Individual generators are coming to agreements and making
payments to the State and to FERC. They know they've been price
gouging. We just ask FERC to do your job. Stop it until we can
get enough power on-line and the market can function. Supply
and demand, the prices will be passed through to the consumer,
and we can have a properly functioning market.
Absent that, the probabilities of California getting
through the next two summers without major blackout are very
remote. I thank you.
The Chairman. Thank you. I would respond very briefly to
the article that appeared Sunday in the Los Angeles Times,
April 15. I think, Senator Feinstein, we both want the same
thing to happen, and that's relief for California. But the
question is how we get there from here.
What concerns me, as evidenced in this statement, and I'll
just read this one paragraph, an effort began last year to
issue plant permits within 4 months led to approval of only one
50-megawatt plant at San Francisco International Airport.
Officials say the deal is collapsing. Half a dozen other plant
applications were withdrawn, due to site problems, including
pollution.
California Energy Commission approved two projects and five
more are being reviewed for a total of about 500 megawatts.
State officials concede that not all the power will be
available the entire summer because developers have until
September 30 to get these plants on-line.
So my concern, as evidenced in my statement, was that these
plants that are receiving certifications also receive the
assurance of being financed. And that's the problem you run
into if you don't have a climate that will encourage that
investment. I know the senator from California agrees with me
on that.
Senator Feinstein. Just so you know, Mr. Chairman, the list
I gave you are approved, they're moving. There is nothing
that's going to stop any of the projects on this list. I hope.
The Chairman. Well, I hope you're right. You have a good
deal more optimism on that than the information that I've been
given by people in the financing community who are yet to give
commitments on a good portion of these plants. Because they're
waiting for some degree of certainty associated with their
ability to amortize those investments.
If we put wholesale caps that don't fit, then the question
I think we have to ask ourselves are we relieving the pressure
on California? What we want to do is create an investment
environment that will work and relieve California.
With that I would encourage us to take the opportunity we
have, evidently, to hear from our panel, relative to a FERC
order. And I guess in the interest of comity, we'll start with
the chairman and move right down the line with Mr. Massey and
Ms. Breathitt. Please proceed. 10 minutes is enough, can you--
okay, fair enough, thank you.
STATEMENT OF CURT L. HEBERT, JR., CHAIRMAN,
FEDERAL ENERGY REGULATORY COMMISSION
Mr. Hebert. Thank you, Mr. Chairman, for the opportunity to
appear here today. Electricity markets in California and the
Western United States are faced with a substantial imbalance of
supply and demand. While no one can build generating capacity
fast enough to eliminate the imbalance this summer, the
commission is taking appropriate action within its jurisdiction
to help mitigate problems in those markets.
For example, in December the commission issued a major
order requiring changes in California's wholesale power markets
to ensure that rates charged to buyers are just and reasonable.
Last month, a Federal appeals court rejected the first
challenges to the Commission's orders, stating that the
Commission had adopted a reasonable middle ground between the
need for temporary price mitigation and the realization that
competition must exist for the California energy market to
survive in the long run.
The Commission continues to balance competing interests and
to strive to reach that reasonable middle ground in the dozens
of orders issued in recent months addressing California and the
Western electricity markets.
Last week, as promised in the December order, the
Commission adopted a new market monitoring and a mitigation
plan in California. The plan packages together a number of
related measures intended to help remedy California's
dysfunctional electricity market in order to offer immediate
relief to consumers, including price mitigation, a demand-
response mechanism, coordination of planned outages, and steps
to prevent economic or physical withholding of power.
The elements of the Commission's plan must be viewed as an
integral package. The price mitigation cannot be evaluated in
isolation. The other elements of the Commission's plan are
equally vital to the success of the price mitigation in the
plan as a whole.
Last week's order will help ensure that customers are
adequately protected against unjust and unreasonable prices,
while also providing a market-oriented price for California
generators.
Starting in late May, a market driven price for real-time
electricity will be determined each day based on market costs
for electricity inputs, natural gas, and emission allowances.
And the fuel usage ratio or heat or the heat rate and emission
rate for the least efficient generator needed to meet demand on
that day. All California generators bidding at or below this
market-driven price will be paid the market price.
Any California generator bidding above this price and
selected to run by the ISO will be paid its price, subject to
refund and justification. But its bidding will not, I repeat
will not raise the market price.
This price mitigation approach reflects the way pricing
works in competitive markets. As in a competitive market, the
prices are set by the highest price supply needed to meet the
demand. This approach encourages development of new efficient
supplies by anyone who can build and operate a facility that
costs less than the existing price.
The new facilities will then reduce the need to rely on the
inefficient facilities setting today's prices. The alternative
approach of paying generators only what they bid will likely
cause their bids to increase. Ultimately raising prices to
consumers.
The Commission's price mitigation approach fulfills the
requirements of the Federal Power Act. The Commission has broad
discretion in setting rates and is not required to use cost
base rates or any other specific methodology, so long as the
end result of its rate making is within a zone of
reasonableness.
The courts have held that the Commission's rate making can
reflect non-cost factors such as the need to promote
development, induce supplies or transportation capacity, or to
increase market efficiency.
The Commission also required that all jurisdictional
sellers with participating generating agreements or PGAs with
the California ISO must offer all power that is available in
real time, not already scheduled or committed by contract. This
includes marketers who would control generation.
This must-sell requirement applies to all California
sellers who own or control generation, even if they are not
jurisdictional public utilities. If they sell in the ISO's
markets or use the ISO's transmission facilities, the only
exception is for hydroelectric facilities because of their
multipurpose characteristics.
Also, all public utilities buying from the ISO must submit
demand bids identifying the price at which they are willing to
curtail power purchases if prices exceed the amount. The
requirement will help the ISO's real-time market behave more
like a competitive market where increases in price reduce
demand.
The plan enhances the ISO's ability to coordinate and
control planned outages. The ISO must submit weekly reports to
the Commission on outages so that the Commission staff can
continue monitoring outages.
Further, the Commission modified the market-based rate
authority of the public utility sellers to prohibit
anticompetitive behavior bidding in the ISO's real-time market.
All elements of the plan, except for price mitigation,
operate 24 hours a day, 7 days a week. The price mitigation
applies when California reaches a stage one emergency. In other
words, when generating reserves are at or below 7\1/2\ percent.
The threshold is based on the fact that the critical
problem is a lack of supply. And a stage one emergency signals
when the supply is nearing the point of being insufficient in
real time.
The Commission's plan terminates not later than one year
from now. The Commission also instituted an investigation into
wholesale prices in other parts of the West. The Commission is
seeking comment on what forms of price relief and market
monitoring are appropriate for Western sales outside of the
California ISO.
The Commission stated that its intent is to mirror its
approach in the ISO's real-time market to the extent possible.
And the Commission is also addressing natural gas prices in
California. Senator Feinstein, I agree. This is a gas situation
as well, and we do need to look into that and we are.
For example, the Commission has expedited the issuance of
natural gas pipeline certificates into California. Recently,
the Commission processed in only 21 days an application for a
major expansion of the Kern River gas system.
The Commission has also ordered an expedited hearing on
whether El Paso Natural Gas Company and its marketing affiliate
exercise market power involving El Paso's pipeline and thus
increase California gas prices.
The Commission also is reviewing comments it saw on
additional actions to increase gas supplies to California, and
I expect the Commission to act soon on those comments.
And today the Commission issued a notice of a technical
conference to be held on May 24 of this year on current and
projected pipeline capacity to California, including the
interconnections between the interstate and intrastate systems.
Let me mention one other issue that the Commission is
working on involving, qualifying facilities under PURPA.
According to the California ISO, 1000 to 3000 megawatts of QF
generation in California is not running because of financial
issues, Mr. Chairman. Those issues are pending before the
Commission. That's enough to supply between 1 and 3 million
homes.
The Chairman. Is not being----
Mr. Hebert. Is not being used right now or run due to
financial difficulty. Those issues are pending before the
Commission in several proceedings. So I cannot comment on the
merits of the issues at this time.
However, I believe that prompt resolution of these issues
is critical to freeing up this capacity for sale in California
this summer. And I expect the Commission to resolve these
proceedings quickly.
A couple of closing comments. Senator Smith, I've heard
your concerns and have read your concerns, and I think they're
appropriate.
Senator Feinstein, I've obviously read yours and heard
yours as well and had conversations. And I want you to know
that this committee has made it clear, certainly the chairman
has made it clear to me that this Commission is to act and act
appropriately in following the Federal Power Act. And we are
doing that.
I will tell you that in the 3 months that this Commission
has been working together, we have issued some 40 different
orders and implementations in dealing with California in the
West.
At the same time, as you know, we've testified at quite a
few hearings, and we're glad to shed light on that and make
sure that the American public and those in California and the
West understand your concerns and ours.
But I will tell you that we have talked about and issued
orders that bring more supply and lower prices to California
and the West to looking at hydro facilities on a temporary
basis.
But what we read about in the press and what we hear people
saying is, in fact, what you're doing is creating loopholes
there. We've also issued refunds, something that wasn't done
before. Something that we've done in the last 90 days. And
we've got price mitigation.
But then again when we read in the press, we hear about
gouging, and we don't hear about how we're moving forward.
Again, we've said that, in fact, California, you, and the
rest of the United States of America understand the importance
for regional transmission organization, but, in fact, when we
ask them to file one and they're the only State that hasn't,
the answer is how dare you tell us what to do in California.
We've also said, in fact, there is a need for additional
generation. There are generators that you can get on-line. Some
of them burn diesel, and their action is don't tell us what we
can burn here. We'll decide whether or not we burn it. And I
will tell you, Mr. Chairman, back to your question about the
megawatts that are available, we look at the purpose, the QFs,
if you will. And under those estimated as much as 3000
megawatts out there are not being used.
Now, the estimates that come from the California Energy
Council suggest that they are only 3,800 megawatts short for
the summer. Some suggest as high as 6,800. It depends on who
you're going to listen to. But we've got around 3,000 there
that people are talking about. With reductions in aggregation
of load that we've talked about, we're estimating around 1,000
there.
Producers who came and communicated to me, in fact, they
are flaring gas. They could hook up systems that could produce
1,000 megawatts. Flaring the gas and could produce a thousand
megawatts.
If I could be given one more minute, Mr. Chairman.
Also, the demand, a 5 percent demand reduction of the
26,000 load we're talking about in California, that will bring
around 2,300 more megawatts on-line. That together is 7,300
megawatts.
Now, that doesn't include capacity added by must-sell
requirements that this order has that we didn't have before.
That doesn't include bidding and outage requirements that this
order has that the previous order didn't have. This does not
include the price mitigation and what it will do.
Now, I will tell you, Mr. Chairman, I want to tell members
of this committee, FERC has acted. FERC is acting responsibly,
but the one thing we cannot do is go to California and build
generators and build electric transmission lines and build
intrastate capacity on pipes and build intrastate pipelines.
We can certificate them quickly, and we have done that.
Three weeks with Kern River, unheard of historically, even got
a letter from the Governor commending us saying that we acted
appropriately and they appreciate it. We're doing what we can
do. But California has got to do some things as well.
I look forward to your questions. Thank you.
[The prepared statement of Mr. Hebert follows:]
Prepared Statement of Curt L. Hebert, Jr., Chairman,
Federal Energy Regulatory Commission
I. OVERVIEW
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to appear here today. Electricity
markets in California and the Western United States face a substantial
imbalance of supply and demand. While no one can build generating
capacity fast enough to eliminate the imbalance this summer, the
Commission is taking all appropriate action within its jurisdiction to
help mitigate the problems in these markets. The Commission's actions
center on three critical needs.
First, we need to encourage new supply and load reductions. Market
prices are sending the right signals to both sellers and buyers (at
least those not subject to a rate freeze). Market prices will increase
supply and efficiency, promote delivery, enhance infrastructure and
reduce demand, thus correcting the current imbalance. Last week, as
described below, the Commission adopted a market monitoring and
mitigation plan for California consistent with these principles. Among
the provisions of that plan, the Commission adopted a price mitigation
approach that will ensure for real-time sales, in emergency hours, that
customers are adequately protected against unjust and unreasonable
rates, while also providing a market-oriented price for California
generators. California generators will be allowed to sell above that
price if they can justify their costs. Other provisions of last week's
order, applicable during all hours, improve the Commission's ability to
detect and remedy anticompetitive bidding behavior by electricity
suppliers in California. The Commission also instituted an
investigation into wholesale rates in Western states outside
California, and is seeking comment on what other relief may be
necessary.
Second, infrastructure improvements are greatly needed throughout
the West and especially in California. We need to create the
appropriate financial incentives to ensure that the transmission system
is upgraded and that new natural gas pipelines are built. The
Commission has taken action on these issues recently, and is
considering additional action.
Finally, we need a regional transmission organization (RTO) for the
West. California is not an island. It depends on generation from
outside the State. The shortages and the prices in California have
affected the supply and prices in the rest of the West. The Western
transmission system is an integrated grid, and buyers and sellers need
non-discriminatory access to all transmission facilities in the West. A
West-wide RTO will increase market efficiency and trading opportunities
for buyers and sellers throughout the West. As described below, the
Commission took important steps last week to promote RTO formation in
the West.
II. MARKET MONITORING AND MITIGATION
A. Action to Help California
In the past few months, the Commission has issued dozens of orders
to address dysfunctional wholesale energy markets in California and the
West. Last week, the Commission adopted an innovative plan, which
packages together a number of related measures, for market monitoring
and mitigation in California. San Diego Gas & Electric Co. v. Sellers
of Energy and Ancillary Service, et al., 95 FERC para. 61,115 (2001).
This plan strikes an appropriate balance by bringing market-oriented
price relief to the California electric market, providing greater price
certainty to buyers and sellers of electric energy, promoting
conservation, and--importantly--simultaneously encouraging investment
in efficient generation and transmission.
The Commission established price mitigation for the real-time
market run by the California Independent System Operator Corporation
(ISO). However, the price mitigation, based on a price determined from
a market-oriented formula, applies only when California reaches a Stage
1 emergency, i.e., when generating reserves are at or below 7.5
percent. (In all hours, as explained further below, the Commission
remains vigilant in detecting and remedying anticompetitive bidding
behavior by electricity suppliers.)
The price mitigation simulates the price a competitive market would
produce. Under the price mitigation, a market-driven price for real-
time electricity would be determined each day based on market costs for
electricity inputs (natural gas and emission allowances), and the fuel
usage ratio (``heat rate'') and emission rate for the least efficient
generator needed to meet demand that day. All California generators
bidding at or below this market-driven price would be paid the market-
driven price. Any California generator bidding above this market price
and selected to run by the ISO would be paid its price, subject to cost
justification and potential refunds, but its bid would not raise the
market price. Non-California generators would be paid the market price
or the bid price, but would not be subject to price justification or
potential refunds.
The price mitigation would apply to marketers as well. A marketer
could accept the market-driven price or specify its own price. If its
price exceeds the market price, the marketer would be required to
justify its price based on the amount it paid for power. However,
marketers (and generators) are not allowed to include extra cost
components for scarcity rents or opportunity costs.
This price mitigation plan reflects the way pricing works in
competitive markets. As in a competitive market, the price is set by
the highest priced supply needed to meet demand. The plan also provides
certainty to the market. All bidders at or below the market price are
paid the market price, and need not provide subsequent justification.
The plan provides incentives for investments in efficient
generation. The market price under this plan is set by the price of the
least efficient generating facility used each day. Any new facility
will receive this same price. Thus, the more efficient the new facility
is, the more it will earn. Conversely, the plan provides incentives for
retiring or replacing inefficient, dirtier facilities.
The plan does not set price caps. A price cap is a fixed limit on
sellers' prices that does not change over time, i.e., a snapshot. By
contrast, the Commission's price mitigation allows prices to vary each
day based on market changes in the cost of electricity inputs (fuel and
emission allowances). Moreover, each generator can bid any amount it
chooses, so long as the generator can justify any bid above the
announced market price. For example, if a seller's own gas costs exceed
the gas costs used in determining the market-driven price, the seller
can seek to justify the higher costs.
Nor does the plan discourage the sale of generation into California
from facilities located outside of California. Out-of-state facilities
have no obligation to sell into California. If they do, they can
recover any bid, even if in excess of the market-driven price, that is
accepted by the ISO; they do not have to justify prices in excess of
the market-driven price.
The price mitigation fulfills the requirements of the Federal Power
Act. The Commission has broad discretion in setting rates, and is not
required to use cost-based rates or any other specific methodology so
long as the end result of its ratemaking is within a zone of
reasonableness. The Commission's ratemaking can reflect non-cost
factors such as the need to promote development of new supplies or
transportation capacity or to increase market efficiency.
The plan contains several other important elements. For example,
all jurisdictional sellers with ``participating generator agreements''
(PGAs) with the ISO must offer all power that is available in real-time
and not already scheduled or committed by contract. This includes
marketers who control generation that is subject to a PGA. In addition,
all sellers that own or control generation in California, including
non-public utilities, and sell in the ISO's markets or use the ISO's
transmission facilities must do the same as a condition of being able
to participate in ISO markets and also as a condition of using
Commission jurisdictional transmission facilities. In addition, these
sellers must agree to abide by the same price mitigation and monitoring
that applies to the other generators. These conditions were put in
place by the Commission so that all generators--even those that are not
otherwise subject to the Commission's jurisdiction--participate in
helping to solve California's problems. The only exception to the
``must-offer'' requirement is for hydroelectric facilities because of
their multi-purpose characteristics (e.g., irrigation, recreation and
power production).
Also, all public utilities buying from the ISO must submit ``demand
bids'' identifying the price they are willing to pay for power and the
load to curtail if prices exceed that amount. This requirement will
help the ISO's real-time market behave more like a competitive market,
where increases in price reduce demand.
The plan enhances the ISO's ability to coordinate and control
planned outages. The ISO must submit weekly reports to the Commission
on outages and bid data, so that the Commission staff can continue to
monitor the market. Further, the Commission modified the market-based
rate authority of public utility sellers to prohibit anticompetitive
bidding behavior in the ISO's real-time market.
All of the elements of the plan, with the exception of the price
mitigation, operate 24 hours a day, seven days a week, during the
specified duration of the plan. Any effort to engage in physical or
economic withholding of scarce electric capacity, to the detriment of
California consumers, will be met with a vigorous and appropriate
remedy.
The various elements of the Commission's market monitoring and
mitigation plan should be viewed, as they were intended by the
Commission, as an integral package. The price mitigation cannot be
evaluated in isolation. The other elements of the Commission's plan
(outage coordination and monitoring, demand bids, the ``must-offer''
requirement and the change in market-based rate authority to bar
anticompetitive bidding behavior) are vital to the success of the price
mitigation and the plan as a whole.
Finally, the Commission imposed two important limits on its plan.
First, all of the mitigation terminates not later than one year from
now, so that California cannot rely indefinitely on mitigation in lieu
of new generation and conservation. Second, all mitigation is
conditioned on the ISO and California's three investor-owned utilities
filing an acceptable RTO proposal by June 1, 2001. An RTO is an
essential tool in improving transmission reliability and addressing the
transmission bottlenecks contributing to the market dysfunctions in
California (and the West).
B. Investigation of Other Real-Time Western Sales
As part of the same order last week, the Commission opened a formal
investigation into prices charged by public utilities for real-time
wholesale power sales (i.e., up to 24 hours in advance) throughout the
West (other than sales through the ISO). The Commission proposed: (1)
to mitigate prices charged by all public utilities; and, (2) to impose
mitigation as a condition on all non-public utilities using the
interstate transmission facilities of public utilities. Similar to the
Commission's approach for the ISO's market, price mitigation here would
apply only when contingency reserves fall below 7.0 percent in any
control area in the WSCC. The Commission sought comments on what the
price mitigation for these sales should be, stating that its intent is
to mirror its approach in the ISO's real-time market to the extent
possible. The Commission also proposed, as it required in the ISO's
market, that generators should have to offer all energy available in
real-time. As above, hydroelectric generation would be exempt from the
``must-offer'' requirement but not from the price mitigation rules.
After receiving and reviewing public comment on its proposal, the
Commission will determine the market monitoring and mitigation plan for
real-time wholesale sales in the West other than sales through the ISO.
III. OTHER COMMISSION EFFORTS TO INCREASE SUPPLY AND REDUCE DEMAND
Six weeks ago, the Commission issued an order seeking to increase
energy supplies and reduce energy demand in California and the West.
Removing Obstacles to Increased Electric Generation and Natural Gas
Supply in the Western United States, 94 FERC para. 61,272 (2001)
(``Order Removing Obstacles''). The Commission implemented several
measures immediately, including:
streamlining filing and notice requirements for various
types of wholesale electric sales, including sales of on-site
or backup generation and sales of demand reduction;
extending (through December 31, 2001) and broadening
regulatory waivers for Qualifying Facilities under the Public
Utility Regulatory Policies Act of 1978, enabling those
facilities to generate more electricity;
expediting the certification of natural gas pipeline
projects into California and the West; and,
urging all licensees to review their FERC-licensed
hydroelectric projects in order to assess the potential for
increased generating capacity.
The Commission also proposed, and sought comment on, other measures
such as incentive rates and accelerated depreciation for new
transmission facilities and natural gas pipeline facilities completed
by specified dates, blanket certificates authorizing construction of
certain types of natural gas facilities, and greater operating
flexibility at hydroelectric projects to increase generation while
protecting environmental resources.
The Commission received many comments on these proposals. I expect
the Commission to complete its review of these comments and finalize
its actions on these issues soon. In addition, the Commission already
is acting on many of the initiatives it announced in its Order Removing
Obstacles. For example, in the month of April, the Commission
significantly expedited its processing of applications--approved in a
mere three or four weeks--to add significant amounts of natural gas
pipeline capacity to California.
IV. A WEST-WIDE RTO
The development of a West-wide RTO is vital to preventing future
problems in the West. Market conditions in California have affected
markets throughout the West because the Western transmission system is
an integrated grid. A West-wide RTO is critical to support a stable
interstate electricity market that will provide buyers and sellers the
needed non-discriminatory access to all transmission facilities in the
West. A West-wide RTO will increase market efficiency and trading
opportunities for buyers and sellers throughout the West.
Last week, the Commission took major steps toward RTO formation in
the West. First, the Commission accepted key parts of a proposal for an
RTO that will span eight Western states, RTO West. RTO West will
operate (but not own) more than 90 percent of the high voltage
transmission facilities from the U.S.-Canadian border to southern
Nevada. The Commission said RTO West can serve as a platform for the
ultimate formation of a West-wide RTO.
In the same order, the Commission accepted a proposal for an
independent transmission company within the RTO West structure,
TransConnect. TransConnect will own and operate the transmission
facilities of six utilities in the region.
Finally, as noted above, the Commission conditioned its price
mitigation in the California ISO's real-time market on the ISO and
California's three investor-owned utilities filing an RTO proposal by
June 1, 2001, consistent with the characteristics and functions set
forth in the Commission's Order No. 2000. As the Commission stated,
this condition ``recognizes that the only real solution to supply
problems that affect the western United States is to create a regional
response.'' By letter dated May 1, 2001, the Commission's General
Counsel and the Director of the Commission's Office of Markets, Tariffs
and Rates, wrote to the ISO and the three utilities, and offered to
make the Commission's staff available to assist them in completing the
application.
V. CONCLUSION
The Commission will continue to take steps that, consistent with
its authority, can help to ease the present energy situation without
jeopardizing longer-term supply solutions. As long as we keep moving
toward competitive and regional markets, I am confident that the
present energy problems, while serious, can be solved. I am also
confident that market-based solutions offer the most efficient way to
move beyond the problems confronting California and the West. Thank
you.
The Chairman. We'll hear now from the Honorable William L.
Massey. Mr. Massey, good afternoon.
STATEMENT OF WILLIAM L. MASSEY, COMMISSIONER,
FEDERAL ENERGY REGULATORY COMMISSION
Mr. Massey. Thank you, Mr. Chairman, members of the
committee. The Commission's April 26 order was perhaps the last
clear chance to put in place adequate measures to protect
consumers in California and other parts of the western market
from runaway prices this summer. There are good features in the
order that could provide some help for this summer and beyond.
But the order is deficient in critical respects. And,
consequently, will fail to achieve our objectives. And because
of these deficiencies, I dissented in part from the order.
We're now 11 months into this absolute calamity out West. It
has had a staggering effect on the economy. There is no end in
sight.
Now is not the time for half-a-loaf solutions. I was not
willing to compromise my vote so cheaply. Our December 15
remedy's order did not contain the effective price relief I
championed or anything close to it. It is now over 4 months, 4
months and many million dollars later. Our refund orders have
been paltry and, in my opinion, arbitrary.
In fact, of the $124 million and potential refunds that
were in order, $100 million of that has been challenged by the
sellers.
Prices are not just and reasonable now and will not be just
and reasonable this summer. The economic carnage is spreading
to other States in the Western interconnection. 406 Workers
were put out of work when Georgia Pacific shut a production
facility in Bellingham, Washington, because of skyrocketing
electricity bills.
The Seattle Tacoma Airport has estimated that this year its
electric bill will triple, triple to $50 million. That's 25
percent of its budget. Countless other examples of economic
harm throughout the Western economic connection could be cited.
Bonneville Power may increase its rates by a whopping 250
percent this fall.
The point is now is not the time for half-a-loaf solutions.
Now is the time to solve this problem. And this order falls
short.
There are four aspects of this order to which I dissented.
First, the price mitigation feature is much too restrictive
because it is applied only when a operating reserve emergency
is called, so-called stages one, two and three. Effective price
mitigation should apply during all hours in California. Period.
Such an approach would not be the least bit punitive. It
would, in fact, replicate the manner which the single-price
auction is supposed to work. That is the single-price auction
theoretically provides a powerful incentive for generators to
bid their running costs into the market. That is the most
effective generator strategy for insuring dispatch, or so the
theory goes.
The problem is it has not worked that way in the California
market. Economic withholding, which is bidding up the price
well above your cost just because you can, is a pervasive
problem. And as a result, high prices that exceed a just and
reasonable level are a severe problem in the California market.
The record is absolutely devoid of any evidence that the
problem is limited to stages one, two, and three hours. The
evidence is highly persuasive that the problem exists 24 hours
a day, 7 days a week.
I found the March 21 California ISO study by Dr. Angelie
Sheffrin, the ISO's director of market analysis, to be
compelling. She concluded that economic withholding is a severe
problem in all hours, not just capacity-constrained hours. Her
analysis concluded that from May through November of last year
withholding that led to inflated market prices in the ISO's
real-time market occurred in over 98 percent of the hours.
According to my calculations, the ISO had declared a stage
one, stage two, or stage three alert in only 5 percent of the
hours during that period.
For Dr. Sheffrin's study period, the price mitigation
proposed in our new order would have missed 93 percent of the
hours when market power drove up prices beyond just and
reasonable levels.
Let me quote from Dr. Paul Jowskow, a very distinguished
professor of economics at MIT. Quote, ``There is considerable
imperical evidence to support a presumption that the high
prices experienced in the summer of 2000 were the product of
deliberate actions on the part of generators or marketers
controlling the dispatch of generating capacity to withhold
supply and increase market prices.''
I could quote from a number of studies by Dr. Frank Wolak
of Stanford, the ISO's independent market monitor.
The solution is to require generators to bid their costs in
all hours. Our order could have done that. What's more, the
more efficient generators would still make money under such an
approach, perhaps a lot of money because the market-clearing
price that all generators would get would be set by the highest
cost generators, probably an inefficient older gas fire
generators with a high heat rate. I have no confidence that
prices will be just and reasonable during all hours this
summer.
This agency is statutorily required to assure just and
reasonable prices at all times. This standard in Federal law is
not limited to stage alert hours.
The order also narrowed the existing refund condition
adopted in our earlier December 15 order. And I object to that
as well. A large part of the market this summer in California
will not be subject to any refund condition whatsoever.
Second, the duration of the monitoring and price mitigation
features of this order are too restrictive. They would expire
one year from now, unless expressly modified by the commission.
This period of time is too short. I would allow the monitoring
and price mitigation features to remain in place for at least
18 months and perhaps 24 months.
Third, I object to the RTO filing conditions. Under this
order, if--this is the condition. If the California ISO and the
three California investor-owned utilities failed to make an RTO
filing by June 1, the entire order is of no effect. As I read
it, the order becomes null and void.
Now this makes no sense. It seems to stand for the
proposition that this Federal agency will make no effort to
ensure just and reasonable prices if the California ISO and the
three California IOUs failed to make an RTO proposal. We let
them decide for us whether we're willing to do our job. I
cannot support such a condition. I urge them to make such a
filing, but this has no relevance to price mitigation over the
next year.
And, fourth, the scope of the section 206 investigation
that is ordered for the Western interconnection must be
substantially broader to do any good whatsoever.
This order opens an extraordinarily narrow section 206
investigation for the Western interconnection. I commend my
colleagues for at least going this far. It's something I've
been championing for months, but the approach is much too
narrow to hold any promise of effective price relief.
I had advocated an investigation and refund condition for
all transactions of one month or less. The investigation refund
condition set out in our order apply, however, only to
transactions of 24 hours or less that occurred during a reserve
deficiency of 7 percent or less.
It is my understanding that many of the transactions that
are driving the high prices in Washington, Oregon, and other
Western States are for terms well exceeding 24 hours. This type
of transaction would not be subject to this investigation nor
to price relief. I strongly object to this omission.
Now, finally, let me express my concern about the high
price of natural gas delivered into California markets, which
also is not dealt with in our order. The transportation
differential in California often exceeds $10 and is often
substantially more at various intrastate delivery points. The
transportation differential into other large markets, such as
New York and Chicago, is usually less than a dollar.
The other day from Henry hub to Chicago was 9 cents and
from Henry hub in Louisiana to New York City was 47 cents. On
that same day it was over $10 into California.
The high cost of natural gas delivered into California is
then used to justify high wholesale electric bids into the ISO
market. An inefficient high heat rate generator using a
considerable amount of high-priced natural gas then sets the
market clear in price that all sellers in the market are paid.
Thus, the high transportation differentials into California
gas markets have a particularly pernicious effect when coupled
with a single-priced option for electricity.
May I have one more minute, Mr. Chairman?
The Chairman. Sure.
Mr. Massey. I urge of my agency to take all available
action to mitigate these high transportation differentials. We
must actively explore any jurisdiction we may legitimately have
that affects the so-called gray market. We must take a second
look if lifting the price cap for secondary market pipeline
capacity a year ago was actually in the public interest.
We must vigorously investigate any allegations of
withholding of market affiliation or affiliate abuse. We must
certificate new interstate pipeline capacity. And as
Commissioner Breathitt has pointed out on more than one
occasion, we must work with the State of California to make
sure there is adequate take away capacity in the intrastate
capacity.
I'm open to any and all ideas, but my attention is riveted
on this issue by a recent staff order setting the so-called
proxy price for electricity for the California market for the
month of February. The order set a proxy clearing price should
be $430 per megawatt hour. In other words, we're concerned
about prices above that if they occurred during stage three. We
weren't concerned below that.
$350 of that amount was the price of natural gas for an
inefficient generator. I've concluded that we'll never get a
handle on electricity prices unless we get a handle on gas
prices.
In conclusion--10 seconds--despite the work of the
commission, our hard working staff, we have not solved these
problems. And we must do so. Our order fell short, and I
dissented in part.
Thank you, Mr. Chairman.
The Chairman. Thank you, Mr. Massey. Our last witness this
afternoon, the Honorable Linda K. Breathitt, Commissioner.
STATEMENT OF LINDA K. BREATHITT, COMMISSIONER,
FEDERAL ENERGY REGULATORY COMMISSION
Ms. Breathitt. Thank you, Mr. Chairman, Senator Bingaman,
Senator Feinstein, and other Senators representing Western
States here this afternoon. I am pleased to be here today to
answer questions on FERC's order of April the 26.
The development of a price mitigation and monitoring plan
for California wholesale electric markets has raised
contentious and difficult issues that go to the heart of each
commissioner's philosophy of public utility regulation.
Our deliberations on this issue have been the subject of
intense and unprecedented scrutiny by an increasingly
sophisticated public. And that's a good thing.
I hope that that public will be well served by the actions
that we took last Wednesday evening, and I believe that they
will be.
I emphasize the complexity and difficulty of the decisions
we made because I believe there is considerable danger in
oversimplifying the problems facing California and western
markets, as well as the solutions this commission and other
State and Federal bodies have sought.
That danger is in the misconception that the issue is
simply whether or not price mitigation in California should
occur. And further, that the answer is going to be either a
simple ``yes'' or a ``no''. To present the matter in such a way
it is not recognized that the Commission has reached a
consensus that price mitigation should occur. And, yes, we did
reach that consensus. The real issues have been what form price
mitigation should take.
For several years now this Commission has focused its
attention on finding market solutions to problems confronting
the wholesale electricity sector. I believe that such a market
approach will achieved the best long term result for the
public, and that our specific mitigation plan addresses the
short-term situation.
While the situation in California has certainly challenged
this resolve, I remain steadfast in my belief that market-
oriented solutions are preferable to those which might further
hinder the evolution towards efficient and workable competitive
wholesale electricity markets that will deliver lower prices.
That said, however, the flawed electricity markets that
exist in California and elsewhere are not at all what
proponents of restructuring had in mind when this process was
initiated at both the Federal levels and State levels in the
past decade.
Over the past months, I have made a point to emphasize my
belief that it is imperative for regulators to take firm steps
to improve markets in California, so that the present turmoil
will not cause to us abandon or retreat from the paramount
objectives of opening the transmission system to fair and non-
discriminatory access in making the wholesale electricity
markets more competitive.
In light of the predictions for prolonged blackouts, supply
shortages, and even higher prices, I am convinced of the need
to implement the structural and regulatory remedies required to
stabilize California and the Western markets.
In developing a price-mitigation procedure for California,
I had several objectives that I wanted to accomplish. And
primary among those was that the plan we ultimately adopt must
address price volatility in California's real-time energy
markets. It shouldn't discourage necessary investment in
California's generation infrastructure, and it should be market
oriented. And I believe our plan meets those objectives.
The hallmark of the order we issued last Wednesday is its
price mitigation plan, which establishes a single market
clearing price auction for the real-time market during reserved
deficiencies. Price mitigation will be required for all
generators with an available capacity when reserves are at 7.5
percent or less.
During those periods, a proxy price will be in effect. That
is a marginal cost based on heat rate, gas cost, and emissions
cost, and that will be calculated for each generator. The
calculated marginal costs of the unit that clears the market
will determine the market clearing price.
This price mitigation mechanism will not operate on an
after-the-fact basis as does our current methodology. Instead,
the ISO publishes the gas index and the emission information to
be used in the formula on a daily basis.
And if mitigation applies, when stage one is called by the
ISO, that will trigger the price mitigation plan. And, Senator
Feinstein, I believe we may likely be in the stages a lot of
the summer. Our mitigation plan will be in effect a lot of
those hours.
I want to highlight the fact that our April 26 order also
contains a number of measures that address California market
issues from the demand side as well as the supply side. And
these measures will be in effect for all hours and are in
addition to ongoing enforcement and monitoring that the
commission is undertaking.
On the supply side, our order requires that the ISO propose
a mechanism for the coordination and control of outages. The
order also requires the ISO to submit weekly reports on the
schedule, the outage, and the bid data for all hours, 24/7, so
that the Commission staff can monitor generating unit outages
and real-time prices.
Another important supply measure in the order is the
imposition of a must offer obligation on all the generators
that have participating generator agreements with the ISO in
real time. And these features that I've just talked about
address economic withholding and physical withholding, and they
speak to enforcement and monitoring on a 24 hour basis, 7 days
a week.
Also, non-public utility sellers must abide by the same
must offer obligation. In other words, if they use interstate
transmission, they must offer any available capacity that they
have to sell into the California ISO in the real time.
In addition to the price mitigation, the order institutes
requirements that should result in demand-side responsiveness.
Specifically, the order requires all entities purchasing
electricity in the real-time market to submit demand-side bids
that establish the price at which their load will be curtailed.
And they need to identify the load to be curtailed.
This action should help mitigate market power and lessen
the severity of price spikes. It also makes more megawatts
available in times of shortage.
As the order points out, when demand responds to price,
suppliers have more incentive to keep their bids close to
marginal cost because high bids are more likely to reduce the
bidder's energy sales.
So in addition to monitoring, the Commission staff has
initiated the following daily reports from the ISO on plant
outages. We're going to be reviewing bids and bidding patterns
into the ISO real-time markets, and we're going to be doing
ongoing financial audits of selected sellers of electricity
power into California.
Finally, I would like to comment on the order's institution
of an investigation under section 206 of the Federal Power Act
into the rates, terms, and conditions of sales in the Western
States Coordinating Council.
The feature of this order was important to me because it
appropriately reflects the regional nature of the wholesale
electricity market and the problems being faced in the West.
This investigation will target the transactions and prices in
the WSCC in a manner that is consistent with our actions in
California.
I am pleased that also the commission issued an order today
establishing a technical conference looking into natural gas
issues in California. An issue I have been speaking about for
several months, and I don't know the exact date of the
technical conference, Mr. Chairman, but it will be designed to
look into the interstate natural gas market and how it fits in
with the intrastate natural gas market.
It will seek to determine why prices are higher in some of
the market hubs in California--Topac, Wheeler Ridge, and
others--and we will hopefully begin to sort out what is driving
some of the high prices of natural gas in California.
Thank you. That concludes my statement. I will enter it
into the record upon permission, Mr. Chairman, and I am
available to answer questions.
The Chairman. Thank you very much, Madam Commissioner.
Before we go into the questions, I know the members have many.
Let me remind all of us that what we have here before us to
consider is an order. That order was voted on by democratic
process within the Commissioners two to one. So I think we have
to question the adequacy of the order and indeed the remedy if
we feel the order is inadequate.
Now, those remedies or another order which would have to be
initiated, of course, by FERC over legislation. It's rare that
you have an opportunity to revisit a dissent. But,
nevertheless, I think in spite of my concern, Mr. Massey's
rationale has certainly been helpful to the members to
understand and appreciate.
But I would hope members as they question will direct their
questions to the adequacy of the order, which is what we're
going to have to live with unless, again, they change the order
or, again, we want to introduce legislation to the contrary.
I think it is also noteworthy to recognize the point that
Chairman Hebert had made regarding the volume of paperwork
that's associated with this cost of production cost.
Senator Bingaman, I understand we have a voted for. I think
we should proceed as best we can limit the members. But we've
been asked to allow a visual of this volume of paperwork. So if
whoever has a strong back and wants to bring it in, maybe as we
begin to question the witnesses, you can explain what's in
these so-called orders.
So if the officer would allow the material to come in, and
if we've got any volunteers with a strong back to bring it in,
well, you make your point.
I think Senator Smith has to chair at 4. I have another 5
minutes, then I'm going to come back. Senator Bingaman, you can
work it any way you want. I'll defer my questions at this time
in order to accommodate Senator Smith, if that's all right with
you.
Senator Smith. Thank you, Mr. Chairman, Senator Bingaman.
Senator Bingaman. May--is this stuff coming in now or--Mr.
Chairman, what is this stuff again?
The Chairman. Well, it's the stuff that he referred to. Go
ahead and tell us what it is.
Senator Bingaman. What is this stuff?
Mr. Hebert. Mr. Chairman, what certainly we are considering
here is the ability for this Commission to turn the clock back,
the ability for this Commission to go back and do cost base for
cost-of-service regulation.
The Chairman. Come on, bring it up.
Mr. Hebert. It has certainly been the position of the
majority of this Commission consistently that we can't go back,
and that it is impractical for us to go back to cost base or
cost of service.
The reason for that is demonstrated by this case, which is
a Florida Power & Light case which goes back to 1993, which has
yet to be finalized.
And what these represent is even--not even a complete list
of the filings which is 15 boxes.
Now, these 15 boxes again represent the complexity of rate
cases. This is not to represent what is the oldest cases that
FERC has dealt with historically. We've had cases go back 15
and 20 years.
The point that these 15 boxes will represent, through this
Florida Power & Light case, which is a rate case, is that
California nor the West can wait eight years, nor can we wait
20.
The Chairman. This is one case before FERC?
Mr. Hebert. That's correct, Mr. Chairman.
The Chairman. And what's in the boxes?
Mr. Hebert. The filings of the case, and it's not complete.
The Chairman. Somebody open the top of one of those.
Mr. Hebert. Some will get out.
The Chairman. Put it back on, quick. How do you relate this
to, you know, a rate-based case? In other words, each rate has
to be examined individually what the production costs are and--
--
Mr. Hebert. Again, this is one case. If we're talking about
cost-based cost of service, we're talking some hundreds, as
many as some as 500 generators that we would have to go back
and establish their cost, subject to litigation, subject to
rehearing of this commission and appellate procedures beyond
that. It's just not an answer.
Senator Dorgan. Mr. Chairman, I'm apparently missing the
message. If the message is we can't regulate because there's
too much paper, that's not a message I understand or accept.
The IRS.
The Chairman. Just a minute, just a minute, just a minute.
I don't think we need any more--we believe there's 15. Is that
fair enough, Senator Dorgan? I think the point has been made
that when you talk about cost base, you're talking about a
great deal of detail because it comes in on various types of
formulas that are applicable. You have to go through them all.
Mr. Hebert. Mr. Chairman, I don't want Senator Dorgan to
misunderstand me. It's not about the magnitude of the paper. It
is the time span of the paper which creates the magnitude. The
8-year period.
Senator Dorgan. I don't want to take other's time, but
Senator Burns and I have been talking about a complaint against
railroad rates that lasted 15 years. But that's the agency's
fault. If these things drag on and can't get done, that says a
lot about the agency.
The Chairman. It says a lot about both sides because
obviously each side wants to make a case and each side gets
good legal----
Mr. Massey. May I make a comment, Mr. Chairman?
The Chairman. The point is we've got an emergency here. We
can't wait 8 years or California will burn out all of its
candles.
Mr. Massey. May I make a comment?
The Chairman. No. I'm going to call on Senator Smith
because he's under a time constraint.
Senator Smith. Thank you, Mr. Chairman.
Mr. Hebert, are you aware that in the bill Senator
Feinstein and I have we could relieve you of this problem? We
give you a choice of imposing just and reasonable load-
differentiated demand rates or cost-of-service service base
rates. So you don't have to go through all of this. You set
them. You don't have to do this facility by facility. Are aware
of that and why isn't that a reasonable option?
Mr. Hebert. I understand, Senator Smith, that the
legislation does address that. What I'm concerned about and
what I've not quite figured out through the legislation is how
we get beyond the due process of law. How we get beyond the
Administrative Procedures Act which I don't believe the
legislation would be able to override. Which then again would
bring us right back here.
Senator Smith. One of the concerns I have for the energy
industry, which seems fairly unanimous in wanting to go to a
deregulated free market, is the presumption that we even have a
free market. It seems to me what we're in the middle of a
process and a ways away from it.
And for a number of reasons of another nature, California's
difficulties with their law have magnified the problem so
incredibly that some are allowed to gain in the system. What I
fear is happening is we're going to set back deregulation for a
generation or more.
And people who are trying to put up plants or think that
there's a future in this are going to be sorely disappointed
when the public outcry is so loud this summer that there's
going to be little to hold back the dam that's going to break
on energy companies if they keep this up. Are they aware of
that?
Mr. Hebert. They being the commission itself, are we aware
of it?
Senator Smith. Are you aware of it? Are the people you deal
with, do you go to these boxes with, do they have a clue about
the kind of--the head of steam that's building up against them?
Mr. Hebert. Well, part of the problem, as you know, Senator
Smith, and you and I have had had conversations and I know
you're sincere as to wanting to correct the problem, and I
commend you for attempting to do that, but these boxes do not
represent two parties. They're not just two parties and two
sides. There are many sides to this. Which is the complexity of
it.
But I will tell you that FERC is acting in a way that we
think is reasonable. And I totally agree with you that the
market is dysfunctional. FERC agrees with you that the market
is dysfunctional. That is, in fact, why you have the price
mitigation plan.
But we have a tender balance in trying to correct the
marketplace and get the marketplace on its feet and get
adequate generation, which means adequate supply.
At the same time, you can't separate out deliverability of
that supply as well. In other words, the transmission side of
that is important too. Because quite frankly whereas some
people want to say, you know, why do you tie the RTO filing
that California should have made 16 months ago? They were put
on notice. Why do you tie that to the mitigation measures? It
doesn't have anything do with mitigation.
Well, quite frankly it has everything to do with
mitigation. Because if someone tells you that transmission
system, especially Path 15 which is not set up correctly which
needs to be improved, that the people have been debating since
1985. At least if they're going to tell you that's not part of
the solution, then what they're doing is putting their thumb in
the eye of every other State but California.
Because what they're going to say is we don't care about
the transmission system and what it does with the other States
and whether or not it sucks your energy dry. What we care about
is just taking care of California, and we have to represent the
entire 50 States of the United States of America. It is about
transmission, it is about generation, it is about supply. It's
a tender balance, and we're trying to provide that.
Senator Smith. It seems to me those boxes are Exhibit A
that we have a functional market, a broken market, and FERC
needs to take a different course.
But I do want to commend you at least for the direction
you're headed. I think it's welcome. I wish you had gone a bit
farther, and I frankly wonder why you didn't include the other
Northwest States on the grid.
Mr. Hebert. Well, we have a section 206 which we're seeking
comment on that comment period. We're hoping to get information
that is somewhat going to be similar and mirror what we've done
in California. That is what we're looking for. So we haven't
ordered it, but we are in a comment period which would end next
week. It is a 10-day comment period, which I think is the
quickest comment period we've ever had.
Ms. Breathitt. Senator, may I add we're legally constrained
to address this situation and the other Western States without
first instituting what we first call section 206 of the Federal
Power Act provision.
Senator Smith. And you have that investigation going now;
is that correct?
Ms. Breathitt. It begins immediately upon publishing in the
Federal Register which should be, hopefully, this week.
Mr. Massey. Senator, may I comment on that? That
investigation is so narrow it holds almost no hope for any
price relief for your State whatsoever. We're only
investigating transactions of 24 hours or less that occur
during reserve deficiencies. All the transactions that are
driving prices very high in your State, pretty much all of them
I would say are excluded.
Senator Smith. My concern is just by including California,
you leave Oregon, Washington, and others more vulnerable to
some of this abuse.
Ms. Breathitt. In 60 days after it is published in the
Federal Register, which should be this week, we will be able
to, upon a finding from our investigation, that we can address
high prices in the other Western States, including yours,
Senator. We just have to go through this important legal step
first.
Senator Smith. I understand, and I know you can't look
backwards. But I tell you looking backwards I'm looking at
differences in pricing of 10 to 12 times what they were just a
year ago. If that isn't unjust and unreasonable I don't know
what is.
And I would just plead for you all to continue to exercise
all of the powers you have. And if you need some more, we'll
get you some because this is unsustainable politically for this
commission, for this administration, for this Congress. And so
tell us what you need and with all delivered speed help.
Mr. Hebert. Commissioner Smith, if I could be clear--
Commissioner Smith, I apologize.
Senator Smith. I've been called worse.
Mr. Hebert. No, you have not been called worse. Senator
Smith, let me clear up one inaccuracy. The price mitigation
does not just apply during the contingency reserve. The price
mitigation we're looking at through the 206, as I said, we're
looking at mirroring California, the must sell, the bid
requirements, the outages, and the reporting, 24 hours a day, 7
days a week. And that will mitigate prices. So I wanted to
clear that inaccuracy up. That is 24 hours a day, 7 days a
week.
Mr. Massey. There's no need to clear up what I said. What I
said was absolutely accurate. The investigation is so narrow
that it holds almost no hope for any price relief in other
States.
Senator Smith. Thank you.
Mr. Hebert. Thank you very much.
Senator Burns [presiding]. Senator Bingaman.
Senator Bingaman. Thank you very much, Mr. Chairman. One of
the confusions I've got about this is whether or not this
mitigation plan that has been implemented or proposed here, I
guess adopted here, whether this can be evaded. Are there
sellers outside of California not subject to this proxy system
who can find a way to get a higher price for the power and the
higher price power wind up getting into California? Is that a
legitimate concern, in your opinion--I'll ask the chairman
first, then the Commissioner Massey.
Mr. Hebert. If you have a concern, Senator Bingaman, it's
legitimate. But I will tell you it is not a concern that I
have. One of those issues will be subject to rehearing and
certainly pending the comment period in the 206 proceeding.
But I will tell you any bid that comes from out of the
State into the State of California is not subject to the
mitigation at this point. But we will get comments on that.
Senator Bingaman. Commissioner Massey, do you have any
thoughts on whether this mitigation plan could be evaded?
Mr. Massey. Oh, I've heard one comment that it is a Swiss
cheese mitigation plan, which I think is true. I expect prices
to go up outside of stage one, two, and three hours.
No. 2, the out-of-State generators that bid into the market
are not subject to the market clearing price and are not
subject to a refund obligation under the order as it's drafted
right now. So, yes, I think that there are several ways that
even the limited mitigation in this order can be evaded.
Ms. Breathitt. Senator, may I respond also?
Senator Bingaman. Yes, sure, please go ahead.
Ms. Breathitt. I'm going to read one sentence from our
order. And it says during mitigation when the stage one
triggers our price mitigation plan, marketers and I don't know
if you're speaking to marketers, but marketers can accept the
market clearing proxy price that is set by the ISO or submit
their own bid.
If their bid exceeds the market clearing price, they would
be required to justify the bid based on the prices they pay for
the power. So our order does seek to include sellers selling
into the ISO and the real-time market.
Mr. Massey. But the out-of-State generators are exempted
from that at-risk condition by the order.
Senator Bingaman. Right. That was my concern that out-of-
State generators could sell to parties also outside the State
at a higher price, and then those parties could sell into
California at whatever they wanted, whatever the market would
bear. But you don't think that's a real problem, Mr. Chairman?
Mr. Hebert. I don't think it's a real problem, and I would
suggest to you, Senator Bingaman, that, in fact, this
commission is going to remain vigilant to look at manipulation.
We have done that. If we find market power manipulation that we
think merits moving forward with and having discouragement, we
will, in fact, do that 24 hours a day, 7 days a week.
Senator Bingaman. Does California have to file a proposal
that incorporates it into a West-wide RTO in order to be
consistent with this order 2000?
Mr. Hebert. It is conditioned. The RTO is a condition as to
their necessity to file with the mitigation plan.
Senator Bingaman. What does that mean?
Mr. Hebert. It is conditioned, and I'll be fair with you. I
would love to have mandated it. If we would have had the votes
to mandate it, I would have mandated it.
Senator Bingaman. You would have mandated that California
file a proposal that incorporated it into a West-wide RTO?
Mr. Hebert. That they file an RTO with us. The provision
within our order does not say West-wide RTO, it says RTO. You
see, some 16 months ago the Commission unanimously, at that
point, ordered all States to file with us regional transmission
organization plans. And, in fact, California has yet to do it.
But what people don't understand is if you're trying to
mitigate prices, which means in the end you're trying to get
more supply delivered so you can bring down those prices, the
transmission system has everything to do with that. That is, in
fact, what order 2000 was about.
And every other State has complied. But if we're going to
get California and the West on its feet, the RTO proposal is
part of that and must be filed. You can't separate it.
Senator Bingaman. But now you're saying that is not
required in this order, but it is conditioned? What does that
mean? What does that mean?
Mr. Hebert. Well, it's obviously subject to rehearing, and
this Commission will speak to that. But I will tell you the
condition is that they must file an RTO with this Commission.
Senator Bingaman. Well, then it's required. If that's a
condition, then it's required. Let me ask the other two
commissioners.
Ms. Breathitt. Senator, the way I read that section in the
order, which I did vote for, let me say that it's not one of my
favorite features of the order, but I did vote for it.
Senator Bingaman. I'm supposed to be the one reading the
order, you're supposed to be the one writing it.
Ms. Breathitt. I know, I'm just explaining it's not my
favorite feature. But notwithstanding, I don't think it will be
difficult for the California ISO to file an RTO plan as every
other jurisdictional transmission-owning entity in the United
States has last October. It does not ask them to join with any
other surrounding RTO.
Senator Bingaman. So you agree they have to file a plan,
but you don't think it will be difficult to do?
Ms. Breathitt. I do not.
Senator Bingaman. Commissioner Massey, did you have any
comment on that?
Mr. Massey. Under this order they don't have to file a
plan. If they don't file a plan, the order self-destructs.
That's the way it works. This Commission has said in this order
if California doesn't file an RTO plan, even the meager steps
that we took here to ensure just and reasonable prices
evaporate.
Ms. Breathitt. Senator, Bill is right, but I don't think it
will be difficult for them to comply.
Mr. Hebert. Senator Bingaman, if I might just add, we have
provided the State of California, the IOUs, and the ISO three
of FERC's brightest and best to help them. We've exchanged
phone numbers. We have three individuals helping with them.
We're doing everything we can. But the RTO is an integral part
of bringing prices down. There's no question about that.
Mr. Massey. May I say one thing? If Chairman Hebert wants
to send a separate order up to mandate this, I will vote for
it. There's two votes right there. So I--but I would not vote
for it as a condition in this order of our commission carrying
out its responsibility to insure just and reasonable prices.
Senator Bingaman. Mr. Chairman, I've used all my time.
Thank you very much.
Senator Burns. Senator Feinstein.
Senator Feinstein. Thank you very much, Mr. Chairman.
Mr. Chairman, someone just handed me an interesting
document. It's entitled, ``Megawatt Laundering Under FERC's
Mitigation Plan or a Primer on How to Gouge California.'' And
it actually described how to use this order to price gouge.
And it's got a step-by-step primer in it that goes on and
says exactly how to do it. I find that very interesting.
But I sent down to Mr. Hebert a letter dated April 30 from
Southern California Edison, and I would like to enter this
letter into the record because it documents that there are not
3,000 megawatts of QF-generating capacity off line in
California due to financial concerns.
The total includes 320 megawatts of generation under
contract with Southern California and 400 under contract to
PG&E.
What this letter points out is that the payment system is
in the process of being worked out, and in light of these
payments made and offered by Southern California Edison, no
financial hardship will result from continued sales by QFs
pursuant to their existing contracts with utilities. And I
would hope that if there are any QFs here, they would make
themselves available of that.
[The letter follows:]
Southern California Edison,
Rosemead, CA, April 30, 2001.
The Vice President,
The White House, Eisenhower Executive Office Building, Washington, DC.
Dear Mr. Vice President: Southern California Edison Company (SCE)
is deeply concerned that some in the Administration and Congress
apparently have come to believe that the abrogation of existing
contracts between investor-owned utilities in California and qualifying
facility (QF) power suppliers offers a means to increase the amount of
electricity available in California. This position appears to be based
on misinformation about the amount of QF power that is currently off-
line in California, the reasons that generation is off-line, and the
implications for California consumers if QF power is sold outside of
these existing contracts at higher, market-based prices. Questions
regarding the government's legal authority to abrogate these binding
contracts aside, it is vitally important to set the record straight
before the government takes precipitous action that will only worsen
the California electricity crisis.
It has been asserted that 3,000 MW of QF generating capacity is
off-line in California due to financial concerns including nonpayment
by SCE and Pacific Gas & Electric (PG&E) for past power deliveries. The
facts, however, show otherwise.
Only 1,200 MW of otherwise dependable QF resources contractually
committed to SCE and PG&E are off-line. (QFs under contract to San
Diego Gas & Electric, which has not missed payments under its
contracts, are not included in this total.) Of this 1,200 MW that are
off-line, approximately 500 MW are off-line due to scheduled
maintenance or equipment failures. Thus, only approximately 700 MW has
been taken out of service due to financial concerns. This total
includes 320 MW of generation under contract to SCE and approximately
400 MW under contract to PG&E.
While there remains a past delivery payment issue that must still
be resolved, going-forward payments for QF power will be made on a
timely basis, as required pursuant to the March 27 decision of the
California Public Utilities Commission (CPUC). SCE will make energy and
capacity payments to all QF generators for power deliveries made on and
after March 27, 2001. The first such payment for April's deliveries was
made by SCE to its QFs on April 13, 2001. We understand that PG&E also
paid its QFs in accordance with the CPUC's March 27 order.
The same CPUC order requiring payments going-forward also modified
the pricing formula that applies to the vast majority of SCE's QF
contracts. Certain gas-fired cogeneration facilities have claimed that
this modification (which ties QF electricity prices to a natural gas
spot market index at the California/Oregon border rather than the
previous, typically higher, index prices at the California/Arizona
border) has caused a financial dislocation while such cogenerators find
ways of transitioning from purchasing natural gas at Arizona spot
border prices to lower priced alternatives. SCE believes that the
financial strain resulting from this change in the price formula is
directly responsible for most, if not all, of the QFs under contract to
SCE being taken off-line.
To ease the effects of the natural gas price change on this limited
class of QF suppliers, and to ensure that all available resources
continue to operate during this crisis, SCE made a proposal last week
to affected cogenerators, subject to the concurrence of the CPUC, to
make a supplemental monthly payment to gas-fired cogenerators during
the calendar months of May 2001 through April 2002. The proposed
supplemental payment would assure that the total energy payment
received would be equal to the amount that would have been paid using
the previously effective Arizona border gas index.
SCE also has offered to prepay the affected cogenerators for the
first full delivery month following the effective date of the agreement
proposed above, in a further effort to assure that there are no
financial obstacles standing in the way of full production by these
facilities. We believe that this package should be effective in
bringing back on-line that limited amount of generation currently off-
line due to financial concerns. We are very encouraged by the favorable
initial reaction of the cogenerators to our proposal and are hopeful
that all of these small generators will be back on-line as early as
this week.
In light of these payments made and offered by SCE, no financial
hardship will result from continued sales by QFs pursuant to their
existing contracts with utilities. The legitimate financial issues
facing these generators are being addressed. Allowing QFs to abrogate
their contract obligations would do nothing to resolve the issue of
past debts.
If QFs are permitted to break their contracts and sell their
generation on the open market, there is no guarantee that this much
needed power will stay in the state of California. What is more, the
government is proposing to abrogate the very type of forward contract
that the Federal Energy Regulatory Commission and others repeatedly
have claimed is necessary to reduce the price volatility in the
California energy market. While the result will be a windfall for QFs
and power marketers selling at market-based prices that are today
roughly four times higher than existing contract prices, the result for
the state will be to make the power supply and price situation worse,
not better. Allowing a QFs to sell all their generation outside their
existing contracts in order to bring back on-line the limited amount of
generation that is off-line due to financial concerns will roughly
double the amount of power that the state must purchase (the ``net
short'') with disastrous financial consequences.
California consumers have paid dearly for the right to finally reap
the benefits of QF contracts that have for years saddled utilities and
their customers with the obligation to pay far in excess of market
prices for QF power. Prior to 2001, SCE had paid its QFs atotal of
$27.9 billion for electricity, approximately $15.8 billion of which
exceeded the prevailing market rate. As the CPUC has acknowledged, QF
contracts were heavily front loaded in order to encourage the financial
community's support for QF development. When consumers are now finally
poised to receive some of the promised benefit of the QF program, that
benefit would also turn out to be illusory if the QFs are permitted to
abrogate their agreements in order to pursue greater profits in a
dysfunctional spot market.
Federal action is not needed here. The CPUC has authority in this
matter, and has recently instituted an investigation regarding the
performance of QFs under their existing contracts. As the CPUC observed
in its Order Instituting Investigation, ``this Commission, like other
state regulatory agencies, has the primary role in calculating payments
to a QF . . . and in overseeing the contractual relationship between
QFs and utilities operating under our rules and regulations.'' There is
no compelling justification for the Federal government to intrude into
this matter at this time.
For all these reasons, we urge you to disavow any intent to
abrogate existing QF contracts. Such a step would be ineffective in
increasing the availability of power in California, and would only
aggravate the substantial burdens being borne by the state and its
residents as a consequence of the broken wholesale electricity market.
Sincerely,
Stephen E. Frank,
Chairman, President & CEO.
Senator Feinstein. But if I could, I would like to ask Mr.
Massey a couple of questions. Mr. Massey, what percentage of
transactions from January to March where FERC ordered refunds
because they found prices were unjust and unreasonable were in
stage three or one or two?
Mr. Massey. It depends on the month. I have the numbers for
stage three. Let me give you an example. For the month of
March, the proxy clearing price was $300. And we said in an
order if generators during stage three bid $300 or above,
they're subject to refund. That only captured 220 out of 9,000
transactions that were above $300.
So 98 percent of the transactions that were above $300 were
for megawatt hour during the month of March were essentially
given a free and clear by our order. I don't have the numbers
for stages two and one.
I have them for last year. From June until December of last
year, only about 5 percent of the transactions occurred during
stages one, two, and three. So if the price mitigation in this
order had been applied then, only about 5 percent of the
transactions would have even been covered by it.
What will happen this summer, what percentage of the
transactions will be in stages one, two, and three it's
anyone's guess. But one estimate I have heard is in the range
of 40 to 45 percent. Which may mean that 60 percent of the
transactions will not be subject to price mitigation this
summer.
Senator Feinstein. And therefore very likely will have
prices go up?
Mr. Massey. I expect the prices outside the mitigation
periods to go up.
Senator Feinstein. Can you give us any estimate of how high
you believe they will?
Mr. Massey. You know, I really do not know, but I do know
that the order the way it's drafted right now, if it's purely
economic withholding, a generator simply bidding a $1,000,
$1,500, just because it can and it's outside of stages one,
two, and three, there's no relief and no at-risk condition.
Senator Feinstein. Well, you know, I think in a sense it
makes the order next to worthless in terms of real impact and--
--
Mr. Hebert. Senator Feinstein, I would love to comment on a
couple of things. One, there is not going to be physical or
economic withholding because the must-sell requirement which,
by the way, doesn't have anything to do with the stage. It is
24 hours a day, 7 days a week. It's important you understand
that.
The must-sell requirement was not in the December 15 order.
Actually, you and I have had some exchanges, and that is one of
the things we agreed that probably was important. I think it
was important, and that is why it's in there. The bidding
requirements are additional, so are the outage requirements. In
the reporting requirements they were going to happen on a
weekly basis. So I don't want you to think those transactions
are not going to be looked at.
Nor do I want you to think that this commission, if it
comes to market manipulation, is not going to act. We are going
to act.
A couple of other things that are very important too.
Commissioner Massey so clearly pointed out a little while ago
the fact that when you had the megawatt rate at around I think
it was $430, that the gas cost itself was around $380. Yet
somehow somewhere in this conversation we talk about capping at
rates such as $150.
Now, I'm not sure how that helps me help you get supply to
the consumers of California, and quite frankly it doesn't. But
a couple of other things. One as to the letter, and I do
appreciate you giving me this, I haven't read it. I will read
it. But I will tell you that we have pleadings that were filed
before us from the ISO in California. And others that do
suggest that there are 3,000 megawatts out there with the QFs.
Not to mention I always find it interesting when I read
letters as to who is copied. This has everything to do with
FERC, and I do notice that we're not copied.
I also note that this letter was sent to the House when the
House was having their hearings, and that Mr. Frank was to
testify and then declined to testify for some reason. So, Mr.
Frank could certainly prove this out by testifying as to the
matter. But I certainly find it interesting that I was not
provided a copy other than by you, and I'm thankful.
Senator Feinstein. Well, the letter was sent to the Vice
President, just so the record is clear.
Ms. Breathitt. Senator, may I add one point? Commissioner
Massey had heard an estimate that the transactions are likely
to be 40 to 45 percent in stages one, two, and three this
summer. I had heard estimates that they will be as high as 80
to 85 percent in stages one, two, and three. We don't know, but
I think the likelihood because of the summer heat of being in
the stages most of the summer is very high.
Senator Feinstein. Yes, let me just ask one last question
because my time is almost up. The just and reasonable provision
of the Federal Power Act applies only to stage one, two, or
three emergencies or all the time? I understand it applies all
the time.
Now, your board applies just to stage one, two, or three
emergencies. Why doesn't the price mitigation apply all of the
time? Why do you select just that one period and do it on the
basis of the least efficient megawatt when you know that this
can be manipulated?
Mr. Hebert. Several reasons. One, inefficiency does set
market prices. Two, by focusing on inefficiency, we'll get
those dirty dog units that burn some 40,000 heat rates and
others out of the State of California because the more
efficient units will come in and they'll clean up----
Senator Feinstein. Why if you get more money for a dirty
unit, why not have a dirty unit?
Mr. Hebert. You're not going to get more money with a dirty
unit. You're going to get more money with an efficient unit.
Because it's an efficient unit. Let's say that unit clearing
price is, let's just pick a number, $175. If that is the proxy
price, if you have an efficient unit that can produce it for
$25, you're going to try to build as many of those efficient
units as you can because, quite frankly, that's where your
profit is. Your profit is not here.
You're on a cost line here, and you're very tight. It's
going to bring efficiency. Understand that and I would like to
take more time to explain it to you further but let me tell you
my colleague, Commissioner Breathitt, I thought did a very good
job of explaining as well that this summer, probably most of
the summer you're going to be in a stage one, two, or three.
And I think we did a very good job of balancing two things.
One, the need to get in when we think market power might be at
an extreme, while there might be illegal conduct. While at the
same time providing an opportunity for there to be new
investment in California so that people of California can get
more supply and can keep their lights on and can have better
prices.
Mr. Massey. Senator, may I make a comment on that point,
please? It may be that if I owned several generators, I would
want to have a bunch of efficient ones and at least one highly
inefficient one. It seems to me that's the point you're making
because that unit could set the market cleaning price. And I
think that is a very valuable point to make.
But your other question is why not apply this 24/7? It
seems to me that the argument that you're going to be in stages
one, two, and three 85 percent of the time anyway is a powerful
argument for going ahead and applying it all the time. Why
exempt that 15 percent, assuming it's that small, which I don't
believe it.
The truth is we don't know when they will be in stages one,
two, and three alerts for the summer, but we do now know that
the Federal Power Act says there shall be just and reasonable
prices in all hours.
Senator Feinstein. Thank you, thank you.
Senator Burns. Senator Cantwell.
STATEMENT OF HON. MARIA CANTWELL, U.S. SENATOR
FROM WASHINGTON
Senator Cantwell. Thank you, Mr. Chairman. I appreciate
this opportunity. I know we're here to discuss the FERC order
of April 26 and obviously some of your testimony was broader
about the larger issues.
From the Washington State perspective, while we can have a
lot of discussion about lack of generation or planning or the
amount that's on the books to produce a greater deal of
capacity in future years, I'm most interested in the next 24
months and what we can do for the people of Washington State.
Hand out all the criticism you want about the past or what is
going to happen in the future, but the next 24 months is
critical to our economy and to the people of our State.
I have some basic questions regarding your actions. Because
we're limited on time, and I believe we have a vote here, if
you could just answer yes or no to these, that would be very
helpful.
First of all, do you believe that the energy prices in
Washington State represent reasonable rates?
Mr. Hebert. Are you asking me?
Senator Cantwell. Yes.
Mr. Hebert. I understand, but if I may ask permission of
the chair, I would certainly like to answer yes or no with the
request of the Senator, but I would like to back that up in
writing with a further comment and explanation.
Senator Burns. Without objection.
Mr. Hebert. Thank you.
Senator Burns. Without further investigation, which is what
the 206 is about, I can't answer that.
Senator Cantwell. So you don't know today whether you think
there are reasonable rates being charged when they are 11 times
what they were a year ago?
Mr. Hebert. That is what the 206 investigation of the
period is about.
Mr. Massey. It actually isn't. It's about a very narrow
investigation aimed at a very narrow part of the market. And
based on what I've seen, BPA has to increase its prices by 250
percent. Is that just and reasonable? I don't think so.
Mr. Hebert. I am concerned about the prices.
Senator Cantwell. Yes, but I'm asking you whether you
think--well, let me get to the second question. Do you believe
there should be price mitigation in Washington State, yes or
no? And Commissioner Breathitt, I didn't mean to cut you out of
the last round, so if you want to jump in too . . .
Ms. Breathitt. I can't prejudge what the 206 will find, but
if it finds that there are prices that need to be mitigated, I
would agree with that.
Senator Cantwell. Well, the reason I'm asking is because
I'm going to see constituents this weekend, and I'll share with
you some of their thoughts. Our prices first spiked in June
2000. If we're going to talk about 206 and what an important
act it is, I would like to point out that we should have done
that a year ago. So telling us today that you don't want to
comment on whether there is a need for----
Ms. Breathitt. I'm legally constrained, I'm sorry.
Senator Cantwell. This was an important action that should
have been taken a year ago if that's the case. If you couldn't
talk about it when we started seeing spike increases, we should
have started having discussions then about investigations. But
now it's a year later and you don't even want to talk about
whether you think that these are reasonable rates?
Mr. Massey. I think you're absolutely right. We've been too
little too late. We should have gotten on this a year ago. And
they don't sound reasonable to me.
Mr. Hebert. Senator Cantwell, if I may add to this, this
commission, through the 206, has stated, which I think is what
you're after, that at certain times and at certain conditions
rates may not be just and reasonable. That is what the 206 is
about. We're not trying to evade you.
As you know, we're quasi-judicial. We're in a comment
period. We made that very clear to the staff. We're in a
situation where if one of us gets conflicted out, we can't make
a decision.
But to answer the June question, I've been chairman of this
agency for 90 days, and we have acted and we've acted quickly.
We were made to be vigilant. That is what the 206 is about.
Ms. Breathitt. Senator, I went to the meeting in Portland
and heard from the Governor in your State and received
correspondence from him. And I do very much share your concerns
and your Governor's concerns. And I've talked to members of
your State commission. And I do believe that the process we're
going through will produce some beneficial results.
Senator Cantwell. So you do think we'll see price
mitigation in Washington State?
Ms. Breathitt. I can't legally say that or I might have to
recuse myself, then we wouldn't be able to move forward.
Senator Cantwell. Well, I would just remind the Commission
of the dates the prices first spiked, and if it was a
limitation on your discussions, we should have invoked 206 a
long time ago, given the increases that people have seen.
Mr. Chairman, if I could, this is still being discussed as
somewhat of a California issue. And yet I very much appreciate
Commissioner Massey's comments about plants and facilities
being shut down in Washington State: Georgia Pacific and
Birmingham have been affected, pulp and paper companies in
Steilacoom, Washington, a chemical company in Tacoma. These are
layoffs that are early indicators of real problems in our
Washington economy.
I have an emotional letter from an 11-year-old whose mother
works in an aluminum facility. He said, ``This is the first
house we've ever lived in. And it's really important for me to
live in a house. And we might not have this house.''
And I hear from senior citizens in eastern Washington who
are saying ``Next winter, if this 200 percent rate increase is
actually implemented, we don't know whether we're going to be
able to pay the bills.''
So this is an emergency now. We can talk all we want about
what is going to happen 2 years from now in generation or
criticize other activities. But FERC has very clear legal
responsibilities under the Federal Power Act of 206, that
whenever the Commission, after a hearing or upon its motion or
upon a complaint, finds that any rate, charge, or
classification is unjust, unreasonable, unduly discriminatory,
or preferential, the Commission shall determine the just and
reasonable rate charge classification rule and then enforce it.
And I think what we're saying, Senator Feinstein, Senator
Smith, and myself is that if you're not going to do that, the
Congress is going to act in pushing that to happen. Because it
is an emergency in our State, citizens are being impacted--to
the degree that they are going to be without house or home or
jobs. Remember that the western economy is 1/3 of the national
GDP. So this is an issue that we must deal with in an
expeditious fashion.
Thank you, Mr. Chairman.
Senator Burns. Thank you Senator.
Senator Dorgan.
STATEMENT BY HON. BYRON L. DORGAN, U.S. SENATOR
FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you. You all aren't
going to like what I'm going to have to say and I'm sorry about
that, but frankly there's not a free market in the power supply
in California. You're phasing an illusion if you're talking
about free markets, number one.
No. 2, the reason I came today is I have been distressed
for some long while. I see regulatory agencies that won't
regulate. I think during the last couple of years you've done a
wonderful imitation of a potted plant. You have not done what
you ought to do. If we're going to spend money for FERC, then
let's have an agency that's going to crank up an effort to do
the right thing at the right time.
You talk about the market system. The market system is a
wonderful thing. I used to teach a little economics, and I
deeply admire the market system. I don't worship it. It needs a
reform from time to time in certain areas. Cranky little Judge
Judy on television, you know how much she makes in the market
system? $7 million is her salary. Judge Rehnquist is $180,000.
So that's the market.
Shortstop for the Rangers is $250 some million in the
market system. Well, the market system sometimes gets out of
whack, and we have regulatory agencies that ought to have the
energy to go right at it, hard and on a timely basis.
And I tell you I'm just not impressed by the paper. Look, I
know that regulating is a tough job, but regulating is not a
four-letter word and not a dirty word. It's what FERC is all
about.
When you see what's happening in California, $7 million to
I think $26 million then nearly to $70 billion this year, let
me make sure we've got it right. Billions, with a B. When you
increase the cost of power tenfold, something is haywire
someplace, and this is not about philosophy I would say,
Commissioner Breathitt.
It's about a lot of folks getting their back broke by
energy prices they can't afford. And I just, you know, I was
listening to this, a couple of observations. One, you all don't
get along very well.
The Chairman. We're going to change that in a few days. We
have a couple more commissioners coming on so that will help.
Senator Dorgan. Well, we'll see.
The Chairman. It depends on your point of view, whether you
want to get something done around here or not.
Senator Dorgan. Well, that's what I'm hoping. I'm hoping
that FERC will decide to saddle up and move out in the right
direction here.
The Chairman. Can't blame this group, you know. They just
got together and it's amazing what they've been able to do in
the last 90 days compared to what's been done in FERC in the
last couple of years.
Senator Dorgan. I understand that. I'm asking the questions
at the moment here.
The Chairman. I understand that. I'm just telling you the
other side of it. Please proceed.
Senator Dorgan. I understand the other side. The point is
we have a regulatory agency, no matter who is in charge, hasn't
been regulating very effectively. And I think it's pretty hard
to make the case, Mr. Chairman, that that which has been done
recently can be called anything other than inching----
The Chairman. Better than nothing, and that's what we had
before.
Senator Dorgan. I will tell you what. If I lived in
California and were subject to the kind of price increases that
they've been subject to, I guess I wouldn't want better than
nothing regulatory----
The Chairman. I believe that charity begins at home, and I
think that's certainly true in California.
Senator Dorgan. Well, better than nothing is not something
that's a standard I relate to in this issue. My hope is
whatever FERC decides it's going to do and whoever is engaged
in this issue down at FERC, you'll decide you're a regulatory
body. And in circumstances where regulation is required, that
you'll step up and move on briskly in the right direction and
provide some help to people.
I tell you I'm just unimpressed and I've been unimpressed
under the previous administration as well. And now too.
It is not about philosophy. There is no free market there.
If you continue to chase that illusion, you're never--you're
never going to solve this issue.
Ms. Breathitt. Senator, I agree with you that there's not a
free market in California.
Senator Dorgan. Well, we keep talking about trying to find
the free market to deal with the efficiencies here. Seems to me
this needs a dose of regulation at this point, effective
regulation. And there are ways for you to deal with that paper
there. Are ways for you to deal with that as a regulatory body.
And so, you know, I understand the differences that you've
expressed here with this particular order, and I know the
chairman asked us to focus on this order, but frankly I just
want you to act like a regulatory body that wants to be
aggressive in pursuit of the right policies, and I don't see
that. Thanks, Mr. Chairman.
Mr. Hebert. Mr. Chairman, if I may----
The Chairman. Thank you very much. Before you do, I think
we all are striving for the same thing, Senator Dorgan. The
question is how do we get there? There is no free market in
California. There used to be. Is it FERC's fault that it isn't?
We can go through that exercise for a long time. Effective
regulations suggest different things to different people.
You're tempting to try and instill in California what has been
lost. And that has created an environment where investment will
come in and put in facilities.
Now, California discouraged that. There's absolutely no
question about it. They discourage it as evidenced by their
purchase outside the State. That was a matter of choice. Now,
I'm not suggesting, and I'm not standing here defending FERC.
And this is one of the things that concerned me about this type
of hearing. We got an order here. We can either live with that
order. You folks are going to come together and change it, but
we're going to legislate something to the contrary. The focus
should be on the adequacy of the order. This is turning into a
debate between the minority and the majority within FERC.
It's a fine democratic process, but it's an exercise that
doesn't address the bottom line. How do you encourage private
sector investment to come into California and create, not
necessarily a surplus but create an environment where they can
meet the increasing demand? First of all, they have to ensure
that they get paid. How much is outstanding, Mr. Hebert?
Mr. Hebert. I think around $13 billion.
The Chairman. For power that's been provided. Would you
agree with that Mr. Massey?
Mr. Massey. Yes, but my view is----
The Chairman. Just a minute. That's the question I asked.
So we got $13 billion out there that hasn't been paid for.
Before other folks are going to be anxious to come into
California, they are going to want to have had some assurance
that they're going to be paid. That's a reasonable assumption.
Those people in California, they got power. Now whether
that power was unreasonably priced is another matter and an
appropriate matter, but they got consideration. They haven't
been paid for it. That has got to be addressed by California
and Californians, whether they're rate payers or taxpayers.
Otherwise what we're talking about here is an exercise of
cosmetics. If we don't encourage investment to come into
California, this whole thing isn't going to work. My question
is whether you can have wholesale caps and still bring in
investment into California. I see people out there shaking
their head both ways. I don't know what to believe, but that's
the crucial thing.
Mr. Massey, you wanted to make a point?
Mr. Massey. Senator, I would not agree that all of that $13
billion represents a just and reasonable----
The Chairman. I didn't say it did, but it's out there and
somebody is making a case that they haven't been paid. And I
assume the lawyers are going to be able to get a little work
out of this deal and so forth.
But, in any event, you know, when I look at this volume
associated with one case and recognize that's part of your job,
but nevertheless we like to have timely decisions based on
reasonable research. You can research to the end of the moon if
you want to. You have to make a decision at some point in time
based on a degree of satisfaction.
So while, you know, I can appreciate some of the comments
of my colleagues here relative to, well, this is your job
anyway, the point is if we magnify this by causing an
evaluation into all--how many rate cases could there be
relative to cost of production? I mean, everybody has a
different cost of production. So you have to look at a
practical aspect of how you're going to measure this in some
way that's responsive to the needs of the people.
And I think your effort here in this evidence is to simply
show that cost of production puts a hell of a load. It's not
impossible but don't expect quick and timely reviews unless you
want to increase your staff tenfold. Enough of that. California
hydro projects are regarded by FERC order to spill water for
fish habitat starting now and through the summer.
I'm curious to know if relief in this order would require
whether FERC would issue an order suspending this bill for a
year after an endangered species section 7 consultation with
national marine fisheries service. I'm told that there's about
2,700 megawatts of additional power per month could be
generated for the region if the spill order could be suspended.
I gather this would almost meet the 3,000 megawatt per month
California has estimated to be short this summer.
Bonneville Power Authority, which is not subject to FERC,
right, just received--a waiver from National Marine Fisheries
to allow it to suspend its planned spill from the Federal hydro
facilities. Are you aware of that?
Mr. Hebert. I just got news of that, Mr. Chairman, on my
way in. And I heard that is several thousand megawatts.
The Chairman. So the Northwest Power Planning Council,
which is an agency created by Congress, just concluded a
meeting I'm told in Spokane to consider requesting relief from
FERC and has put its intention to request relief out for public
comment. The Northwest Power Planning Council analysis of a 1-
year suspension of the FERC's bill order shows a negligible
impact on fish populations.
Now, this conclusion evidently is consistent with the no-
jeopardy opinion of Bonneville Power received from NMPS
allowing it to suspend spills from the Federal hydro project.
Now, are you folks looking into this matter, and are you
going to determine how FERC can expedite the process to suspend
spills from the mid Columbia hydro facilities? And, in
conclusion, this would appear to be an extremely important
source of power that perhaps could be available to the West
during the summer.
Mr. Hebert. Obviously we are looking into every opportunity
to squeeze every available megawatt out of the West. We would
have to cooperate with other agencies. We're more than willing
to do that.
That is something we actually did with Kern River in trying
to move that process ahead and got it out in 3 weeks. Obviously
not a hydro, but we are willing to do that in looking for any
and all opportunities, and I appreciate you bringing that
before our attention.
The Chairman. Now, are you satisfied with the contention of
the Planning Council's analysis that this suspension would have
little impact on fish populations, or do you depend on other
agencies like Fish & Wildlife?
Mr. Hebert. We have other agencies that would have to make
comments on that, and we would have to comply with that.
The Chairman. You have not had any feedback from the Fish &
Wildlife Service at this time?
Mr. Hebert. On this, no. I just heard about it.
The Chairman. What if indeed this would potentially provide
you with 3,000 megawatts per month or thereabouts? I guess it's
2,700 megawatts that we're looking at here potentially, would
that pretty much alleviate the California situation?
Mr. Hebert. With the demand management techniques, with our
mitigation plan, the must sell, the bidding requirements,
everything taken in context, I believe it would make California
very close, yes.
The Chairman. Are we likely to have a negative reaction
based on the fisheries issue and the escapement issue, and what
it would do to the levels of maintaining an adequate level for
the salmon?
Mr. Hebert. My educated guess would be probably. Based on
past experiences.
The Chairman. At least this is one of the more positive
potential availabilities that is attainable and has some
immediate----
Mr. Hebert. I agree.
The Chairman [continuing]. Capability of making a
significant contribution. That's what we're really looking
form. We're looking for immediate relief here. Go ahead. You
were going to add something else.
Mr. Hebert. I had a couple of things, yes, I wanted to add
one to the record, then answer your price cap question. This is
basically a list of what FERC has done. I would like to enter
it as Exhibit 1.
The Chairman. Without objection.
Mr. Hebert. Thank you. It would provide you and the
committee members with some opportunity to understand what we
have been doing.
Price caps for the West and price caps for California, Mr.
Chairman, when you look at a hard cap, that is what I think is
the beauty of the mitigation plan which looks at prices, which
looks at bidding, and must sell and outages. I think that's the
beauty of it in that it is a tender balance in that it is going
to get the supply that is necessary into California and the
West.
And if you want to look at temporary price caps and
understand what temporary price caps can do to you, you don't
have to go far to get the answer. You can ask California. They
have temporary retail caps for about 2\1/2\ years, and it
absolutely destroyed their market. And they have now confessed
to that and reversed that.
The other thing price caps, when they had them in
California, what did they do? They went out of market for
those. The other thing that price caps does it sets a price at
which we in Washington might tell the people in California and
the West, Mr. Chairman, that they should turn out their lights.
Now, I agree with you that we don't condone high prices. We
want prices to be reasonable but at the same time I think it's
important to keep the lights on. And I guarantee you the people
of California are smart people, and they know when to turn down
and turn over and they will, in fact, do that.
But if we set price caps in California a hard cap at X
price, then we set a hard cap in the Northwest, which is
naturally what comes next in the entire West. I'm not sure how
we keep the power from escaping the United States of America
and going to Mexico and going to Canada. And for those who
think we can do that, there's this little thing we have a
problem with called the free trade agreement. I think we'd have
a problem with that.
And the last thing, if they want a price cap in California,
there's an opportunity. The Governor can say there's a price at
which we're not going to pay. The Governor of California can
stand up and say we're not going to pay this price, we're going
to turn the lights out in California when the price goes that
high. FERC doesn't have to do it, the U.S. Senate doesn't have
to do it, the President and the House don't have to do it.
The Chairman. And the Governor chose not to do it.
Mr. Hebert. Correct.
The Chairman. Look, I want to thank you all three of you
for making your time available to the committee. It has been
very gratifying, and I would admonish whatever segment of the
financial community is here for not giving us some better
guidelines on what you will or won't do under the theoretical
wholesale price cap.
We can't hold you accountable, but I've been around long
enough to know what happens. Either incentive is there for an
investment and you go in and invest or it isn't. From we're
sitting here is obviously not with the expertise in the area
the financial community has nor that you commissioners have
trying to make a determination of how we're going to get out of
this mess.
But I can tell you the bottom line that the financial
community will come in and say these are the terms and
conditions we have to have to come into California. We can cut
through this chaff and get down to whether or not we're going
to put in more generating facilities in California.
Now, that's not quite that simple because we have
transmission, consider ourself with, but that's certainly where
you start. I would suggest we duck out of here now other. This
thing could go on at great length. Mr. Massey, you have the
last word and I don't mean plural.
Mr. Massey. 10 seconds. May I even send a follow-up letter?
I have six compelling reasons how a price cap would bring power
into the California market.
The Chairman. What I would like you to do with that letter
is have a few people that we can ask that are in the financial
community that will give us the terms and conditions under
which they will come in and finance generating facilities in
California. And I want substantial people that have a little
meat on their bones. Thank you, gentlemen. Thank you, lady.
[Whereupon, at 4:32 p.m., the hearing was adjourned.]
APPENDIX
Responses to Additional Questions
----------
Federal Energy Regulatory Commission,
Office of the Commissioner,
Washington, DC, June 14, 2001.
Hon. Frank Murkowski,
Ranking Member, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Senator Murkowski: I appreciate the opportunity to respond to
follow-up questions from you, Chairman Bingaman and Senator Campbell
pertaining to the Federal Energy Regulatory Commission's recent actions
related to energy markets in California and the West. I am pleased to
offer you my thoughts on these matters.
Attached you will find my responses to the questions contained in
your letter dated May 16, 2001, to be included in the hearing record. I
look forward to working with you and other members on these important
issues. If you have any additional questions, please do not hesitate to
contact me.
Sincerely,
Linda K. Breathitt,
Commissioner.
[Attachment]
Responses to Questions From Senator Murkowski
Question 1. As I see it, the fundamental problem in California
isn't a lack of regulation, it is a lack of generation and
transmission. What are your views?
Answer. I agree that a lack of generation and transmission
infrastructure is a fundamental problem in California. But there are
other problems, as well. The Commission's investigations of
California's electricity markets have identified several factors that
have contributed to high prices and uncertain market conditions. First,
a combination of market forces, including increased power production
costs, increased demand for electricity, and a scarcity of electric
generation in the West, led to price volatility. Second, flaws in the
current market design and rules in California, such as a lack of
forward contracting, mandatory buy-sell requirements for investor-owned
utilities, and a lack of demand responsiveness, magnified the effects
of higher prices. Third, the California market structure provided the
opportunity for sellers to exercise market power, especially during
periods when supply is tight. While these are the factors that have
contributed to high prices in California's electric market, please see
my response to Question No. 3 with regard to natural gas issues. That
said, strong regulatory action is imperative in an energy crisis such
as we are experiencing.
Question 2. Is it correct that a large share of California's price
volatility problems can be attributed to the State's insistence that
investor-owned utilities divest their generation and acquire all of
their power from the spot market instead of through self-generation and
long-term contracts?
Answer. I adopt Chairman Hebert's response to this question.
Question 3. There are a lot of complaints that the price of natural
gas at the border of California is too high. Has the California public
utility commission opposed new pipelines and expansion of existing
pipelines? What about California's local distribution companies?
Answer. I adopt Chairman Hebert's response to this question.
Further, I would like to add that I do not believe the expansion of
interstate capacity, by itself, represents the solution to high gas
prices at the California border. As shippers and local distribution
companies have pointed out in comments to interstate pipeline expansion
proposals, there may not be adequate intrastate capacity at the
California border to take away additional volumes that might flow
through new or expanded interstate pipeline facilities. Without
adequate takeaway capacity, actions on FERC's part to approve
additional interstate pipeline facilities may not have the desired
effect of increasing natural gas supplies in the California markets
where they are needed. Indeed, uncoordinated interstate pipeline
expansions could serve to exacerbate congestion at the border and
result in even higher prices to consumers.
In this regard, I am attaching my separate statement in Kern River
Gas Transmission Company (Kern River), Docket No. CP01-106-000, in
which I called for a coordinated approach to resolving California's
natural gas pipeline infrastructure needs. Subsequent to the issuance
of the order in Kern River the Commission established a proceeding in
California Natural Gas Transportation Infrastructure, Docket No. PL01-
4-000, and directed the Commission's staff to hold a technical
conference. At that conference, which was held on May 24, 2001,
representatives of all industry sectors, including California
regulators, discussed both physical constraints and regulatory
impediments to natural gas transportation into and within California.
Comments on the issues raised by the conference are due June 25, 2001.
Apart from the issue of take-away capacity at the California
border, there are other pipeline issues about which I have recently
expressed concern: (1) the high level of spot market purchases of
natural gas in California (as opposed to longer-term contractual
arrangements); (2) the low levels of working gas storage inventories
last year; (3) the lack of firm capacity rights on some intrastate
pipelines in California; (4) the appropriateness of continuing the
waiver of the price cap on short-term secondary market pipeline
capacity transactions; and (5) allegations of the exercise of market
power by interstate pipelines, affiliate preference, and the
withholding of interstate pipeline capacity. While I recognize that
some of these matters are not within FERC's jurisdiction, I believe
they are all relevant to the objective of stable natural gas prices in
California.
Question 4. Am I also not correct that the State of California has
steadfastly insisted that all interstate pipelines end at the border of
California, with interstate pipelines inside the border being subject
to State jurisdiction? Isn't the net effect of this to deny California
consumers the benefits of FERC's open access transportation program,
which has saved consumers elsewhere in the U.S. billions of dollars?
Answer. I adopt Chairman Hebert's response to this question.
Responses to Questions From Senator Bingaman
THE CALIFORNIA MITIGATION PLAN
Question 1a. How easy or hard is the mitigation plan to implement?
The ISO is charged with developing a proxy price for every gas
plant in California for every hour. Is that a huge burden, or something
they already have the capacity to do?
Answer. The actual calculation by the ISO of the proxy marginal
cost for each generator should not be unduly burdensome. The data
inputs necessary to compute the proxy price are straightforward and
easily accessible. These include heat rates and emission rates filed by
each California generator, proxy gas costs and emission costs published
each day by the ISO, and a $2.00/MWh adder for operation and
maintenance expenses.
Question 1b. Does the after-the-fact justification of bids that are
above the proxy price impose a huge burden on the Commission?
Answer. Generators that submit bids higher than the proxy market
clearing price must file at the end of each month a complete
justification of their bids, including a detailed breakdown of all
component costs. A refund obligation will end 60 days from the date the
information is filed, unless the Commission, within that period,
notifies the seller otherwise. Reviewing this cost justification data
will obviously be time consuming for the Commission, but I expect it to
be a manageable. I'm sure that appropriate resources will be assigned
to this task and that we will process this information in a timely
fashion.
Question 1c. Would a pre-set price cap be easy to administer while
getting a similar result?
Answer. Whether or not a pre-set price cap would be easy to
administer or would produce results similar to the Commission's price
mitigation plan depends entirely on the specific design of the price
cap mechanism. For example, a cost-based price cap set for individual
sellers would likely be administratively burdensome and costly for the
Commission, as well as other parties, since the process would be
litigation-intensive and time-consuming. A single price cap for the
entire market would be less administratively burdensome.
Question 1d. How accurate is the information that is used? In other
words, will lots of plants have gas prices above the average that the
ISO will use, so that all of them will be trying to justify prices
above the proxy price, or will it just be a few? Does the use of an
average gas price guarantee a lot of prices above the proxy price? Is
there a similar problem with the emissions prices?
Answer. The Commission's price mitigation plan uses proxy costs for
natural gas and emissions. The gas cost proxy to be used in the
mitigation plan is the average of the daily prices published in Gas
Daily for all California delivery points. Because the plan uses an
average of gas prices, some generators will be paying gas prices that
are lower than the average proxy cost and some will be paying prices
higher that the average. Each generator has the choice of either
electing the proxy price or submitting a bid greater than the proxy
price. Whether or not a generator chooses to bid higher than the market
clearing price will depend on many factors, including the extent to
which its actual gas costs are higher than the average proxy cost
published by the ISO. But just because a generator's actual gas cost is
higher than the proxy cost does not mean that it will always choose to
bid a higher amount. It is not possible to predict, at this time, how
generators will bid in this regard.
The proxy emission cost is an index published by Cantor Fitzgerald
Environmental Brokerage Services. Just as in the case of the proxy gas
cost, whether or not a generator will bid a price based on actual
emission costs that are higher that the Cantor Fitzgerald index will
depend on numerous factors. It is not possible to predict, at this
time, how generators will bid in this regard.
Question 2a. Does the mitigation plan actually result in lower
prices?
The proxy system is similar to the system you used to develop the
refund numbers for the last few months. Have you looked at the market
to determine whether prices outside the time that you applied the proxy
price were higher or lower? Do you intend to do so in the future? It
seems that this would help determine whether the plan is being applied
broadly enough or not. Do you intend to use some kind of measuring
stick like this to keep a check on the effectiveness of this system?
Answer. I adopt Chairman Hebert's response to this question.
Question 2b. How does the spot market mitigation plan result in
lower prices in other markets, such as the futures market or the long-
term firm contracting market?
Answer. I adopt Chairman Hebert's response to this question.
Question 2c. Does the fact that sellers outside of California are
not subject to the proxy price and refunds mean that the market may
clear well above the proxy price because of outside bids, so that the
real effect is that prices in the spot market are still high?
Answer. I adopt Chairman Hebert's response to this question.
Question 3a. Can the mitigation plan be evaded?
The sellers outside California are not subject to the proxy system.
What is to prevent generators inside California from selling to parties
outside the state at a high price, then those parties selling back into
California above the proxy price?
Answer. I adopt Chairman Hebert's response to this question.
Question 3b. Marketers are required to show the price they paid for
electricity in order to justify a bid above the proxy price. What is to
prevent marketers from selling to one another at high prices then
bidding into the market at that high price and so evading the proxy
price?
Answer. I adopt Chairman Hebert's response to this question.
THE RTO CONDITION
Question 1. You have conditioned implementation of the mitigation
plan on California's utilities filing a regional transmission
organization proposal that is consistent with the requirements of Order
No. 2000. What does ``consistent with'' mean? If CA files a plan that
you reject or modify will you withdraw the plan? If they file a
proposal that you accept conditionally will you withhold implementation
until they meet the conditions?
Answer. The California ISO and public utilities were directed to
make a compliance filing pursuant to Order No. 2000. Such a filing
should fully address, among other things, the Commission's required RTO
functions and characteristics. Compliance filings were made by these
entities on June 1, 2001 as required by the April 26, 2001 order. As
the RTO compliance filings are presently before us, I am not able to
discuss what we might or might not do with respect to either the RTO
compliance filings or the price mitigation plan. I will add, however,
that I am very pleased that the RTO compliance filings were made.
Question 2. Does California have to file a proposal that
incorporates it into a West-wide RTO in order to be consistent with
Order No. 2000?
Answer. No. As stated above, the California parties were directed
to make an RTO compliance filing that fully addresses the requirements
established in Order No. 2000, including the Commission's required RTO
functions and characteristics. A commitment to join a West-wide RTO is
not a specific requirement. While I believe larger RTOs are the best,
longer term result, I think RTOs will need time to develop into large
regional entities.
Question 3. If so, what is the likelihood of other states coming to
an agreement with California? I know my home state of New Mexico at one
point was considering joining together with the CA ISO, but has changed
their minds about that as a result of the troubles in California
markets. What can California do about that?
Answer. As stated above, California is not being required at this
time to join a West-wide RTO.
THE 206 INVESTIGATION
Question 1. Why is the investigation into markets in the rest of
the West limited to spot markets and those periods when reserves are
below 7 percent?
Answer. The Commission instituted a 206 investigation into the
rates, terms and conditions of service in the WSCC for sales for resale
into real-time spot markets that take place during periods of reserve
deficiencies. The Commission believes that currently such rates, terms
and conditions for these sales may not be just and reasonable. The
limitations placed on the investigation reflect the Commission's
general view that real-time spot markets, not longer-term bilateral
contracts, are the primary source of price volatility and that the
exercise of market power is most likely to occur during periods of
severe supply/demand imbalance, such as those in which contingency
reserves (as defined by the WSCC) fall below 7 percent. Comments on
this issue are currently pending Commission review.
Question 2. Do you know without investigation that the long-term
firm contract market, for example, is producing prices that are just
and reasonable?
Answer. I adopt Chairman Hebert's response to this question.
THE PROPOSED MITIGATION FOR THE REST OF THE WEST
Question 1. You have proposed that a plan somewhat similar to that
ordered for California might be useful in the rest of the West. How
would such a plan work, given that there are no clearly defined spot
market institutions elsewhere to play the role that the CA ISO is
playing in California?
Answer. I adopt Chairman Hebert's response to this question.
Question 2. You suggest that a plan would be in effect for the West
in any time that reserves fall below 7 percent in any control area.
Does that mean that an implementation plan will be in effect for the
whole West if reserves are low in a single small area?
Answer. I adopt Chairman Hebert's response to this question.
THE DEMAND RESPONSE PROPOSAL
Question 1. You order that California utilities state a price at
which they will curtail load. How might this mechanism work? Will
customers have to tell the utilities their curtailment price, so that
the utilities can assemble a collective demand response, or will the
utilities make this judgment on their own?
Answer. I adopt Chairman Hebert's response to this question.
Question 2. You suggest that a West-wide clearing-house for demand
response might be instituted. Would this interfere with already
existing state programs? Are there issues in state law that would have
to be dealt with before implementation of such a plan?
Answer. I adopt Chairman Hebert's response to this question.
Question 3. You do not have jurisdiction over behavior by retail
customers, which is what demand response ultimately comes to. Is there
something we need to do in Federal Law that would allow you to consider
demand response?
Answer. I adopt Chairman Hebert's response to this question.
Responses to Questions From Senator Campbell
Question 1. Why have a single market clearing price, especially
since this will probably cost California more money?
Answer. I adopt Chairman Heert's response to this question.
Question 2.Could this possibly drive up prices in the West?
Answer. I adopt Chairman Hebert's response to this question.
Question 3. I am skeptical of price caps. Many say they are likely
a disincentive to investment in new generation. Won't they hurt in the
long run?
Answer. I have been on record supporting price caps in prior
California orders and in other parts of the country. I agree that price
caps could deter new investment. That is why price caps should be
implemented only after careful consideration and for a short duration.
Question 4. What does the FERC see as the best means to fix this
problem?
Answer. I believe the orders this Commission has issued over the
past several months on the California and Western energy situation
(well over 50) have begun to address the problems being experienced in
those markets. I believe we need to stay the course of market oriented
solutions combined with strong regulatory oversight and enforcement of
market rules and behavior. For a discussion of natural gas issues,
please see my response to Senator Murkowski's Question No. 3.
Question 5. How will your new orders affect the rural electric
associations, the co-ops?
Answer. I adopt Chairman Hebert's response to this question.
Question 6. What can we all do to ensure that the rest of the
Western region is minimally affected by the crisis in California,
because I don't want my home state of Colorado's resources and
consumers hit by these problems?
Answer. In our April 26, 2001 order we instituted a Federal Power
Act Section 206 investigation into the rates, terms and conditions of
service in the WSCC for sales for resale into real-time spot markets
that take place during periods of reserve deficiencies. Comments on
this issue are currently pending Commission review.
ATTACHMENT
United States of America Federal Energy Regulatory Commission
Kern River Gas Transmission Company Docket No. CP01-106-000
(Issued April 6, 2001)
BREATHITT, Commissioner, dissenting in part, concurring in part:
This protested filing has raised difficult issues for me that
today's order does not resolve to my satisfaction. As I will explain in
greater detail below, I believe that the parties have raised valid
concerns that require further exploration. Specifically, Southern
California Gas Company (SoCal Gas) requested that the Commission
establish a technical conference in this proceeding, on a compressed
schedule, in order for the Commission and the parties to approach Kern
River's filing in a more orderly and informed fashion. Pacific Gas &
Electric Company also sought further information about this project,
either through a technical conference or additional written data. In
addition, Kern River's Firm Customers sought a coordinated approach to
expansion of capacity on Kern River. I would have granted these
requests by either: (1) establishing a conference before issuance of
the certificate, or (2) conditioning the certificate we are issuing
today on the outcome of a conference. I am disappointed that my
colleagues fail to see the value of granting this request. Therefore, I
am issuing this partial dissent. However, for reasons I will delineate
below, I am concurring on other aspects of the order.
Each of us seeks to use FERC's regulatory authority in a positive
way to alleviate the energy market disruptions being experienced by
California consumers. I strongly believe that the Commission must act
within the limits of its jurisdiction, to ensure that additional
natural gas supplies reach the California markets to curb the shortage
of electric generation in that state. I do have serious reservations
about this project and about the Commission's general direction with
respect to capacity expansions into California; however, I find on
balance that it is in the public interest to certificate this project.
I share the hope that this action today represents a step in the
right direction. However, it has been somewhat difficult for me to view
Kern River's ``California Action'' project as being one that
necessarily merits the kind of extraordinary regulatory treatment that
we have granted the applicant in this case. My hesitation does not come
only from the fact that Kern River has pending before this Commission a
very similar proposal in which the parties have raised valid concerns
that would pertain to any expansion of Kern River. I believe that it
would have made more sense for the Commission to have considered the
merits of that proposal at the same time we deliberated the merits of
the instant expansion. It is my understanding that such consideration
would have been possible and timely; and in my opinion, it would have
given us a more complete picture to consider. However, the relationship
between Kern River's two proposals is not my main concern.
The intervenors, who themselves represent the intended
beneficiaries of this expansion of interstate capacity, point out the
primary problem: Kern River's application does not demonstrate--or even
assert--that any more gas will flow through the Wheeler Ridge
interconnection than currently flows. This is due to congestion at that
point that could prevent additional supplies from reaching the intended
markets and, importantly, providing natural gas that is needed for
electric generation.\1\ Furthermore, the record of this proceeding is
inadequate for the Commission to independently assess the congestion
issues at Wheeler Ridge. I am very uncomfortable that this order does
not take the opportunity for a fuller airing of this issue.
---------------------------------------------------------------------------
\1\ In an April 5, 2001 pleading, the Kern River Firm Customers
emphasized the need for the Commission to address the Wheeler Ridge
situation. As a result of an alert issued on March 30, 2001, by SoCal
Gas, nominations allowed by SoCal Gas for the Wheeler Ridge receipt
point were 600 times the available capacity of 518,500 dth. The Firm
Customers allege that such `` `gaming' demonstrates that the situation
at Wheeler Ridge is out of control'' and that this situation ``will
only further deteriorate under Kern River's proposal.'' The Firm
Customers contend that such data pertaining to recent developments at
Wheeler Ridge reinforce their claims that while Kern River may be able
to implement its expansion very quickly, the gas cannot be delivered to
the markets needing gas.
---------------------------------------------------------------------------
This order acknowledges, in dismissing claims that existing
shippers will be negatively affected by the project, that ``the
delivery point capacity at Wheeler Ridge will be greater than the sum
of the combined Kern River and Mojave volumes'' that must pass through
that point, but that ``this does not factor in the volumes attributable
to both PG&E and local production that are also delivered to Wheeler
Ridge.'' In other words, Kern River's expansion could result in the
displacement, by interstate natural gas, of gas that is already
available, such as natural gas produced within California. But it will
not necessarily result in any net increase of natural gas in the
California marketplace. This makes it difficult to understand just how
our approval of Kern River's proposal is going to assist in increasing
electric generation in California this summer.
But beyond questioning whether we are doing any good by
certificating this project, I am even more concerned that our approval
of it could make the situation in California even worse by exacerbating
the congestion problem at Wheeler Ridge. And this is exactly what the
intervenors have alleged: that insufficient take-away capacity at
Wheeler Ridge and the resulting degradation of firm shippers' rights
will place them in a situation analogous to the type of capacity rights
controversy that we recently addressed with respect to the Topock
delivery point.\2\ Today's order gives little weight to these claims on
the speculation that future expansion of intrastate capacity will
occur. I hope it does; but I am wary of the potential for creating
congestion and future capacity turn-back problems without firm
assurance that sufficient additional capacity downstream of Wheeler
Ridge will materialize.
---------------------------------------------------------------------------
\2\ Amoco Energy Trading Corp., et al., v. El Paso Natural Gas Co.,
93 FERC para. 61,060 (2000).
---------------------------------------------------------------------------
While I do not question that additional interstate natural gas
pipeline capacity to California may be needed, we at the Commission are
tasked with acting on individual projects and their effects on specific
markets. I strongly believe that the California situation warrants a
thoughtful and coordinated approach to interstate pipeline expansion.
This case has raised issues that will likely continue to appear as we
analyze other expansion projects on an expedited schedule. It would be
counterproductive for this Commission to act precipitously on projects
related to California without ensuring that they will, in reality,
benefit specific markets--and more importantly, that they will cause no
further harm. There appears to be great uncertainty about exactly what
interstate capacity is needed to assist California in alleviating its
energy crisis; and the information available to us is, at times,
confusing. For example, while we have been urged to take extraordinary
measures and expend considerable resources to process this application
on an emergency basis, the California Gas Utilities, in their 2000
California Gas Report, state that Southern California continues to
operate in an environment of excess interstate pipeline capacity.\3\ In
addition, the California Energy Commission's report on siting peaking
plants for the summer of 2001 \4\ establishes that the 32 potential
sites for this summer's ``peaker project'' were chosen, in part,
because of the existing availability of natural gas supplies at those
sites. The report does not call for additional interstate capacity to
effectuate the program. It is obvious to me that FERC must work in
tandem with California officials to establish common goals and
understanding, since the primary responsibility for take-away capacity
belongs to intrastate pipelines and state regulators.
---------------------------------------------------------------------------
\3\ California Gas Utilities, 2000 California Gas Report, http://
www.pge.com/pipeline/news/ (2000) (prepared at the direction of the
California Public Utilities Commission). In addition, the California
Energy Commission's November 2000 staff analysis concludes that while
local constraints can be a problem, the physical capacity of interstate
pipelines appears adequate, when used in conjunction with in-state
storage capacity. California Energy Commission, Staff Report:
California Natural Gas Analysis and Issues, http://www.energy.ca.gov/
naturalgas/ (November 2000).
\4\ California Energy Commission Fuels Office, Staff White Paper:
Natural Gas Issues That May Affect Siting New Power Plants in
California, http://www.energy.ca.gov/naturalgas/ (January 25, 2001).
---------------------------------------------------------------------------
It is not good public policy, in my view, for the Commission to
encourage interstate capacity to California that does not have the
desired effect of bringing additional supplies into the areas where
they are needed. As the parties argue in their comments, a coordinated
approach could avoid pipeline expansions that (1) would not match up
with downstream capacity; (2) could not be used by the markets and end-
users that require additional supplies; or (3) would degrade the
service of existing firm shippers. It is regrettable that we must act
on Kern River's proposal without the benefit of such coordination. I
hope that FERC will seek a collaborative resolution to the broader
California expansion issues, and I suggest that the Commission's
inquiry in Docket No. EL01-47-000 provides a suitable forum for such
discussion.\5\ We have other proposals in-house for which the
applicants are seeking expedited action. It is simple common sense that
more coordination should take place so that additional interstate
pipeline capacity can be targeted to areas where it will represent a
positive response to California's energy needs.
---------------------------------------------------------------------------
\5\ Removing Obstacles to Increased Electric Generation and Natural
Gas Supply in the Western United States, Order Removing Obstacles to
Increased Electric Generation and Natural Gas Supply in the Western
United States and Requesting Comments on Further Actions to Increase
Energy Supply and Decrease Energy Consumption, 94 FERC para. 61,270
(2001).
---------------------------------------------------------------------------
The speed with which the Commission has acted in this proceeding is
something which will no doubt be touted as a great effort. And it has
been. The staff responsible for processing this application has put in
countless overtime hours to meet compressed deadlines. The precedent we
have created could be a double-edged sword. What signals does this
order really send? Will the Commission be able to keep up this pace on
other pending ``emergency'' expansion applications? Is there sufficient
time built into the process for the Commission and staff to fully
analyze the issues? Should we be willing to sacrifice careful review
for speedy action? Will we be overlooking significant issues? It would
certainly be helpful for the Commission to have a plan of action before
embarking on this course. I would also like to point out that if the
Commission is to act within weeks of receiving certificate
applications, I have been told that there could be more prefiling
involvement of Commission staff than we are all accustomed to. The
extent of such involvement is a matter about which I hope the
Commission can reach a comfortable agreement. Meanwhile, I feel it
necessary to caution the public and other agencies that staff's role is
not to advocate or support individual projects. Each agency must use
its own discretion to determine the urgency of any application.
I fully support the Commission's overarching goal of finding
solutions to the energy problems facing California, and I am voting to
issue the certificate.
Linda K. Breathitt,
Commissioner.
______
Federal Energy Regulatory Commission,
Office of the Commissioner,
Washington, DC, June 14, 2001.
Hon. Frank H. Murkowski,
Ranking Member, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Senator Murkowski: Enclosed herewith are my responses to the
questions asked by you and by Chairman Bingaman, and Senator Campbell.
If you have further questions or need additional information,
please let me know.
Sincerely,
William L. Massey,
Commissioner.
[Enclosure]
Responses to Questions From Senator Murkowski
Question 1. As I see it, the fundamental problem in California
isn't a lack of regulation, it is a lack of generation and
transmission. What are your views?
Answer. I agree that the lack of adequate generation capacity and
the presence of transmission constraints that keep power from reaching
certain areas are fundamental problems that need to be addressed. These
fundamental problems allow the exercise of market power that results in
wholesale prices that are not just and reasonable. Effective short term
price mitigation is needed to ensure prices are just and reasonable
until the fundamental problems are resolved.
Question 2. Is it correct that a large share of California's price
volatility problems can be attributed to the State's insistence that
investor-owned utilities divest their generation and acquire all of
their power from the spot market instead of through self-generation and
long-term contracts?
Answer. The lack of adequate forward contracting contributed to the
recent high prices. However, generation and transmission facility
inadequacy and the lack of demand side price responsiveness has allowed
sellers to exercise market power and drive up prices.
Question 3. There are a lot of complaints that the price of natural
gas at the border of California is too high. Has the California public
utility commission opposed new pipelines and expansion of existing
pipelines? What about California's local distribution companies?
Answer. Please see Chairman Hebert's response to this question.
Question 4. Am I also not correct that the State of California has
steadfastly insisted that all interstate pipelines end at the border of
California, with interstate pipelines inside the border being subject
to State jurisdiction? Isn't the net effect of this to deny California
consumers the benefits of FERC's open access transportation program,
which has saved consumers elsewhere in the U.S. billions of dollars?
Answer. Please see Chairman Hebert's response to this question.
Third, a price cap would restore investors' confidence in the
Western market. I do not believe that investors take much comfort from
a wildly volatile market. And finally, a price cap would restore both
consumers' and state regulators' confidence in the wholesale market
that is needed to facilitate effective retail market restructuring.
Question 5. How will your new orders affect the rural electric
associations, the co-ops?
Answer. Please see Chairman Hebert's response to this question.
Question 6. What can we all do to ensure that the rest of the
Western region is minimally affected by the crisis in California,
because I don't want my home state of Colorado's resources and
consumers hit by these problems?
Answer. Please see my response to question 4.
Responses to Questions From Senator Bingaman
THE CALIFORNIA MITIGATION PLAN
Question 1a. How easy or hard is the mitigation plan to implement?
The ISO is charged with developing a proxy price for every gas
plant in California for every hour. Is that a huge burden, or something
that they already have the capacity to do?
Answer. Under the mitigation plan in the Commission's April 26,
2001 order, the ISO is charged with calculating a mitigated proxy bid
from each gas generator. The heat rate of each unit is supplied to the
ISO by the generator, and the mitigated bid for each unit is calculated
daily using published prices for gas and NOX emission credit
costs. This would not seem to be much of a burden for the ISO. I
objected to this mitigation plan because it is effective only during
stage 1, 2, or 3 emergencies. There is no basis to conclude market
power cannot be exercised at other times. Indeed, the record in the
Commission's proceeding indicates otherwise. However, I believe the
mitigation plan, although inadequate, is administratively feasible.
Question 1b. Does the after-the-fact justification of bids that are
above the proxy price impose a huge burden on the Commission?
Answer. No.
Question 1c. Would a pre-set price cap be easy to administer, while
getting a similar result?
Answer. Yes. One type of pre-set cap is to limit prices to the
variable costs of each generator plus an adder to allow a reasonable
profit. Administering such a generator-specific price cap would not be
administratively difficult. Before the Commission allowed market-based
pricing, the many inter-utility coordination transactions were
regulated in a similar way and resulted in mostly short, ministerial
filings. Generally, variable costs were specified in, and recovered by,
a formula so that extensive cost data did not have to be filed but
adherence to the formula could be verified in audits. A cost-based
adder to recover fixed costs was derived based on depreciation rates,
rate of return, and annual operation and maintenance costs. Such
factors are generally not controversial. But to avoid any controversy
over the profit factor, the Commission could simply specify a profit
adder, say in the range of $25/mwh. Thus, I do not believe
administering a fixed price cap, even one that varied by generator,
would be burdensome.
An important consideration in administering any price cap is that
it be applied to all markets where the targeted sellers can transact.
Otherwise, when the price cap might be constraining, sellers will sell
in the markets where the cap is not applied. The ISO's price caps were
ineffective last summer because they applied only in California.
Question 1d. How accurate is the information that is used? In other
words, will lots of plants have gas prices above the average that the
ISO will use, so that all of them will be trying to justify prices
above the proxy price, or will it be just a few? Does the use of an
average gas price guarantee a lot of prices above the proxy price? Is
there a similar problem with the emissions prices?
Answer. I do not have the information needed to answer the
question. However, it is likely that there will be many instances where
a generator's actual gas costs will be different (higher or lower) than
the published index used in the Commission's formula.
Question 2a. Does the mitigation plan actually result in lower
prices?
The proxy price system is similar to the system you used to develop
the refund numbers for the last few months. Have you looked at the
market to determine whether prices outside the time that you applied
the proxy price were higher or lower? Do you intend to do so in the
future? It seems that this would help determine whether the plan is
being applied broadly enough or not. Do you intend to use some kind of
measuring stick like this to keep a check on the effectiveness of this
system?
Answer. I do not believe that the proxy price system used for
refunds was effective price mitigation because it was applied only
during stage 3 emergencies and was based on a very high proxy price.
Because the only transactions that were questioned were those that
occurred during stage 3 emergencies, there were many sales that were
made above the proxy price were not questioned. During January, 14% of
the transactions reported above the $150 breakpoint were also above the
$273 proxy price but were not subject to refund because they were made
outside of stage 3 hours. For February, 56% of reported transactions
were above the $430 proxy price but made outside of stage 3 hours. And
for March, 97% of the reported transactions were above the $300 proxy
price but made outside of stage 3 hours. For April, the figure was 100%
because there were no stage 3 emergencies. I would also point out that
to my knowledge, most of the refunds identified have been contested by
the sellers.
The price mitigation plan now in effect is effective in stage 1, 2,
and 3 hours, but I am concerned even that expanded coverage will not
ensure just and reasonable prices. There is persuasive evidence that
the problem exists twenty-four hours a day, seven days a week. I found
the California ISO March 21, 2001 study by Anjali Sheffrin, the ISO's
director of market analysis, to be compelling. Dr. Sheffrin concluded
that economic withholding is a severe problem in all hours, not simply
capacity constrained hours, and I agree. Her analysis concludes that
from May to November 2000, withholding that led to inflated market
prices in the ISO's real time market occurred in over 98% of hours.
According to my calculations, the ISO declared a stage one or higher
alert in only 5% of the hours during this period. For Dr. Sheffrin's
study period, the price mitigation in place now would have missed the
great bulk of the hours when market power drove up prices.
Question 2b. How does the spot market mitigation plan result in
lower prices in other markets, such as the futures market or the long-
term contract market?
Answer. Forward and futures contract prices are based on
expectations of spot market pries in the future. To the extent that
spot prices are expected to be reasonable, prices forward and futures
contract prices will be reasonable. Thus, an effective spot market
price mitigation program will result in reasonable forward contract
prices. However, because I question the effectiveness of the mitigation
program announced in the April 26th order, I have no basis to expect
lower forward contract prices as a consequence of the program.
Question 2c. Does the fact that sellers outside California are not
subject to the proxy price and refunds mean that the market may clear
well above the proxy because of outside bids, so that the real effect
is that prices in the spot market are still high?
Answer. The Commission's mitigation program applies only to the
California ISO's real time and ancillary services markets and only
during stage 1, 2, or 3 emergencies. During emergency conditions,
prices in those markets will not ``clear'' at prices higher than the
mitigated bid levels because sellers that bid above the mitigated bid
levels and are dispatched will be paid only their bid. Those bids will
not set the market clearing price. Paying those higher bids, however,
will increase customer bills. There is no limit to bids or prices when
a stage 1, 2, or 3 emergency has not been declared by the ISO.
Question 3a. Can the mitigation plan be evaded?
The sellers outside California are not subject to the proxy system.
What is to prevent generators inside California from selling to parties
outside the state at a high price, then those parties selling back into
California above the proxy price?
Answer. There is nothing in the Commission's mitigation program to
prevent this evasive behavior as long as the sales to parties outside
the state are contracted for ahead of time. The Commission's program
requires California generators to make available to the ISO's real time
market any power not previously contracted. But power may be committed
to sellers outside of California in transactions made before the real
time market hour. Those outside sellers could then resell the power
into California. A uniform price mitigation program applied across the
entire western interconnection would prevent such evasive behavior.
Question 3b. Marketers are required to show the price they paid for
electricity in order to justify a bid above the proxy price. What is to
prevent marketers from selling to one another at high prices then
bidding into the market at that high price and so evading the proxy
price?
Answer. There is nothing in the Commission mitigation program to
prevent this type of evasive behavior. Again, a uniform price
mitigation program applied across the entire western interconnection
would prevent such behavior.
THE RTO CONDITION
Question 1. You have conditioned implementation of the mitigation
plan on California's utilities filing a regional transmission
organization proposal that is consistent with the requirements of Order
No. 2000. What does ``consistent with'' mean? If CA files a plan that
you reject or modify will you withdraw the plan? If they file a
proposal that you accept conditionally will you withhold implementation
until they meet the conditions?
Question 2. Does California have to file a proposal that
incorporates it into a West-wide RTO in order to be consistent with
Order No. 2000?
Question 3. If so, what is the likelihood of other states coming to
an agreement with California? I know my home state of New Mexico at one
point was considering joining together with the CA ISO, but has changed
their minds about that as a result of the troubles in California
markets. What can California do about that?
Answer. I dissented to the RTO filing condition in the April 26
order. The RTO filing condition stands for the proposition that the
Commission will not fulfill its statutory obligation to ensure just and
reasonable prices if the California ISO and all three California IOUs
fail to make an RTO proposal. This condition is unlawful. We must
fulfill our statutory obligations.
THE 206 INVESTIGATION
Question 1. Why is the investigation into markets in the rest of
the West limited to spot markets and those periods when reserves are
below 7 percent?
Answer. There is no reasonable rationale for limiting the western
investigation to conditions when operating reserves fall below 7%. I
dissented from the Commission's decision to so limit the investigation.
The Commission should investigate the potential for market power to be
exercised and unjust and unreasonable prices to be charged regardless
of generation conditions.
Question 2. Do you know without investigation that the long-term
firm contract market, for example, is producing prices that are just
and reasonable?
Answer. No. There is no way to reach a rational conclusion
regarding the reasonableness of contract prices without an
investigation.
THE PROPOSED MITIGATION FOR THE REST OF THE WEST
Question 1. You have proposed that a plan somewhat similar to that
ordered for California might be useful in the rest of the West. How
would such a plan work, give that there are no clearly defined spot
market institutions elsewhere to play the role that the CA ISO is
playing in California?
Answer. The aspect of the Commission's California mitigation
program that depends on a single market clearing price based on
mitigated bids could not be applied to the rest of the west to develop
non-California market clearing prices because there is no other
centralized bid-based market in the west. Some means of capping or
otherwise mitigating prices (instead of bids) would have to be
developed. Another idea would be to simply extend the California
mitigated market clearing price as a ceiling to the rest of the West. I
have not given adequate thought to this last idea.
Question 2. You suggest that a plan would be in effect for the West
in any time that reserves fall below 7 per cent in any control area.
Does that mean that an implementation plan will be in effect for the
whole West if reserves are low in a single small area?
Answer. I dissented from this limitation on when mitigation would
be implemented. However, it is my understanding that mitigation would
be implemented on a control area by control area basis. Prices would be
mitigated on a sale made into a control area where reserves in that
control area are below 7%.
THE DEMAND RESPONSE PROPOSAL
Question 1. You order that California utilities state a price at
which they will curtail load. How might this mechanism work? Will
customers have to tell the utilities their curtailment price, so that
the utilities can assemble a collective demand response, or will the
utilities make this judgment on their own?
Answer. Please see Chairman Hebert's response to this question.
Question 2. You suggest that a West-wide clearing-house for demand
response might be instituted. Would this interfere with already
existing state program? Are there issues in state law that would need
to be dealt with before implementation of such a plan?
Answer. Please see Chairman Hebert's response to this question.
Question 3. You do not have jurisdiction over behavior by retail
customers, which is what demand response ultimately comes to. Is there
something we need to do in Federal Law that would allow you to consider
demand response?
Answer. Please see Chairman Hebert's response to this question.
Responses to Questions From Senator Campbell
Question 1. Why have a single market clearing price, especially
since this will probably cost California more money?
Answer. Economists believe that in a centralized bid based market
that is functioning well, a single market clearing price will keep
costs down. A single market clearing price encourages sellers to bid
something very close to their costs to ensure that they are dispatched.
There is no reason to bid higher because sellers get paid the market
clearing price if dispatched. Encouraging sellers to bid close the
their costs helps ensure that the plants with the lowest costs are
picked before more expensive ones. However, if seller's are able to
exercise market power due to shortages or the ability to withhold
plants, that market power must be mitigated directly.
Because I remain concerned about the California market, I still
have an open mind on the single market clearing price. So far, however,
the Commission has not dealt with the seller's market power directly.
Question 2. Could this possibly drive up prices in the West?
Answer. It is my view that prices throughout the West have been
correlated with prices in California. To the extent prices are driven
up in California for whatever reason, it is likely that prices will
also rise in the rest of the West.
Question 3. I am skeptical of price caps. Many say they are likely
a disincentive to investment in new generation. Won't they hurt in the
long run?
Answer. Yes, price caps applied over the long term may act as a
disincentive to new generation investment. I do not believe, however,
that some type of price mitigation in the short term will result in
such a disincentive. The price signal for new investment in the West
has been sent many times over. The continued high prices in the West no
longer are needed to signal the need for new generation.
Question 4. What does the FERC see as the best means to fix this
problem?
Answer. My views on this question differ from those of the other
Commissioners. I believe that an effective short term price cap applied
to the entire western interconnection would achieve the following
goals. First, it would remove the incentive for generators to withhold
power from the market in order to drive up prices. Second, limiting
prices would stop the economic bleeding in the region that is serving
no legitimate economic purpose.
______
Federal Energy Regulatory Commission,
Office of the Chairman,
Washington, DC, June 14, 2001.
Hon. Frank H. Murkowski,
Ranking Member, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Senator Murkowski: Thank you again for giving me the
opportunity to testify at the Committee's May 3, 2001, oversight
hearing reviewing the Federal Energy Regulatory Commission's recent
order addressing wholesale electricity prices in California and the
Western United States.
On May 29, 2001, subsequent to the May 3, 2001 hearing, the
Commission's mitigation plan became effective. Experience so far has
been positive. Price mitigation has been triggered twice, on May 30 and
31, 2001, and prices fell during those events. In fact, electricity
prices in California and throughout the West have trended significantly
lower since May 29, 2001.
As you know, the Commission has taken and continues to take a
number of actions to address the energy market situation in the West.
These steps are detailed in the enclosed responses. Attached you will
find answers prepared by the Commission's staff to the additional
questions from yourself and Chairman Bingaman, and Senators Campbell,
Cantwell, Craig, Thomas, and Dorgan, to be included in the hearing
record.
Sincerely,
Curt L. Hebert, Jr.,
Chairman.
[Enclosures]
Responses to Questions From Senator Murkowski
Question 1. As I see it, the fundamental problem in California
isn't a lack of regulation, it is a lack of generation and
transmission. What are your views?
Answer. I agree with you. California's rolling blackouts are not
caused by high wholesale prices in the West, but are caused by
shortages of generation and insufficient transmission investment. These
infrastructure shortages are the root cause of both rolling blackouts
and high prices. More generation and transmission are greatly needed
throughout the West and especially in California. We must ensure that
new generation is built, that the transmission system is upgraded, that
hydroelectric projects are licensed, and that new gas pipelines are
built. We must also recognize that in the short-run there will be
shortages of electricity during peak periods. Market-responsive
wholesale and retail prices may offer the best, if not only, way of
both minimizing blackouts in the short run, and maximizing the
incentives to add the necessary new generation and transmission
investment to secure California's long-term reliability.
The FERC continues to do what it can to encourage increases in
generation and transmission in the West. The Commission recently
streamlined regulatory procedures for wholesale electric power sales,
expedited the certification of natural gas pipeline projects into
California and the West, and urged licensees to review their
Commission-licensed hydroelectric projects in order to assess the
potential for increased generating capacity.
In addition to increased generation, a key element for stability in
the western markets is investment in transmission facilities. The
Commission recently approved a series of economic incentives aimed at
ensuring upgrades to the western transmission grid. For projects that
significantly increase transmission and can be in service by November
1, 2001, these incentives include increased rates of return on equity
invested and accelerated depreciation rates.
The Commission's efforts alone will not solve the electricity
crisis in California. However, together with state-level action within
California to facilitate the siting of generation and transmission
facilities, and to ensure more market-responsive retail pricing, our
actions will provide additional incentives to increase power supplies
in the western markets in the long run. Markets will do the rest--by
providing clear price signals to stimulate the necessary new
investment. While the Commission has found it necessary to impose price
mitigation to protect consumers in the short-term, consumers will best
be protected in the long-term if market forces are allowed to work.
Question 2. Is it correct that a large share of California's price
volatility problems can be attributed to the State's insistence that
investor-owned utilities divest their generation and acquire all of
their power from the spot market instead of through self-generation and
long-term contracts?
Answer. Yes. California, unlike most states, required investor-
owned utilities to divest substantial generating assets and to sell all
of their generation into and buy all of their energy needs from the
California Power Exchange (PX), which resulted in total reliance on
spot market purchases. The Commission, in its December 15 Order,
eliminated the mandatory PX buy-sell requirement, which allowed the
three investor-owned utilities to self supply about 25,000 MW subject
to state regulation. The Commission encouraged market participants to
develop long-term contracts for power, and required California market
participants to preschedule all resources and loads with the ISO and
limit their real-time energy purchases to no more than five percent of
their load. In a key decision, issued on April 11, 2001, the United
States Court of Appeals for the Ninth Circuit refused to disturb the
Commission's approach to remedying the dysfunctional California
electricity market structures.
Question 3. There are a lot of complaints that the price of natural
gas at the border of California is too high. Has the California public
utility commission opposed new pipelines and expansion of existing
pipelines? What about California's local distribution companies?
Answer. In the past, the Public Utilities Commission of the State
of California (CPUC) and the California local distribution companies
frequently opposed interstate pipeline projects in California. However,
in light of recent events in California's energy markets, California
authorities are updating their knowledge of California's natural gas
infrastructure, and may be more receptive to new pipeline proposals
which enhance interstate natural gas deliveries to the state.
As recently as a year ago, the CPUC and Southern California Gas
Company opposed a certificate authorizing Questar Southern Trails
Pipeline Company to convert and operate an oil pipeline to provide open
access gas service from the Four Corners area of Utah, Arizona,
Colorado, and New Mexico into Southern California. (Questar Southern
Trails Pipeline Company, 89 FERC para. 61,050 (1999); 92 FERC para.
61,110 (2000).) (At present, the Questar Southern Trails Pipeline is
not operating.) In May, 2001, the staff of the California Energy
Commission (CEC) issued a staff draft report on ``Natural Gas
Infrastructure Issues,'' examining the adequacy of California's natural
gas delivery infrastructure. On June 5, 2001, the CEC held a public
conference on these issues.
Question 4. Am I also not correct that the State of California has
steadfastly insisted that all interstate pipelines end at the border of
California, with interstate pipelines inside the border being subject
to State jurisdiction? Isn't the net effect of this to deny California
consumers the benefits of FERC's open access transportation program,
which has saved consumers elsewhere in the U.S. billions of dollars?
Answer. Yes. In the Commission's proceedings authorizing the Kern
River Gas Transmission Company, Mojave Pipeline Company, and Wyoming-
California Pipeline Company systems, as well as the northward expansion
of the Mojave system, the CPUC argued that it would have jurisdiction
over those companies within California because they would be performing
local distribution and would be exempt from Commission jurisdiction and
subject to State regulation under both sections 1(b) and 1(c) of the
Natural Gas Act. The Commission rejected this argument. (See, e.g.,
Mojave Pipeline Company, 41 FERC para. 61,040 at page 61,117 (1987).
See also Public Utilities Commission of the State of California v.
FERC, 900 F. 2d 269 (D.C. Cir. 1990) (affirming Commission
certification of interstate pipeline into California).
Responses to Questions From Senator Bingaman
THE CALIFORNIA MITIGATION PLAN
Question 1a. How easy or hard is the mitigation plan to implement?
The ISO is charged with developing a proxy price for every gas
plant in California for every hour. Is that a huge burden, or something
they already have the capacity to do?
Answer. The ISO, in its May 18, 2001 status report, stated that it
was actively working towards implementing the Commission's plan. The
ISO reported that it would have in place by May 29, 2001, a manual
process for implementing mitigation. The ISO has since done so. The ISO
also stated in its May 18 status report that it will have an electronic
version fully operational by July 1, 2001. The ISO should be able to
use a computer formula to generate the proxy rate.
Question 1b. Does the after-the-fact justification of bids that are
above the proxy price impose a huge burden on the Commission?
Answer. Evaluating the justification for bids imposes a burden on
the Commission, but one that should not be extreme, depending on how
many bids are above the proxy price. Under the price mitigation
approach in effect from January until recently, the number of hourly
transactions requiring justification was 69,522 in January; 71,890 in
February; 34,488 in March; and 15,057 in April. While I cannot predict
the number of bids that will be above the proxy price under the new
price mitigation approach imposed by the Commission effective May 29,
the ex ante nature of the new proxy price mechanism will provide
advance price certainty to the market, which should lead to fewer
transactions requiring justification.
Question 1c. Would a pre-set price cap be easy to administer while
getting a similar result?
Answer. Setting seller-specific price caps based on each seller's
own costs would be difficult administratively, because the Commission
would have to gather extensive cost data and make separate findings for
each seller. Such a process would be time- and litigation-intensive.
Setting a single cap for all sellers would be easier to administer but
would raise the problem that, on some days, the price cap could be
lower than the costs incurred by sellers for fuel and emission
allowances, while on other days, the price cap could be too high. In
contrast, the Commission's mitigation plan is based on the prices
generators would be expected to bid on a daily basis based on current
costs.
A price cap also would have adverse effects compared to the
Commission's approach. Price caps would discourage investment in new
generation which California desperately needs and can create incentives
for suppliers to sell their power in markets without price ceilings,
creating greater shortages of power. Indeed, when price caps have been
tried before in California, the ISO was forced to petition the
Commission for emergency relief from the caps in order to enable it to
avoid shortages and obtain the power it needed. (See California
Independent System Operator Corporation, 93 FERC para. 61,239 (2000).)
Price caps also can discourage investment in technology that will make
generating units more efficient. Instead of using inflexible price
caps, the Commission's market mitigation plan seeks to replicate
competitive markets and maintain incentives to supply California as
well as increase investment in making generating units more efficient
and environmentally friendly.
Question 1d. How accurate is the information that is used? In other
words, will lots of plants have gas prices above the average that the
ISO will use, so that all of them will be trying to justify prices
above the proxy price, or will it just be a few? Does the use of an
average gas price guarantee a lot of prices above the proxy price? Is
there a similar problem with the emissions prices?
Answer. The proxy price is recalculated each day based on current
market costs for natural gas and emission allowances. Individual
sellers may have higher costs on a given day depending upon their
contractual arrangements for buying these inputs. I cannot predict how
many sellers will be in those circumstances on any given day. However,
those sellers will be required to justify any sale of power above the
proxy price.
Question 2a. Does the mitigation plan actually result in lower
prices?
The proxy system is similar to the system you used to develop the
refund numbers for the last few months. Have you looked at the market
to determine whether prices outside the time that you applied the proxy
price were higher or lower? Do you intend to do so in the future? It
seems that this would help determine whether the plan is being applied
broadly enough or not. Do you intend to use some kind of measuring
stick like this to keep a check on the effectiveness of this system?
Answer. The Commission's market monitoring and price mitigation
plan took effect only recently, on May 29. The Commission will be
receiving bid data for all hours (i.e., not simply during system
emergencies) and will monitor that data to determine the effectiveness
of its price mitigation approach. The Commission's price mitigation
plan seeks to replicate the prices that would occur in a competitive
market. By doing so, the plan will ensure that prices are just and
reasonable.
Experience so far has been positive. Although the Commission's
mitigation plan went into effect in California on Tuesday, May 29,
2001, there were no alerts, and hence no price mitigation occurring on
that day. Price mitigation was triggered during portions of the day on
Wednesday, May 30, 2001, and Thursday, May 31, 2001, when the
California ISO called Stage I emergencies. As a result, prices for
hourly imbalance energy, which had risen to around $299 per MWh before
the emergency alert on Wednesday, fell to $120, and rose no higher than
$135 per MWh during the rest of the day. On Thursday prices rose to
$130 per MWh prior to the emergency, but fell to $109 per MWh when
mitigation began, and fell further to $64 per MWh. Although no
emergencies nor price mitigation occurred during the period from June 1
to June 4, 2001, prices remained relatively modest, not exceeding $150
per MWh, and generally trending below $100 per MWh for most hours.
The Commission's market monitoring and price mitigation plan took
effect on May 29, 2001. The following table (Table 1) shows Western
electricity spot prices before and after mitigation:
Table 1.--WESTERN ELECTRICITY PRICES ($/MWh)
----------------------------------------------------------------------------------------------------------------
Mid-
Date COB Columbia NPIS Palo Verde SPIS
----------------------------------------------------------------------------------------------------------------
Mid-Week Daily Spot Prices
4-Apr............................................ $314 $316 $267 $237 $237
11-Apr............................................ $388 $383 $347 $181 $178
18-Apr............................................ $262 $271 $258 $230 $224
25-Apr............................................ $318 $313 $296 $292 $281
2-May............................................ $246 $252 $225 $220 $212
9-May............................................ $443 $438 $476 $455 $479
16-May............................................ $247 $247 $235 $222 $211
23-May............................................ $419 $415 $410 $385 $381
Daily Spot Prices Following Mitigation
29-May............................................ $165 $161 $163 $153 $130
30-May............................................ $127 $122 $128 $129 $117
31-May............................................ $180 $177 $175 $176 $151
1-Jun............................................ $153 $151 $156 $165 $150
4-Jun............................................ $167 $160 $163 $178 $153
6-Jun............................................ $102 $100 $114 $118 $105
6-Jun............................................ $ 62 $ 60 $ 75 $ 90 $ 75
----------------------------------------------------------------------------------------------------------------
Price Chart Labels: ``COB'' is the California-0regon Border price. Mid- Columbia is a market pricing point
located in the Pacific Northwest. ``NP15'' is north of Path 15, and represents prices in northern California.
``SP15'' is south of Path 15, and represents prices in southern California. Palo Verde is located in Arizona
near the California border, and represents prices in the Southwestern United States.
Question 2b. How does the spot market mitigation plan result in
lower prices in other markets, such as the futures market or the long-
term firm contracting market?
Answer. In fashioning its market mitigation plan for California in
the April 26, 2001 order, the Commission carefully considered the
supply and demand circumstances faced during all periods in the
marketplace. Prices in the daily spot market, the day ahead market, and
longer term bilateral contracts are strongly interrelated. In the long
term, each represents an alternative to the other, as long as they are
available. However, as the time between commitment and consumption
shortens, alternatives become fewer. Buyers and sellers price
electricity sales to reflect, among other factors such as demand, the
opportunities available in these different products. Futures prices are
related to physical products in a similar manner. Although electricity
futures are not themselves substitutes for the physical product, the
open expiration of a futures contract results in the requirement for
physical delivery, which provides an ultimate linkage back to spot
market sales, prices.
Given these linkages, the lowest priced service generally sets the
value basis for all services. To the extent the Commission can succeed
in crafting a well-functioning short-term electricity market in
California without barriers which might prevent purchasers from using
these services as one of many alternative energy supplies, long-term
firm contracts, and futures prices should also be beneficially
affected.
Question 2c. Does the fact that sellers outside of California are
not subject to the proxy price and refunds mean that the market may
clear well above the proxy price because of outside bids, so that the
real effect is that prices in the spot market are still high.
Answer. No. Under the mitigation plan, generators outside of
California can accept the market clearing price determined by the proxy
methodology (in which case, their bid will not affect the price) or
submit their own bid. If they submit a separate bid, that bid will be
paid (if they are dispatched), but the bid will not affect the market
clearing price in the ISO's real-time market.
Question 3a. Can the mitigation plan be evaded?
The sellers outside California are not subject to the proxy system.
What is to prevent generators inside California from selling to parties
outside the state at a high price, then those parties selling back into
California above the proxy price?
Answer. Your question raises an issue commonly referred to as
``megawatt laundering.'' The April 26, 2001 order, at p. 12,
acknowledged concerns regarding ``megawatt laundering.'' In response,
the order recognized that the California market is integrated with
those of other states and, for that reason, FERC is instituting a West-
wide, Federal Power Act Section 206 investigation into public utility
sales for resale. The order solicited public comment on the proposed
West-wide investigation. This issue is pending before the Commission on
rehearing of its April 26 Order. Thus, I cannot comment on the merits
of this issue. However, I recognize that the issue is an important one
and warrants careful consideration by the Commission on rehearing. The
Commission's price mitigation plan just became effective on May 29,
2001, and experience to date has been very good. But, if this concern
about ``laundering'' is realized, I would consider modifying the
Commission's approach to ensure the effectiveness of its price
mitigation mechanism.
Question 3b. Marketers are required to show the price they paid for
electricity in order to justify a bid above the proxy price. What is to
prevent marketers from selling to one another at high prices then
bidding into the market at that high price and so evading the proxy
price?
Answer. This issue is pending before the Commission on rehearing of
its April 26 Order. Thus, I cannot comment on the merits of this issue.
However, this issue also will receive careful consideration by the
Commission on rehearing.
THE RTO CONDITION
Question 1. You have conditioned implementation of the mitigation
plan on California's utilities filing a regional transmission
organization proposal that is consistent with the requirements of Order
No. 2000. What does ``consistent with'' mean? If CA files a plan that
you reject or modify will you withdraw the plan? If they file a
proposal that you accept conditionally will you withhold implementation
until they meet the conditions?
Answer. Order No. 2000 set forth the essential characteristics and
functions required of regional transmission organizations (RTOs) but
also left significant flexibility to adapt to regional needs. RTO
filings were made by the California ISO and the three California
investor-owned utilities on June 1, 2001. The Commission currently is
reviewing the merits of the filings and I cannot prejudge the
Commission's response to them.
Question 2. Does California have to file a proposal that
incorporates it into a West-wide RTO in order to be consistent with
Order No. 2000?
Answer. I cannot comment upon or prejudge the acceptability of the
RTO filings made on June 1. However, the Commission's April 26, 2001
Order on RTO West made it clear that a West-wide RTO was a long-term
goal--not a requirement for filing.
Question 3. If so, what is the likelihood of other states coming to
an agreement with California? I know my home state of New Mexico at one
point was considering joining together with the CA ISO, but has changed
their minds about that as a result of the troubles in California
markets. What can California do about that?
Answer. As noted above, a West-wide RTO is not a requirement for
filing. I cannot assess the likelihood of other western states joining
with California, especially during these difficult times. However, the
western states have an excellent history of acting cooperatively in
electric industry coordination. Regional coordination has been taking
place through the Western Governor's Association, the Western Systems
Coordinating Council, the Western Regional Transmission Association,
the Committee on Regional Electric Power Cooperation and other groups.
In addition, the CA ISO and RTO West have created a joint technical
group to work on interregional coordination issues.
It is important for California to work with other states within the
Western region to stabilize the energy markets in the west. I expect
RTO West, as well as participants in other RTO efforts under
consideration in the West, to work cooperatively with the California
ISO to develop comprehensive solutions to the problems confronting
western markets.
THE 206 INVESTIGATION
Question 1. Why is the investigation into markets in the rest of
the West limited to spot markets and those periods when reserves are
below 7 percent?
Answer. The Commission proposed to adopt mitigation measures in the
West that, to the extent possible, mirror those being applied in
California. The California investigation (which was initiated in August
2000) was limited to the markets operated by the California ISO and PX,
i.e., spot energy and ancillary services markets. In addition, the
price mitigation in those markets applies to spot markets when reserves
are deficient. I note that parties in both proceedings have filed
comments asking the Commission to expand the scope of the West-wide
investigation and the scope of the mitigation. Thus, I cannot comment
further on these pending issues.
Question 2. Do you know without investigation that the long-term
firm contract market, for example, is producing prices that are just
and reasonable?
Answer. The allegations in recent months regarding unjust and
unreasonable prices in California and the West have focused on spot
market prices. These markets are the closest in time to when load must
be met and therefore can exhibit the highest prices in times of
shortage. Forward markets, on the other hand, present buyers with more
time and options, and offer greater rate stability and certainty.
Pursuant to its authority under section 206 of the Federal Power Act,
the Commission will investigate any complaints that prices in long-term
contracts are unjust and unreasonable. (See, San Diego Gas and Electric
Company v. Alamito Company, 46 FERC para. 61,363, at p. 62,125 (1989).)
In doing so, the Commission must consider all of the rates, terms and
conditions of a long-term contract for the full duration of the
contract, instead of merely a ``snapshot'' of the contract at one time.
The Commission's market monitoring and price mitigation plan took
effect on May 29 of this year. Since this plan has been in effect,
electricity prices in California have fallen sharply as illustrated in
Table 1, presented earlier within these responses.
the proposed mitigation for the rest of the west
Question 1. You have proposed that a plan somewhat similar to that
ordered for California might be useful in the rest of the West. How
would such a plan work, given that there are no clearly defined spot
market institutions elsewhere to play the role that the CA ISO is
playing in California?
Answer. As your question recognizes, the goal of the West-wide
investigation initiated in the April 26, 2001 order is to mirror the
California mitigation plan. The order instituted a Federal Power Act
section 206 investigation into the rates, terms and conditions of
public utility sales for resale of electric energy in interstate
commerce in the WSCC other than sales through the California ISO
markets, to the extent that such sales for resale involve: (1) electric
energy sold in spot markets (i.e., up to 24 hours in advance); and (2)
take place during conditions when reserves (as defined by the WSCC) for
any control area fall below 7 percent. The order proposed that all non-
hydroelectric generators and marketers in the WSCC with energy
operationally and contractually available in real-time (public
utilities and non-public utilities) would be required to offer that
real-time energy for sale at that time. The generators would not be
required to sell that energy into California; they would only have to
offer the power for sale in any location. Any sales made in other (non-
California) spot markets in the WSCC would also be subject to price
mitigation, but that mitigation would be limited to system conditions
when contingency reserves (as defined by the WSCC) for any control area
fall below 7 percent. The order sought comment on what this price
mitigation should be.
As FERC established proceedings which purposely invited comment on
this and other aspects of the West-wide mitigation proposal, and those
comments are currently before the Commission, I am unable to comment
further on the issues raised by this question.
Question 2. You suggest that a plan would be in effect for the West
in any time that reserves fall below 7 percent in any control area.
Does that mean that an implementation plan will be in effect for the
whole West if reserves are low in a single small area?
Answer. The April 26, 2001 order instituting the West-wide
investigation, at p. 30, states that any sales made in other (non-
California) spot markets in the WSCC would be subject to price
mitigation, but that mitigation would be limited to system conditions
when reserves for any control area fall below 7 percent. The order
requested comments on the details of this price mitigation.
As FERC established proceedings which purposely invited comment on
this and other aspects of the West-wide mitigation proposal, and those
comments are currently before the Commission, I am unable to comment
further on the issues raised by this question.
THE DEMAND RESPONSE PROPOSAL
Question 1. You order that California utilities state a price at
which they will curtail load. How might this mechanism work? Will
customers have to tell the utilities their curtailment price, so that
the utilities can assemble a collective demand response, or will the
utilities make this judgment on their own?
Answer. The Commission did not impose a ``one-size-fits-all''
approach on how utilities should implement demand-side bidding. Thus,
each utility may implement an approach that fits its circumstances,
including any contracts it may have with retail customers and any
programs it may have for implementing retail load reduction. Generally,
I would expect the utility's demand-side bids to reflect the expressed
willingness of its customers to reduce load at certain prices. Thus, if
20 percent of a utility's customers indicate their desire to curtail
usage when prices reach a specific level, and its other customers
indicate a desire to continue consuming power, the utility could submit
a demand-side bid corresponding with this consumption pattern.
Question 2. You suggest that a West-wide clearing-house for demand
response might be instituted. Would this interfere with already
existing state programs? Are there issues in state law that would have
to be dealt with before implementation of such a plan?
Answer. The Commission wishes to do what it can to promote demand
reductions as a means of alleviating the supply/demand imbalances in
Western markets, and does not want to interfere with existing state
programs aimed at achieving demand reductions. As the Commission
recently stated in its Order Removing Obstacles in Docket No. EL01-47-
000, the Commission is promoting wholesale programs that complement
existing state demand-side management programs, and our goal is not to
supersede state authority over retail customers, but to work
cooperatively with the states to achieve a common good.
Question 3. You do not have jurisdiction over behavior by retail
customers, which is what demand response ultimately comes to. Is there
something we need to do in Federal Law that would allow you to consider
demand response?
Answer. See the answer to question 2 above. I believe that the
combination of existing state and Federal authority is currently
sufficient.
Responses to Questions From Senator Campbell
Question 1. Why have a single market clearing price, especially
since this will probably cost California more money?
Answer. As explained by economist Alfred E. Kahn and other notable
economists in a study by the Blue Ribbon Panel Commissioned by the
California Power Exchange on January 23, 2001, an auction that pays all
accepted sellers a single, market-clearing price will, in practice,
generally result in lower prices than an as-bid auction. Moreover, a
single clearing price auction offers the following advantages over as-
bid auctions. First, a single market clearing price auction encourages
construction of efficient, new generation. Generators that can build
and operate at a cost less than the expected future market clearing
price will see that they can profit by entering the market. The
additional, more efficient supply will lower prices and benefit
consumers.
A single price auction also encourages all generators to reduce
their costs and their bids. All generators, including the least
efficient generators, have an incentive to reduce their costs. All
generators will attempt to come in below the clearing price so they can
profit. Bids above the clearing price will result in no sales and,
therefore, no revenues. Lower bids mean lower prices for consumers.
Finally, a single price auction encourages the lowest bids. When
the price is set by a single price auction, competitive generators have
an incentive to bid their running costs, because they know that they
will make a profit by being paid the clearing price. But when there is
no single price auction, generators will bid above their running costs,
because this is the only way they can be sure they will make a profit.
As they guess at the potential market clearing price, they could end up
bidding higher than what a single market clearing price would have
been. As a result, pay-as-bid auctions are not as likely to result in
lower prices for consumers.
Question 2. Could this possibly drive up prices in the West?
Answer. No, that is not likely. As noted above, an auction that
pays all accepted sellers a single, market-clearing price will, in
practice, generally result in lower prices than an as-bid auction.
However, there are many factors underlying high prices recently
experienced by California and the West, most notably insufficient
supply and inadequate transmission capacity.
The Commission's market monitoring and price mitigation plan took
effect on May 29, 2001. Table 1, presented earlier within these
responses, shows Western electricity spot prices before and after
mitigation.
Question 3. I am skeptical of price caps. Many say they are likely
a disincentive to investment in new generation. Won't they hurt in the
long run?
Answer. Price caps are not the long-term solution and would only
make the situation worse. They do not promote long-term consumer
welfare as they will not increase energy supply or encourage
conservation.
Question 4. What does the FERC see as the best means to fix this
problem?
Answer. In general, market-based solutions offer the most efficient
solution to the problems confronting California and the west.
Infrastructure improvements are greatly needed throughout the West and
especially in California. Appropriate financial incentives are needed
to ensure that new generation is built, that the transmission system is
upgraded, that hydroelectric projects are licensed, and that new gas
pipelines are built. Without these upgrades, constraints and
bottlenecks increasingly will block energy supplies from reaching load.
In addition, purchasers must also have the ability to reduce load in
response to high prices.
The Commission has ordered a range of measures to promote a better
balance of supply and demand, but its jurisdiction is limited. The
Commission can and has set pricing policies which encourage entry, but
it is state regulators that have siting authority for electric
generation and transmission facilities, as well as authority over local
distribution facilities, both for electricity and natural gas. State
regulators also have the most significant authorities to encourage
demand reduction measures, which can greatly mitigate the energy
problems in California and the West.
Question 5. How will your new orders affect the rural electric
associations, the co-ops?
Answer. Sales by co-ops (and other non-public utilities such as
municipal utilities) under bilateral agreements will not be affected by
the Commission's April 26 Order. Co-ops in California that voluntarily
use the ISO's transmission facilities or sell into the ISO's markets
are subject to the same price mitigation as other utilities and the
same requirement to offer available power for sale in real-time, but
only for electric energy that is available in real-time and not already
scheduled to run under a bilateral arrangement. It is my understanding
that very few co-ops sell into the California ISO spot market. Absent
this approach, the Commission could not fulfill its statutory duty to
ensure the justness and reasonableness of jurisdictional prices. For
sales in Western States other than California, the Commission proposed
to adopt a similar approach to co-ops and other non-public utilities;
the Commission has received comments on this proposal and intends to
issue an order in the near future. Throughout the West, co-ops are
typically wholesale power purchasers, and our price mitigation should
help them.
Question 6. What can we all do to ensure that the rest of the
Western region is minimally affected by the crisis in California,
because I don't want my home state of Colorado's resources and
consumers hit by these problems?
Answer. The most important measure is to ensure that infrastructure
(generating facilities, transmission lines and natural gas pipelines)
can be built when and where needed, without unreasonable impediments.
Another important step is to provide price signals for new supplies and
conservation by not capping prices artificially. Finally, utilities
should be allowed to purchase needed power under long-term arrangements
when it is economical, instead of being forced to buy power only in
spot markets.
Responses to Questions From Senator Cantwell
Question 1. Consider the situation in Washington state. We've
already experienced retail rate increases in the high double-digits,
suffered plant closures and job loss as a result of skyrocketing
electricity costs, and are facing the prospect of a BPA rate increase
this fall that threatens to further undermine the economic health of
the entire region. Do you believe prices in the Pacific Northwest are
just and reasonable?
Answer. Prices in the Pacific Northwest may not be just and
reasonable under certain conditions. For this reason, the Commission
recently instituted an investigation into the rates, terms and
conditions of certain wholesale sales by public utilities within the
Western Systems Coordinating Council. The Commission has received
comments in this investigation and will address the issues in the near
future.
The Commission's market monitoring and price mitigation plan took
effect on May 29, 2001. Table 1, presented earlier within these
responses, shows Western electricity spot prices before and after
mitigation.
Question 2. How do you make the case that FERC has upheld its
statutory mandate to ensure just and reasonable rates at all times and
in all markets?
Answer. Under the Federal Power Act, the Commission can order
changes to existing rates, and practices and contracts affecting those
rates, only upon finding those rates to be unjust and unreasonable. In
its December 15, 2000 order, the Commission found that, under prior
market rules and under certain conditions, prices in spot markets in
California were not just and reasonable. Consistent with the Federal
Power Act, the Commission ordered changes to the market rules governing
California's spot markets and also ordered additional market monitoring
and price mitigation. On March 9, 2001, the Commission implemented the
price mitigation that was ordered in the December 15 order. A federal
appeals court recently rejected challenges to the primary remedy
adopted by the Commission in the December 15 order, characterizing the
Commission's approach as a ``middle ground between the need for
temporary price mitigation and the realization that competition must
exist for the California energy market to survive in the long run.''
California Power Exchange Corp. v. FERC, No. 01-70031, 2001 U.S. App.
LEXIS 6153 (9th Cir. April 11, 2001). The same court recently rejected
another challenge to the Commission's actions. John L. Burton, et al.
v. FERC, No. 01-70812 (9th Cir. May 29, 2001).
In its April 26, 2001 order, the Commission adopted a new approach
to price mitigation for the California ISO's spot markets, and proposed
to adopt a similar approach for spot markets throughout the West, to
ensure that rates are just and reasonable. The Commission will act on
its proposals for Western States other than California in the near
future.
The Commission has not found that rates are unjust and unreasonable
at all times and in all markets. Unless such a claim is supported on
the record, the Commission has no authority under the Federal Power Act
to impose a remedy applicable at all times and in all markets. That
said, prices in the spot markets and in more forward markets are
influenced by each other and a decline in spot prices should result in
lower prices generally.
Question 3. What specific elements of this order promise relief for
Washington state consumers?
Answer. The April 26, 2001 order's most direct means of short-term
relief for Washington state consumers is its Federal Power Act Section
206 investigation into the rates, terms and conditions of public
utility sales for resale of electric energy in spot markets in the
Western Systems Coordinating Council (WSCC) (order at p. 30-31). The
investigation portion of the order seeks comment on the Commission's
proposal to require all non-hydro-electric generators and marketers in
the WSCC to offer all available energy in the spot market at any non-
California location; and to subject any sales made in non-California
spot markets in the WSCC to price mitigation, with the form of that
price mitigation to be determined following review of comments. The
proposed mitigation would be limited to system conditions when reserves
for any control area fall below 7 percent; and condition the market-
based rate authority of public utility sellers selling in the WSCC
region to ensure that they do not engage in anti-competitive behavior.
The April 26, 2001 order recognizes that FERC is limited in its
ability to solve all of the problems facing California and the West.
However, the order, coupled with previous orders addressing California
and the West, seeks to remove regulatory obstacles and provide
incentives to increase investment in needed infrastructure, including
ensuring that new generation is built, that the transmission system is
upgraded, and that new gas pipelines are built. FERC has also sought to
get California's market situation under control through, among other
things, moving electricity purchases to serve load from the spot market
to long-term contracts.
In addition, the April 26, 2001 order included a number of
conditions which were designed to prevent anti-competitive behavior
during all hours and not just during hours when emergencies are
declared by the ISO. Among the measures is the conditioning of market-
based rate authority on not withholding available supply and not
engaging in other anti-competitive behaviors; the coordination of
planned outages by the California ISO; FERC's monitoring of unplanned
outages; requiring all generators with Participating Generator
Agreements (PGAs), as well as all non-public utility generators in
California which sell through the ISO markets or currently use the
ISO's interstate grid, to sell all available supply into the ISO's spot
market; requiring ISO buyers to submit demand reduction bids by hour,
amount, and customer; and the monitoring of all bids in all hours by
the ISO and FERC through an ISO weekly report. Removing the volatility
of prices in California through price mitigation should have a
beneficial effect on prices in the West. This is evinced by Table 1,
presented earlier within these responses.
Question 4. I do appreciate that your April 26 order institutes an
investigation into wholesale prices throughout the West. As I've tried
to illustrate in my remarks, this is a crisis that is having profound
effects throughout the Northwest and promises to reverberate throughout
the nation if left unchecked. I'm concerned, however, about the scope
of this Section 206 proceeding. The investigation will only take up
transactions that occur up to 24-hours in advance on the spot market,
and only during California emergencies. This includes very few hours,
particularly in the Northwest where most of our transactions are done
under longer-term contracts. Shouldn't you be investigating the broader
issue of why prices remain extremely high (and very much above costs)
for all types of transactions across the entire West Coast?
Answer. As part of its investigation into California's spot
markets, the Commission also received information about the
circumstances in spot markets in other parts of the West. Based on this
information, the Commission concluded that rates, terms and conditions
for sales in spot markets in these areas may not, under current market
rules and under certain conditions, be just and reasonable and should
be modified. On this basis, the Commission instituted its West-wide
investigation in the April 26 Order. The information available to the
Commission did not warrant a finding that rates, terms and conditions
are unjust and unreasonable for all types of transactions. However, I
note that parties in the proceeding have filed comments on both the
scope of the investigation and the scope of the proposed mitigation and
therefore I cannot comment further on these pending issues.
Pursuant to its authority under section 206 of the Federal Power
Act, the Commission will investigate any complaints that prices in
long-term contracts are unjust and unreasonable. (See, San Diego Gas
and Electric Company v. Alamito Company, 46 FERC para. 61,363, at p.
62,125 (1989).) In doing so, the Commission must consider all of the
rates, terms and conditions of a long-term contract for the full
duration of the contract, instead of merely a ``snapshot'' of the
contract at one time.
Question 5. As you may recall, I submitted to you a question at our
March 15 hearing about why FERC's order regarding potential refunds for
California did not include the Northwest. I appreciated receiving your
written response, but based on your answer, I am not fully satisfied
that Northwest ratepayers will eventually receive the refunds they may
very well deserve. You cited the Commission's considerable discretion
in establishing ``just and reasonable rates,'' that FERC did not want
to ``blunt the price signals needed to induce supply entry,'' and that
``fundamental differences'' in the structure of the markets would make
it difficult to adapt the approach the Commission has used for
California to the Northwest. Now, in your April 26 order and as you've
testified today, the Commission has solicited 10 days' worth of
comments on putting in a price mitigation plan for the entire WSCC that
would resemble the one you're putting in place for California. The
order also makes mention of potential refunds. The language, however
seems a bit ambiguous. Could you please more fully articulate what,
precisely, FERC is proposing West-wide, and how/if this relates to the
Section 206 investigation and potential refunds?
Answer. The Commission's April 26, 2001 order established an
investigation into the rates, terms and conditions of public utility
sales for resale of electric energy in interstate commerce in the
Western Systems Coordinating Council (WSCC) other than sales through
the California ISO markets. This investigation applies to sales for
resale that involve electric energy sold in spot markets (up to 24
hours in advance), and which take place when contingency reserves fall
below 7 percent.
The Commission is proposing three measures in connection with the
WSCC investigation. The three measures are:
(1) requiring all non-hydroelectric generators and marketers in the
WSCC to offer for sale any available electric energy not scheduled in
real-time pursuant to a bilateral arrangement;
(2) instituting price mitigation when reserves fall below 7
percent; and
(3) prohibiting public utility sellers selling in the WSCC region
from engaging in anti-competitive behavior discussed in the April 26
order.
The April 26 order also established the earliest refund effective
date permitted by section 206 of the Federal Power Act with respect to
the West-wide investigation, which is 60 days after publication in the
Federal Register. This means that the Commission will have the
discretion to order any unjust and unreasonable amounts to be refunded
for rates charged in the WSCC spot markets other than California
beginning July 2, 2001, through a period 15 months thereafter. (See
section 206(d) of the Federal Power Act (as amended by P.L. 100-473,
October 6, 1988).) Please note that the refund effective date and
therefore the Commission's refund authority, associated with the West-
wide investigation differs from that in the California investigation.
The refund effective date with respect to the California investigation
is October 2, 2000.
Question 6. Aside from my vigorous insistence that FERC recognize
and address the situation in the Northwest, I also have a number of
qualms about the technical elements of this order and how well its
price mitigation mechanism will actually work in California. I agree
with Senator Feinstein's assessment that this order doesn't go nearly
far enough. And to the extent it does attempt to moderate prices, I'm
afraid it is so riddled with potential loopholes as to be ineffective.
I'm concerned about unintended consequences in California--and
especially if you intend to export the mechanics of this model to the
rest of the West. Specifically, the order requires California
generators to offer the ISO all of their capacity in real time, during
all hours, if it is available and not scheduled to run through
bilateral contracts. The thinking, according to the order, is that a
generator ``should be willing to sell that energy at a price that
covers its marginal costs, since it has no alternative purchaser at
that time.'' Is it true then, that as long as the ISO has not declared
an alert, generators can demand as high a price as possible--one far
exceeding marginal costs?
Answer. It is true that there is no price mitigation during periods
when no emergency has been declared by the ISO. This is premised on
there being sufficient supply during non-emergency hours to discipline
price. However, the Commission made clear that it would revoke the
market-based rate authority of any seller, or take other appropriate
action against any seller, which withholds available supply or engages
in other anticompetitive behaviors in any hour. In addition, the order
required the ISO to monitor all bids in all hours and file with FERC a
weekly report, which will enable FERC to monitor for any
anticompetitive behavior. Moreover, all public utility generators, as
well as all non-public utility generators, in California which sell
through the ISO markets or currently use the ISO's interstate grid,
must sell all available supply into the ISO's spot markets during all
hours.
Thus, the Commission's market monitoring and price mitigation plan
operates during all hours of the day, not simply during those hours
when the ISO has declared a system emergency. I note that, although the
Commission's mitigation plan went into effect in California on Tuesday,
May 29, 2001, there were no alerts, and hence no price mitigation
occurring on that day. Price mitigation was triggered during portions
of the day on Wednesday, May 30, 2001, and Thursday, May 31, 2001, when
the California ISO called Stage I emergencies. As a result, prices for
hourly imbalance energy, which had risen to around $299 per MWh before
the emergency alert on Wednesday, fell to $120, and rose no higher than
$135 per MWh during the rest of the day. On Thursday prices rose to
$130 per MWh prior to the emergency, but fell to $108 per MWh when
mitigation began, and fell further to $64 per MWh. Although no
emergencies nor price mitigation occurred during the period from June 1
to June 4, 2001, prices remained relatively modest, not exceeding $150
per MWh, and generally trending below $100 per MWh for most hours.
The Commission's market monitoring and price mitigation plan took
effect on May 29, 2001. Table 1, presented earlier within these
responses, shows Western electricity spot prices before and after
mitigation.
Question 7. What prevents California generators from entering into
bilateral agreements with marketers at high, uncapped prices?
Answer. See answer to question number 8 below.
Question 8. Further, during ISO emergency conditions, marketers
bidding higher than the market clearing price would, according to the
order, ``be required to justify the bid based on the prices they paid
for power.'' What prevents marketers from paying high prices to
generators, and then passing those costs on to the ISO?
Answer. Power sellers and purchasers are free to enter into
bilateral contracts at terms agreeable to both entities. In fact, FERC
has encouraged and continues to encourage sellers and purchasers to
enter into mutually agreeable, long-term bilateral contracts.
Your question raises an issue commonly referred to as ``megawatt
laundering.'' The April 26, 2001 order, at p. 12, acknowledged concerns
regarding ``megawatt laundering.'' In response, the order recognized
that the California market is integrated with those of other states
and, for that reason, FERC is instituting a West-wide, Federal Power
Act Section 206 investigation into public utility sales for resale. The
order solicited public comment on the proposed West-wide investigation.
This issue is pending before the Commission on rehearing of its April
26 Order. Thus, I cannot comment on the merits of this issue. However,
I recognize that the issue is an important one and warrants careful
consideration by the Commission on rehearing. The Commission's price
mitigation plan just became effective on May 29, 2001, and experience
to date has been very good.
Question 9. So if the ISO rejects a marketer's bid because the
price is too high, how does the order assure that the generator will be
made available to sell to the ISO? After all, as the order notes,
``Marketers generally have a portfolio of energy supplies and often
sell energy numerous times. It, therefore, would be exceedingly
difficult to try and trace energy back to the generating source . . .''
Answer. First of all, the April 26, 2001 order's must-sell
requirement is independent of price mitigation, and operates during all
hours. Under the scenario you describe, the marketer's bid would have
been rejected because the ISO determined that it had sufficient
resources at a lower price than that offered by the marketer to meet
expected load. At that point, the marketer could seek to sell
elsewhere. However, if it had no alternative market in which to sell
its power, and the ISO later determined that the marketer's supply was
needed to meet load, the April 26, 2001 order's must-sell requirement
would obligate the marketer to offer its supply to the ISO. Second, all
California generation and all sales by marketers in California spot ISO
markets are subject to price mitigation. Thus to the extent the
marketer sought a price in excess of the market clearing price, such a
bid must be justified. Thus, if the ISO requires the supply but the
marketer's bid exceeds the proxy price, the ISO will accept the bid
subject to justification and refund.
Question 10. Several parties have raised concerns, as noted in the
order, about so-called ``megawatt laundering,'' where a supplier
schedules supply out-of-state and then reimports that power to avoid a
mitigated price. Doesn't all this assume that marketers can't game the
system, including by selling outside the state of California?
Answer. The April 26, 2001 order, at p. 12, acknowledged concerns
regarding ``megawatt laundering.'' In response, the order recognized
that the California market is integrated with those of other states
and, for that reason, FERC is instituting a West-wide, Federal Power
Act Section 206 investigation into public utility sales for resale. The
order solicited public comment on the proposed West-wide investigation.
As FERC established proceedings which purposely invited comment on
this and other aspects of the West-wide mitigation proposal, and those
comments are currently before the Commission, I am unable to comment
further on the issues raised by this question.
Question 11.These technical issues illustrate a simple point: we
need a common-sense, consistent solution throughout the West that will
restore rationality to the market over the next two years. You have
repeatedly questioned how a simple price cap could be effective. About
a decade ago, I understand that the WSCC had a short-term wholesale
power tariff--cost of generation, plus 28 mills--that applied to all
systems. At the time, if you wanted to buy power at a certain price,
you had to be willing to sell at that same price. This seems like a
simple, common-sense model, relative to the one you have proposed here.
Please explain why the price mitigation mechanism proposed in your
order is preferable.
Answer. The program you describe allowed voluntary sales at prices
below the costs of a hypothetical average utility (based on data filed
by the FERC-regulated participants). This approach was preferable to
seller-specific rates based on each seller's costs because it allowed
efficient trading by willing sellers and buyers when both were able to
benefit at prices higher than seller-specific cost-based rates but
lower than the prices calculated from the aggregated cost data.
Mandating such an approach now would require abrogating voluntary
contracts, which would most likely create more uncertainty in the
marketplace.
The Commission's price mitigation mechanism seeks to replicate
pricing in a competitive market. I believe the power generation
industry will better meet the needs of consumers if prices are allowed
to balance supply and demand. When prices increase, suppliers will
build more and consumers will conserve more, thus driving prices down.
This is exactly what has happened in recent weeks. Price caps reduce
the incentive for suppliers to produce and consumers to conserve.
Question 12. The order also conditions implementation of
California's market mitigation plan on the California ISO and the three
investor-owned utilities filing a regional transmission organization
(RTO) proposal by June 1, 2001. Setting aside for today the debate
about merits of Western RTOs, my question is how can you make exercise
of your statutory mandate to ensure just and reasonable rates
contingent upon something altogether unrelated--namely RTO development?
Further, does the Commission have a back-up plan if California doesn't
file a proposal?
Answer. I do not see price mitigation and formation of RTOs as
unrelated. The West is a single market without the regional
institutions to support it. An RTO is vital to removing impediments and
inefficiencies in California and the West. An RTO will allow power to
be traded across a broader area, thus expanding trading opportunities
for all buyers and sellers. An RTO will allow for improved transmission
infrastructure by alleviating bottlenecks. This, in turn, should dampen
generation prices.
On June 1, 2001, the Commission received RTO filings by the
California ISO and the three California investor-owned utilities. The
Commission will address the merits of the RTO filings in a future
order. I cannot prejudge the Commission's response to the RTO filings.
Question 13. Why do you think expanding the role of the ISO into an
RTO will help?
Answer. In Order No. 2000, the Commission established specific
characteristics and functions for a regional transmission organization
that the Commission believed would result in independent and efficient
management of the transmission grid, which would in turn foster
competitive electricity markets over a broad region. An RTO meeting the
Commission's Order No. 2000 requirements should facilitate improved
competitive markets within California. In addition, it would establish
a platform for cooperation or integration of California's investor-
owned utilities with other utilities in California and with other RTOs
in the Western interconnection, which should add stability to the
markets.
Question 14. You have asked for load curtailment options in your
ISO real time market proposal. Are you aware that load curtailment
programs have now been adopted throughout the Pacific Northwest, but
not in California?
Answer. The Commission's April 26 order directed each public
utility purchasing electricity in the ISO's real-time market to submit
demand-side bids that will indicate the price at which each load will
be curtailed. Also, the Commission has authorized market-based sales
for resale of retail load reductions when consistent with state law.
(See Further Order on Removing Obstacles to Increased Energy Supply and
Reduced Demand in the Western United States, 95 FERC para. 61,225
(2001).). This is in addition to other demand relief programs that are
already in place or will be in place for the upcoming summer months in
California. The Commission understands that each California local
service entity has interruptible or curtailable load programs. Entities
not participating in such programs may qualify to bid into (or be bid
into by aggregators) the ISO's Discretionary Load Curtailment Program
(DLCP) or its Demand Relief Program (DRP). According to ISO documents,
the DLCP has already been implemented and will continue through March
31, 2002, and DRP resources will be available for ISO operations for
the period June 1, 2001 to September 31, 2001.
Question 15. I am also concerned because the California ISO has a
reputation for poor operational performance--not refilling pumped
storage units, announcing Path 15 problems while capacity was available
on the Pacific Northwest Intertie, derating the power system in
California for communications and forecasting problems. Have you
directed your staff to investigate these ISO problems?
Answer. Contrary to the statement in your question, Commission
staff's general impression from on-site visits and what they have heard
from NERC, WSCC and other operators, is that the ISO staff is competent
and has performed very well under very difficult circumstances. The
pumped storage units are owned by the California investor-owned
utilities. Refill decisions are theirs, not the ISO's. It is likely
that the CA ISO, the operator and security coordinator for the
California transmission system, is in a better position to judge Path
15 problems than utilities in the Northwest. I would hope that the ISO
takes precautions, such as derating the power system, if they
experience communication and forecasting problems.
The Commission is not able to investigate every unsubstantiated
claim we might read in the press. If neighboring utilities believe that
these problems are serious, they will bring specifics to our attention
as an informal or formal complaint. The Commission will seriously
investigate such complaints as they arrive.
Question 16. Are you aware that in March the ISO announced that it
was derating the 8,500 MW of Qualifying Facility capacity to 5,500 MW
because they were unable to communicate with or forecast the operations
of these generators? Are you investigating this report?
Answer. In March 2001, the ISO announced a reduction in its
expected available capacity from Qualifying Facilities (QFs) from 8,500
to 5,500 MW. This was not a surprise. Commission staff discussed with
ISO staff their experience with QF suppliers during our Bulk Power
Market investigation in the fall of 2000. Staff's understanding is that
the 8,500 MW number is total nameplate capacity of the QF units.
Nameplate ratings do not provide an accurate measure of dependable
output. The 5,500 MW reflects the amount of capacity the ISO believes
it can depend on from QFs.
It is important to remember that the ISO does not have a direct
relationship with or control over the QFs. QFs have supply contracts
with the three investor-owned utilities. These contracts and the
Commission's rules with respect to QFs may inhibit full use of QF
capacity in California. This is why on May 16, 2001 the Commission
allowed QFs in California to sell excess power they generate into the
wholesale market and to arrange for necessary transmission and
interconnection service, to the extent permitted by a court after
review of QF contracts.
Question 17. Some Pacific Northwest utilities have had their
schedules cut without warning by the ISO. This threatens the stability
of the entire system. Are you investigating these failures?
Answer. The Commission has not been informed of schedule cuts by
the California ISO. If Pacific Northwest utilities can show that these
cuts have taken place and believe they are a serious threat to the
stability of the Western Interconnection, they should bring specifics
to our attention in the form of an informal and formal complaint.
Question 18. The ISO has stated repeatedly that the WSCC
reliability guidelines do not apply to California. Have you considered
how we should evaluate ISO reliability if they no longer operate by
traditional utility rules pertaining to reliability?
Answer. The Commission is not aware of the California ISO making
any declarations regarding the applicability of WSCC reliability
guidelines to California. The Commission expects the ISO to comply with
established practices as a member of the WSCC and as a signatory to the
WSCC's Reliability Management System--a voluntary contract-based
program designed to preserve reliability with sanctions for
noncompliance with established reliability criteria. Further, under
FERC's Order No. 888 and the pro forma tariff requirements issued in
1996, a transmission provider, including the Cal ISO and the three
major California utilities, has the responsibility to plan, construct,
operate and maintain its transmission system in accordance with good
utility practice.
While the Commission does not have direct responsibility over
electric reliability matters, its policies have always been directed
toward ensuring the continued reliability of the systems. The
Commission has encouraged California utilities to participate in the
development of a Regional Transmission Organization (RTO) that would
meet the Commission's Order No. 2000 requirements. The Commission
concluded in Order No. 2000 that the RTO must have exclusive authority
for maintaining the short-term reliability of the transmission grid
under its control. The RTO must perform its short-term reliability
functions consistent with established NERC (or its successor)
reliability standards and notify the Commission immediately if
implementation of these or any other externally established reliability
standards would prevent it from meeting its obligation to provide
reliable, non-discriminatory transmission service.
Question 19. The ISO Management has told entities in the Northwest
that they sometimes declare system emergencies for the legal powers
this confers on the agency, instead of a legitimate reserves
deficiency. Have you investigated this?
Answer. The Commission has received formal complaints from Reliant
and Dynegy alleging that the ISO misused its emergency powers and
caused economic harm. The complaints are still pending. I am unable to
comment further on the issues raised by this question.
Question 20. Have you had your staff check out the outages
announced by Duke, Dynegy, Reliant, Mirant, and Williams against the
data on comparable units at the North American Reliability Council? How
do you explain the fact that the outages at the plants owned by these
marketers are twice as high as those experienced by similar units of
the same age?
Answer. The Commission staff investigated unit outages in
California and issued a report on February 1, 2001. The investigation
included site visits to the generating units and the owners' corporate
headquarters to obtain: (1) a further understanding of the outages, (2)
information of how these outages correlate to scheduling practices,
maintenance and capital programs, and (3) an understanding of the
relationship between the plant manager and individuals that makes daily
marketing and commercial decisions. Among other things, the outage
report found that these units are generally old peaking plants that in
recent years had only run for very few hours during the year. Last
summer, these units were run many more hours than usual because of
California's short supply situation. These units had much higher
capacity factors than similar units of the same age. One downside of
running the units more is that they have more opportunity to break
down. Thus, a higher reported outage rate is not unexpected.
Although the Commission staff did not find evidence of physical
withholding of capacity through manipulation of outages, the staff is
coordinating its efforts with the California ISO to monitor unit
outages. Additionally, the staff will conduct more site visits, and is
continuing to investigate past and present outages. Recently, we
received OMB approval to receive outage incident reports from
California generators which they will submit within 24 hours of their
occurrence and conclusion. (Note that this is a voluntary submission
for non-jurisdictional generators.)
However, in a case involving AES and Williams, the Commission found
serious questions about whether physical withholding of capacity
occurred through manipulation of outages in April and May of 2000.
Williams agreed to refund $8 million to the California ISO, to accept
for one year the financial risk of a forced outage at a reliability
must run unit and to provide replacement power at the same price.
Question 21. Thermal plants north of the California border,
regardless of age or fuel type, ran at close to their theoretical
maximums since May 2000. Have you investigated why the plants owned by
the big five generators/marketers (Duke, Dynegy, Reliant, Mirant,
Williams) averaged only 50% operations in 2000? Do you plan to do so?
Answer. As noted above, the Commission staff is investigating both
historical outage patterns and current outage patterns, including the
derating of thermal units in California as part of its on-going outage
investigation. A small part of the outages were attributable to
discrepancies in the ratings of the units in the ISO's records and the
plant owners' reports. Commission staff has been working with the ISO
and the plant owners and has largely resolved those rating
discrepancies. As for operating practices in the past year, staff is
still collecting data to evaluate those operations.
Responses to Questions From Senator Craig
Question 1. There has been considerable discussion and debate as to
the obligation of the Commission to ensure ``just and reasonable''
rates in California and the rest of the West in light of its finding
that Western markets are dysfunctional and that market power may be
exercised in some hours under some conditions. Please explain how the
courts have construed the Commission's obligation to ensure just and
reasonable rates under the Federal Power Act. In particular, please
explain whether the courts have imposed on the Commission an obligation
to balance consumer and investor interests, and whether the Commission
may consider other factors (such as the need to induce capital
investment).
Answer. The Federal Power Act does not define the phrase ``just and
reasonable.'' The courts have said the Commission has broad discretion
on ratemaking methods, so long as the end result is that rates are
within a zone of reasonableness and are neither confiscatory (to the
detriment of investors) nor excessive (to the detriment of consumers).
FPC v. Hope Natural Gas Co., 320 U.S. 591 (1944). The Commission is not
required to use any particular ratemaking method. Permian Basin Area
Rate Cases, 390 U.S. 747 (1968). The Commission can set rates based on
non-cost factors such as encouraging greater production of energy
supplies or construction of transportation facilities. Id.
A federal appeals court recently rejected challenges to the primary
remedy adopted by the Commission in December 2000 for California's spot
markets, characterizing the Commission's approach as a ``middle ground
between the need for temporary price mitigation and the realization
that competition must exist for the California energy market to survive
in the long run.'' California Power Exchange Corp. v. FERC, No. 01-
70031, 2001 U.S. App. LEXIS 6153 (9th Cir. April 11, 2001). Recently,
the same court rejected another challenge to the Commission's actions.
John L. Burton, et al. v. FERC, No. 01-70812 (9th Cir. May 29, 2001).
Question 2. In its April 26 order, the Commission has linked its
market monitoring and mitigation plan with the imperative for
California to file for a regional transmission organization (RTO).
Please explain how RTO development is, in your opinion, necessary or
helpful in overcoming current market defects and improving market
conditions in California and throughout the West.
Answer. In Order No. 2000, the Commission established specific
characteristics and functions for a regional transmission organization
that the Commission believed would result in independent and efficient
management of the transmission grid, which would in turn foster
competitive electricity markets over a broad region. An RTO meeting the
Commission's Order No. 2000 requirements should facilitate improved
competitive markets within California. In addition, it would establish
a platform for cooperation or integration of California's investor-
owned utilities with other utilities in California and with other RTOs
in the Western interconnection, which should add stability to the
markets. At present, the West is a single market without the regional
institutions to support it.
Question 3. Much of the testimony at the May 3 hearing focused on
the hours during which the Commission's market monitoring and
mitigation plan will be in effect. Please explain which provisions of
the Commission's plan will be in effect at all times, and please
explain their effectiveness in protecting consumers against the
possible exercise of market power.
Answer. The following aspects of the plan are in effect for all
hours: coordination and control of outages; must-offer obligation; and
demand response. Only the price mitigation component is limited to
reserve deficiencies.
The ability of the ISO to coordinate and control outages will help
ensure that there is sufficient generation available to meet demand.
The must-offer obligation ensures that generation is not withheld from
the market in order to raise prices. The requirement for demand
responses will apply downward market pressure on prices.
I note that, although the Commission's mitigation plan went into
effect in California on Tuesday, May 29, 2001, there were no alerts,
and hence no price mitigation occurring on that day. Price mitigation
was triggered during portions of the day on Wednesday, May 30, 2001,
and Thursday, May 31, 2001, when the California ISO called Stage I
emergencies. As a result, prices for hourly imbalance energy, which had
risen to around $299 per MWh before the emergency alert on Wednesday,
fell to $120, and rose no higher than $135 per MWh during the rest of
the day. On Thursday prices rose to $130 per MWh prior to the
emergency, but fell to $108 per MWh when mitigation began, and fell
further to $64 per MWh. Although no emergencies nor price mitigation
occurred during the period from June 1 to June 4, 2001, prices remained
relatively modest, not exceeding $150 per MWh, and generally trending
below $100 per MWh for most hours.
The Commission's market monitoring and price mitigation plan took
effect on May 29, 2001. Table 1, presented earlier within these
responses, shows Western electricity spot prices before and after
mitigation.
Responses to Questions From Senator Thomas
Question 1. Electricity rates in Wyoming have been going up, as
much as 100 percent in the Cheyenne area. What does your Order of last
week do to mitigate this kind of drastic rate increase?
Answer. The Commission's April 26, 2001 order established an
investigation into the rates, terms and conditions of public utility
sales for resale of electric energy in interstate commerce in the WSCC
other than sales through the California ISO markets. This investigation
applies to sales for resale that involve electric energy sold in spot
markets (up to 24 hours in advance), and which take place when
contingency reserves fall below 7 percent.
The Commission is proposing three measures in connection with the
WSCC investigation. The three measures are:
(1) requiring all non-hydroelectric generators and marketers in the
WSCC to offer for sale any available electric energy not scheduled in
real-time pursuant to a bilateral arrangement;
(2) instituting price mitigation when reserves fall below 7
percent; and
(3) prohibiting public utility sellers selling in the WSCC region
from engaging in anti-competitive behavior discussed in the April 26
order.
The remedies proposed for the WSCC region are intended, to the
extent possible, to mirror those being applied to sales in the
California ISO's spot markets. The Commission has received comments on
these proposals and intends to act on these proposals in the near
future.
The Commission's market monitoring and price mitigation plan took
effect on May 29, 2001. Table 1, presented earlier within these
responses, shows Western electricity spot prices before and after
mitigation.
Question 2. You state in your testimony that, ``Electricity markets
in California and the Western United States face a substantial
imbalance of supply and demand.'' But, as I understand it, the order
that you issued last week would provide a measure of price mitigation
only for California. Is that correct? If so, why shouldn't this same
level of mitigation be provided throughout the West?
Answer. I agree with you that a similar type of mitigation may be
warranted for the WSCC outside of California, and the Commission has
proposed to adopt Mitigation mirroring its approach in California.
However, the Commission cannot immediately impose mitigation without
following the requirements of the FPA to change rates. For that reason,
in the April 26, 2001 order, the Commission instituted an investigation
into the rates, terms and conditions of service in the WSCC outside of
California in Docket No. EL01-68-000. The Commission intends to act on
these matters in the near future.
Question 3. According to yesterday's Gas Daily, the price for
natural gas in the Rockies is $4.06. The price at the California border
to Southern California Gas is $14.98 and to Kern River Station is
$14.85. This is much higher than anywhere else in the country,
including prices here in Washington ($5.08-$5.54), which is a long way
from the producing region. What does it cost to transport gas from
Wyoming to the California border? Is that transportation rate regulated
by the Commission? Since high California natural gas prices are cited
by generators in California as a reason for high electricity prices,
what is the Commission doing to make sure that pipeline rates for
transporting gas to California are just and reasonable?
Answer. All transportation of natural gas from Wyoming to
California is subject to Commission regulation. Commission-approved
maximum tariff rates along the several paths available for these
movements range from about $0.60 to $0.70 per MMBtu, plus the cost of
fuel retained by the pipeline for compression. As an alternative to
purchasing natural gas transportation service from the pipeline,
shippers may seek to acquire capacity released by existing firm
transportation customers of the pipeline. The ceiling price for
capacity release transactions was waived for a two-year period
beginning in March 2000, allowing market-determined prices to be set
for these transactions.
The Commission has taken a number of actions to ensure that there
is sufficient transportation capacity to California at reasonable'
rates. On May 18, 2001, the Commission, recognizing that prices remain
higher in California than in any other market in the United States,
proposed new reporting requirements to provide the Commission with the
necessary information on the prices of natural gas delivered to
California. On May 22, 2001, the Commission issued a notice seeking
comment on whether to re-impose ceiling prices for capacity release
transactions on pipelines serving California.
To ensure that there is sufficient pipeline capacity available at
reasonable rates, the Commission has expedited certification of new
construction projects, held a technical conference to examine the
ability of California intrastate pipelines to redeliver the interstate
pipeline capacity delivered to the California border, and issued an
order proposing enhanced reporting requirements on natural gas sales to
California markets.
Since mid-December, 2000, natural gas prices delivered to
California have fallen significantly from the levels seen over the past
winter. Southern California gas prices have fallen from their mid-
December 2000 peak of $59 per MMBtu to $3.54 (June 11, 2001). Northern
California prices have fallen over the same span from $49 per MMBtu to
$2.67.
Question 4. How does the Commission's market monitoring and
mitigation order encourage investment in efficient generation and
transmission? (Testimony at p. 3)
Answer. The Commission's April 26 Order seeks to replicate pricing
in a competitive market. By doing so, the Order will provide price
signals reflecting the current imbalance of supply and demand. These
prices will encourage investors to provide capital for more
construction of power plants. At times, prices in California also
reflect the fact that power available in one part of the state is
prevented by transmission limitations from being used where it is most
needed. The Commission's price mitigation mechanism would reflect this
fact (by setting a proxy price based on the least efficient supply
needed to meet demand), and thus provide an incentive for market
participants to expand transmission and eliminate the bottlenecks.
Responses to Questions From Senator Dorgan
Question 1. I am concerned about this most recent FERC Order for
several reasons. I am concerned about making the mitigation plan
contingent on the filing of an RTO, which I will elaborate upon
shortly.
Answer. Order No. 2000 set forth the essential characteristics and
functions required of regional transmission organizations (RTOs) but
also left significant flexibility to adapt to regional needs. RTO
filings were made by the California ISO and the three California
investor-owned utilities on June 1, 2001. The Commission currently is
reviewing the merits of the filings and I cannot prejudge the
Commission's response to them.
Question 2. I also would like to know why the FERC's mitigation
plan is being limited to the spot market and to times when reserves
fall below 7 percent.
If the plan and investigation are being limited to those times,
then how will the FERC know whether market power is being exercised
during other times?
Answer. The April 26, 2001 order recognizes that FERC is limited in
its ability to solve all of the problems facing California and the
West. Under current conditions, the supply of electric energy available
from existing generation capacity has not been able to meet peak
demands in California. This supply-demand imbalance is the direct cause
of both high prices and the blackouts experienced in California.
However, the Commission's April 26, 2001 order, coupled with previous
orders addressing California and the West, seeks to remove regulatory
obstacles and provide incentives to increase investment in needed
infrastructure, including ensuring that new generation is built, that
the transmission system is upgraded, and that new gas pipelines are
built. FERC has also sought to get California's market situation under
control through, among other things, moving electricity purchases to
serve load from the spot market to long-term contracts.
In addition, the April 26, 2001 order included a number of
conditions which were designed to prevent anti-competitive behavior
during all hours and not just during hours when emergencies are
declared by the ISO. Among the measures is the conditioning of market-
based, rate authority on not withholding available supply and not
engaging in other anti-competitive behaviors; the coordination of
planned outages by the California ISO; FERC's monitoring of unplanned
outages; requiring all generators with Participating Generator
Agreements (PGAs), as well as all non-public utility generators in
California which sell through the ISO markets or currently use the
ISO's interstate grid, to sell all available supply into the ISO's spot
market; requiring ISO buyers to submit demand reduction bids by hour,
amount, and customer; and the monitoring of all bids in all hours by
the ISO and FERC through an ISO weekly report. Removing the volatility
of prices in California through price mitigation should have a
beneficial effect on prices in the West.
The Commission's price mitigation plan took effect only recently,
on May 29. Most of its provisions apply during all hours--not simply
during system emergencies. For example, the Commission will be
receiving bid data for all hours and will monitor that data to
determine the effectiveness of its price mitigation approach. The
Commission's price mitigation plan, which is in effect only during
emergency hours, seeks to replicate the prices that would occur in a
competitive market. By doing so, the plan will ensure that prices are
just and reasonable.
Although the Commission's mitigation plan went into effect in
California on Tuesday, May 29, 2001, there were no alerts, and hence no
price mitigation occurring on that day. Price mitigation was triggered
during portions of the day on Wednesday, May 30, 2001, and Thursday,
May 31, 2001, when the California ISO called Stage I emergencies. As a
result, prices for hourly imbalance energy, which had risen to around
$299 per MWh before the emergency alert on Wednesday, fell to $120, and
rose no higher than $135 per MWh during the rest of the day. On
Thursday prices rose to $130 per MWh prior to the emergency, but fell
to $108 per MWh when mitigation began, and fell further to $64 per MWh.
Although no emergencies nor price mitigation occurred during the period
from June 1 to June 4, 2001, prices remained relatively modest, not
exceeding $150 per MWh, and generally trending below $100 per MWh for
most hours.
The Commission's market monitoring and price mitigation plan took
effect on May 29, 2001. Table 1, presented earlier within these
responses, shows Western electricity spot prices before and after
mitigation.
Question 3. Do the mitigation plan and structure that are being
used in California and that are proposed for the rest of the West set a
precedent for other parts of the country? In other words, in the
future, will the FERC apply this same plan and these same guidelines to
the rest of the country for investigating and mitigating high
electricity prices? Does the proxy price system work in other parts of
the country? Would a price cap work better elsewhere, or would the cap
discourage new market entrants and new construction?
Answer. I do not believe price mitigation, when needed, must be
approached identically across the country. Instead, any price
mitigation should recognize, and be adapted to reflect, any relevant
differences in market conditions. Having said that, however, I do not
foresee circumstances in which a price cap would be preferable to a
proxy price approach.
Question 4. In the past, the FERC has looked at the behavior of
sellers to determine whether the seller, or utility, is doing something
wrong or behaving as a ``bad actor.'' (Market power: is the capacity to
raise prices and sustain price increases over periods of time). It may
well be that market power is not being exercised by individual
utilities with mal (evil) intent, but that the market structure itself
is flawed--as in California, where long-term contracts were not
available for purchases. In cases where the market structure might be
flawed, the FERC's traditional way of looking at the behavior of
individual sellers does not appear to work any more. In California, the
FERC can examine the ISO and the market structure, and can look at
hourly prices.
What should FERC do in the rest of the country--where there isn't a
clearly defined spot market, or market structure--to determine whether
market power is being exercised, or whether instead market flaws are
causing or encouraging prices to be unjust and unreasonable, but the
price increases are based on the market structure, not necessarily on
the malicious intent of individual companies? In other words, companies
are in business to make a profit, so if the market is structured to
make a maximum profit, why wouldn't companies naturally avail
themselves of that opportunity?
How Should the FERC analyze the market itself to determine what
needs to be done to cure the potential for market power to be
exercised?
Answer. As you suggest, bulk power markets in different regions of
the country are far from identical. The Commission cannot, and does
not, assume that ``cookie-cutter'' approaches will work in ensuring
just and reasonable rates. Moreover, the Commission must adapt its
approach over time, as markets evolve.
In determining whether to grant an applicant's request for market-
based rates, the Commission traditionally has focused on whether the
applicant and its affiliates lack or have mitigated market power over
generation and transmission. In recent years, the filing of open access
transmission tariffs has reduced the ability of transmission-owning
utilities to use their transmission facilities in ways that favor their
own generation. The Commission examines the applicant's market share in
the relevant generation market to assess generation market power. In
addition, the Commission has looked to determine whether the applicant
and its affiliates can erect other barriers to entry or engage in
inappropriate reciprocal dealing. In most circumstances, this analysis
has proven fully adequate to ensure that rates for wholesale power
remain just and reasonable.
However, in recent proceedings, the Commission found that in
California and the West, under current market rules and certain
conditions, the rates for wholesale power may not be just and
reasonable, even though the jurisdictional sellers previously met the
Commission's test for authorizing market-based rates. Accordingly, the
Commission has imposed or proposed certain remedies to ensure just and
reasonable rates.
The Commission regularly monitors prices for wholesale power in
other parts of the country. Also, the Commission will investigate any
complaints concerning wholesale prices in other parts of the country.
If these efforts indicate that prices in a region are no longer just
and reasonable, despite the Commission's prior determinations that
sellers with market-based rates lacked market power, the Commission
will take appropriate action, as it has in California and the West.
Question 5. Do you think that the increase in mergers, and the
rapid consolidation of the electric utility market, is causing an
increase in market power? Is FERC examining these changes sufficiently?
Answer. I do not think mergers and consolidation are causing an
increase in market power. The Commission must authorize each merger
involving a public utility, and a dominant issue in these cases is
whether the merger will harm competition. The Commission examines
carefully whether a merger will enhance the market power of the merging
companies. In cases where relevant information indicates a possible
concern about market power, the applicants usually propose mitigation
alleviating the concern. If they do not, the Commission can impose (and
has imposed) such mitigation as a condition of authorizing the merger.
Question 6. Related: Is the FERC gathering sufficient information,
both in the West, and in other parts of the country, to know whether
market power is being exercised? What other tools would help FERC
determine whether market power is being exercised?
Answer. It is always difficult to know how much information is
needed to say definitively that market power is or is not being
exercised. However, the Commission's staff is gathering a significant
amount of market information and developing more refined analytic
tools. Staff has recently begun operations of a Market Observation room
which gives our analysts access to some of the same on-line information
and databases that are used by sophisticated gas and power marketers
and traders. Moreover, the Commission has aggressively sought
confidential market information from sellers and generators when we are
concerned about how well markets are working.
OMB recently authorized the Commission to receive incident reports
from generators within 24 hours of an outage. Commission staff have
also assisted in resolving disputes between generators and the
California ISO concerning the generating capacity (rating) of certain
generation units, and are working with the California ISO to improve
outage reporting accuracy.
Question 7. The new FERC Order requires California utilities and
the ISO to file a Regional Transmission Organization (RTO) proposal by
June 1 for the price cap to remain in effect. It seems fairly likely
that California would file a one-state RTO. However, a one-state RTO
does not seem consistent with FERC's Order 2000, nor would a one-State
RTO seem to attempt to correct the problems that California has been
experiencing with skyrocketing electricity prices.
If the FERC thinks California is likely to file a one-state RTO,
but does not think a one-State RTO is a good idea, why did the FERC
condition the price cap and mitigation plan on the RTO filing? And why
would FERC withdraw, or threaten to withdraw, the mitigation plan if
California does not meet FERC's RTO June 1 filing requirements?
Answer. On June 1, 2001, the California ISO and the California
utilities filed a one-State RTO plan. However, the Commission's April
26, 2001 Order on RTO West made it clear that a West-wide RTO was a
long-term goal--not a requirement for filing. I cannot prejudge the
merits of the June 1, RTO filings.
However, it is important for California to work with other states
within the Western region to stabilize the energy markets in the west.
I expect RTO West, as well as participants in other RTO efforts under
consideration in the West, to work cooperatively with the California
ISO to develop comprehensive solutions to the problems confronting
western markets. I view the filing of an RTO proposal by the California
utilities and ISO as part of that collaborative process.
In addition, I would not describe the market monitoring and price
mitigation plan outlined in FERC's April 26, 2001 Order as a price cap.
Determining how to set a price cap would be difficult. On some days,
the price cap could exceed the competitive marginal cost price that
would be bid, while on other days, the price cap could be too low. In
contrast, the Commission's mitigation plan is based on the prices
generators would be expected to bid on a daily basis based on current
costs (or ``proxy price'') of the highest-priced gas-fired generator
dispatched.
Question 8. Can marketers and out-of-state sellers dodge the proxy
price (i.e., conduct ``Megawatt laundering'')? Could marketers sell
electricity to one another to raise the price, and in this way be able
to demonstrate and justify a higher price, then sell the power back
into the market at that higher price?
Answer. The April 26, 2001 order, at p. 12, acknowledged concerns
regarding ``megawatt laundering.'' In response, the order recognized
that the California market is integrated with those of other states
and, for that reason, FERC is instituting a West-wide, Federal Power
Act Section 206 investigation into public utility sales for resale. The
order solicited public comment on the proposed West-wide investigation.
This issue is pending before the Commission on rehearing of its April
26 Order. Thus, I cannot comment on the merits of this issue. However,
I recognize that the issue is an important one and warrants careful
consideration by the Commission on rehearing. The Commission's price
mitigation plan just became effective on May 29, 2001, and experience
to date has been very good. But, if this concern about ``laundering''
is realized, I would consider modifying the Commission's approach to
ensure the effectiveness of its price mitigation mechanism.
Question 9. You could also ask about the West-``wide''
clearinghouse set up to let customers decide whether to curtail power
use and bid their unused power back into the spot market. Who owns the
power? Does this type of arrangement preempt state programs and/or
infringe on states' rights? Would such an arrangement interfere with
WAPA's, or BPA's, power obligations? Does FERC have sufficient
authority to make such determinations with respect to retail management
(decisions)?
Answer. The Commission did not impose a ``one-size-fits-all''
approach on how utilities should implement demand-side bidding. Thus,
each utility, including WAPA and BPA, may implement an approach that
fits its circumstances, including any contracts it may have with retail
customers and any programs it may have for implementing retail load
reduction. Generally, I would expect the utility's demand-side bids to
reflect the expressed willingness of its customers to reduce load at
certain prices. Thus, if 20 percent of a utility's customers indicate
their desire to curtail usage when prices reach a specific level, and
its other customers indicate a desire to continue consuming power, the
utility could submit a demand-side bid corresponding with this
consumption pattern.
The Commission wants to do what it can to promote demand reductions
as a means of alleviating the supply/demand imbalances in Western
markets, and does not want to interfere with existing state programs
aimed at achieving demand reductions. To the extent a wholesale
purchaser voluntarily reduces an entitlement under a contract and seeks
to resell the reduction, this involves only Commission, not state,
jurisdictional matters. To the extent a retail purchaser reduces an
entitlement and seeks to sell the reduction for resale in interstate
wholesale markets, this also invokes Commission jurisdiction. As the
Commission recently stated in its Order Removing Obstacles in Docket
No. EL01-47-000, the Commission is promoting wholesale programs that
complement existing state demand-side management programs, and our goal
is not to supersede state authority over retail customers, but to work
cooperatively with the states to achieve a common good. Finally, I
believe that the combination of existing state and Federal authority is
currently sufficient to address demand response.