Senate Energy, Utilities and Communications Committee
Senator Debra Bowen, Chairwoman
INFORMATIONAL HEARING
Future Ownership and Operation of Utilities’ Hydroelectric Assets
Issue Two: Market Power
Thursday, April 29, 1999
10:00 a.m. or upon adjournment of session – 1:00 p.m.
State Capitol, Room 4203
AGENDA
- James Bushnell – University of California Energy Institute
- Kellen Fluckiger – California Independent System Operator (ISO)
- John Flory – California Power Exchange (PX)
- Joseph Malkin – Pacific Gas and Electric Company
- Ann Cohn – Southern California Edison
- Robert Kinosian – Office of Ratepayer Advocates
- Michael Florio – The Utility Reform Network
- Lon House – Association of California Water Agencies
Market Power Background
Addressing market power issues is essential to successfully developing a competitive market for electricity generation and related services in California. Market power can be exercised when market participants, through consolidation or collusion, control enough of a given market that they are able to strategically influence prices for their own benefit. The early experience with a competitive electricity market indicates that at times of peak demand, a few large participants may have sufficient leverage to manipulate the market and control prices.
For a number of reasons, the hydroelectric systems currently owned by PG&E and Edison are uniquely suited to influence market power, for better or worse. The reasons include the significant generation capacity of the systems (combined, they serve nearly 15% of the state’s electricity demand and as much as 50% of certain ancillary services, or reserves) and their unique potential to serve peak demand and ancillary services because of their short ramping, or start-up time.
If these hydroelectric systems remain consolidated as their products (energy, ancillary services and, potentially, water) are exposed to the market, vigorous competition may be threatened, particularly if the systems are controlled by non-utility entities that have a responsibility to maximize shareholder profits and/or the controlling entities are affiliated with utilities that retain significant generating capacity (e.g., nuclear plants).
On the other hand, the same qualities that make the utilities’ hydroelectric systems susceptible to abuse of market power could allow them to be used to improve the electricity market from a ratepayer perspective. In a fully competitive situation, hydroelectric facilities could diminish the overall leverage of individual market participants.
In addition to energy, concentration of market power is also a potential problem in the case of water commodities. Much of the flow of water through the Sacramento and San Joaquin River systems is influenced by operation of the utilities’ hydroelectric facilities. Whoever controls a hydroelectric facility is able to schedule the release of water for downstream uses, within the parameters of the facility’s FERC license. An appropriate schedule reflects a complex balance between the competing demands of water consumption, environmental protection and electricity generation.
The natural cure for market power abuse is robust competition. Lacking robust competition, market power abuse can potentially be deterred or mitigated through regulatory disincentives, although sophisticated participants who are clever in their exercise of market power may be able to avoid clear evidence of abuse.
Witnesses should prepare to address the following general questions:
- What is "market power" in the context of electricity generation, ancillary services and water delivery?
- How much market power is too much market power?
- If abuse of hydroelectric market power is a threat, what structural or regulatory remedies are available?
- What, if anything, should the Legislature do to address market power?
