SENATE COMMITTEE ON ENERGY, UTILITIES AND COMMUNICATIONS AND ASSEMBLY COMMITTEE ON UTILITIES AND COMMERCE

JOINT INFORMATIONAL HEARING

Thursday, August 10, 2000
State Capitol, Room 4203
Sacramento, California

1. Opening Comments

• HONORABLE DEBRA BOWEN
  Chairwoman, Senate Committee on Energy, Utilities and Communications
   
• HONORABLE RODERICK D. WRIGHT
  Chair, Assembly Committee on Utilities and Commerce

2. Setting the Stage: Supply Adequacy – Trends and Outlook

• WILLIAM J. KEESE
  Chairman, California Energy Commission

3. Assessment And Potential Solutions

• LORETTA LYNCH
  President, California Public Utilities Commission
   
• MICHAEL KAHN
  Chairman, Electricity Oversight Board
   

4. The Federal Perspective

• DOUGLAS W. SMITH
  General Counsel, Federal Energy Regulatory Commission
   

5. Cal-ISO and Cal-PX

• TERRY M.WINTER
  California Independent System Operator (Cal-ISO)
   
• GEORGE SLADOJE
  California Power Exchange (Cal-PX)
   
• SEVERIN BORENSTEIN
  University of California, Energy Institute

6. Stakeholders’ Perspectives

• TOM SAYLES, Sempra Energy
• GARY SCHOONYAN, Southern California Edison
• DANIEL RICHARD, JR., Pacific Gas and Electric, Co.
• DAVE FREEMAN, Los Angeles Department of Water and Power
• JAN SCHORI, Sacramento Municipal Utility District
• V. JOHN WHITE, Center for Energy Efficiency and Renewable Technologies
• RALPH CAVANAGH, Natural Resources Defense Council
• MICHAEL FLORIO, The Utility Reform Network (TURN)
• SCOTT CAUCHOIS, Office of Ratepayer Advocates (ORA)
• MICHAEL SHAMES, UCAN
• MAUREEN O'CONNOR
• PETER LIVINGSTON, Hewlett Packard
• WILLIAM F. HALL, Duke Energy North America
• JAN SMUTNY-JONES, Independent Energy Producers (IEP)
• JACOB M. RUDISILL, Calpine

7. Public Comment

Background Information

Chronology of Significant Events
 

November 9, 1978 Congress passed the Public Utility Regulatory Policies Act (PURPA), which encouraged conservation and promoted the development of renewable sources of energy. PURPA helped stimulate the development of a non-utility generation industry by requiring utilities to purchase power from independent power generators known as qualifying facilities (QFs).

September 17, 1992 California Public Utilities Commission (CPUC) directed its Division of Strategic Planning to prepare a report that described current conditions and future trends facing the electric industry, and examined alternative regulatory approaches in light of conditions and trends.

October 24, 1992 Congress enacts the Energy Policy Act of 1992 (EPACT), which was designed to encourage competition in energy markets. EPACT created a new type of generation supplier for wholesale markets, the "exempt wholesale generator," which is exempt from being regulated as utilities under the Public Utility Holding Company Act.

February 3, 1993 CPUC's "Yellow Book" (California's Electric Services Industry: Perspectives on the Past, Strategies for the Future) concluded that California's regulatory approach needed reform, and identified several possible options.

April 20, 1994 CPUC issued an Order Instituting Rulemaking (OIR) and Order Instituting Investigation (OII), commonly referred to as the "Blue Book" proposal. The Blue Book endorsed specific market-based principals, including direct access, and the recovery of stranded generation assets through a competition transition charge (CTC).

May 24, 1995 CPUC issued a Preferred Policy Decision and an Alternative Policy Decision. The preferred policy decision supported a wholesale power pool, known as POOLCO. The alternative policy decision supported customer choice through direct access.

September 18, 1995 Southern California Edison, California Large Energy Consumers Association, California Manufacturers Association, and the Independent Energy Producers filed a Memorandum of Understanding reflecting joint policy recommendations. The MOU contained recommendations for a market structure, which combined elements of both CPUC preferred policy decisions, including a pool-like Power Exchange (PX) and an early phase-in of direct access.

December 20, 1995 CPUC issued its Preferred Policy Decision (D.95-012-063). The decision included many of the provisions that would later be incorporated into California's electric restructuring legislation, including creation of the PX and the Independent System Operator (ISO), and CTC recovery for "reasonable costs" by 2005. The decision was modified by D.96-01-099 on January 10, 1996.

August 31, 1996 California Legislature enacted Assembly Bill 1890 (Brulte, Chapter 854, Stats. 1996). Key elements include: a four-year transition; a 10 percent rate reduction for residential and small commercial customers financed through the sale of public bonds and repaid by ratepayers; recovery of stranded generation assets through the CTC; creation of the ISO, PX, and Electricity Oversight Board (EOB); market valuation of utility generation assets, which the investor-owned utilities can retain if the CPUC determines it is in the public interest; IOU nuclear cost recovery per previous CPUC decisions, consumer protection provisions and continued public purpose programs via a non-bypassable public benefits charge to fund energy efficiency and conservation, renewable energy, public-interest research, development, and demonstration (RD&D), and low-income energy programs.

September 23, 1996 Governor Pete Wilson signed AB 1890 into law, which takes effect immediately.

August 11, 1997 AB 578 (Martinez, Chapter 261, Stats. 1997), which specifies the framework and authorities for the EOB, was signed into law.

August 15, 1997 SB 477 (Peace, Chapter 275, Stats. 1997) which provides for a comprehensive registration and enforcement programs for electric service providers, and included technical "clean-up" modifications of the AB 1890 rate reduction provisions, was signed into law.

October 12, 1997 SB 90 (Sher, Chapter 905, Stats. 1997) is signed into law. SB 90 codified a 1997 California Energy Commission report to the Legislature on AB 1890 renewable energy funding, and required those revenues collected by IOUs to be deposited in the Renewable Resources Trust Fund.

March 31, 1998 PX opens trading and ISO assumes management of the power grid.

November 3, 1998 Proposition 9, a ballot initiative to reverse many of the policies of AB 1890, is defeated by California voters.

January 27, 1999 FERC confirmed the ISO's authority to reject bids that exceed price caps in its real-time and ancillary service markets, pending the submission, approval and implementation of reforms in the ancillary services market. Additionally, FERC further determined the ISO should have the flexibility necessary to adapt its price caps to conditions in those markets, as they change over time.

May 26, 1999 FERC conditionally approved all elements of the ISO's ancillary services market redesign proposal, and confirms the ISO's authority to impose caps on the prices it would pay for ancillary services and imbalance energy. The authority expired on November 15, 1999.

July 1, 1999 The rate freeze ended in the San Diego Gas and Electric (SDG&E) service territory.

November 12, 1999 ISO proposed to extend the purchase price cap until November 15, 2000, set the cap at $750 MWh effective November 30, 1999, with a proposal to lower the cap to $500 effective June 1, 2000 if the ISO governing board made specified determinations.

March 14, 2000 ISO governing board authorized continuation of the $750 MWh price cap.

June 28, 2000 ISO reduced the price cap in the ISO real-time, ancillary services, and intra-zonal congestion markets from $750 MWh to $500 MWh effective July 1, 2000 through October 15, 2000.

August 1, 2000 ISO Board of Governors imposed a $250 price cap in the ISO market.

Recent Actions by the Davis Administration

On August 2, Governor Davis issued three Executive Orders in response to the recent increases in electricity prices and concerns about system reliability. The Orders are briefly summarized below.

1. Executive Order D-14-00 calls on relevant state agencies to streamline the review process for siting new power plants without compromising environmental or health and safety protections. Specifically, agencies are ordered to complete their reviews within 100 days of receiving a completed application.
   
   Order D-14-00 also directs the California Energy Commission to propose policies to prioritize and expedite project applications with the least environmental health impact.
   
   Finally, Order D-14-00 establishes a Task Force on Energy Reliability, made up of relevant agency heads, to coordinate actions of energy-related agencies.
    
2. Executive Order D-15-00 directs state agencies to institute energy conservation measures to reduce consumption during Stage II and Stage III emergencies.
    
3. Executive Order D-16-00 directs the Secretary for State and Consumer Services to incorporate sustainable building practices into plans for new state buildings to improve energy efficiency.

In addition to issuing these Executive Orders, the Governor asked the Attorney General to investigate allegations of price manipulation in the wholesale electricity market.

 

Finally, the Governor released a report prepared by Public Utilities Commission President Loretta Lynch and Electricity Oversight Board Chairman Michael Kahn. The report’s major conclusions are:

1. Retail price spikes in San Diego and blackouts in the Bay Area warrant major concern over supply and reliability.
2. Deregulation transferred the regulation of rates to the Federal Energy Regulatory Commission, limiting the state’s ability to protect California businesses and consumers.

The report recommends addressing these problems through action in each of four general areas:

1. Enhance the state’s authority to protect consumers.
2. Focus on improvements in energy efficiency, renewable energy supplies and transmission upgrades.
3. Curb wholesale volatility.
4. Manage retail prices.

The report further outlines a series of more specific, short and long-term steps to implement its recommendations. These are summarized below.

Short-term actions with immediate effects:

1. Coordinate efforts to limit the impact of rolling blackouts. Require CPUC approval to institute outages in Stage III.
2. Initiate load reduction programs in state and commercial buildings.
3. Survey and prepare emergency generation for deployment.

Short-term actions with long-term effects:

1. Continue and expand CPUC and Attorney General investigations.
2. Unify state agency actions by establishing an "Energy Council" made up of relevant agency heads.
3. Request that FERC extend price cap authority and find that the wholesale market is not competitive.
4. Invest in energy efficiency, load shifting and renewable energy programs.
5. Eliminate the ISO and PX board conflicts, increase public access to market data and increase EOB authority over the ISO and PX.

Actions deserving further consideration:

1. Investigate the market impacts of retail price caps, then consider imposing caps in San Diego.
2. Evaluate price management tools for utilities, such as bilateral contracts and hedging.
3. Revise and accelerate Title 24 building standards to improve energy efficiency.
4. Streamline siting procedures consistent with environmental requirements, prioritize clean (BACT+) plant applications.
5. Apply "use it or lose it" permitting to power plant licensing and emissions credits.
6. Invest in targeted transmission upgrades in San Diego and San Francisco.
7. Address the feasibility of extending the transition period and retail rate freeze throughout the state.
8. Reform PX pricing protocols and structures (report suggests that "pay as bid" approach would lower prices relative to the current uniform price auction).
9. Evaluate the utilities’ role as providers of last resort.
10. Determine distributed generation interconnection standards.

On August 9, Governor Davis announced additional steps designed to minimize the impact of price spikes in San Diego.

First, the Governor called on the CPUC to establish a rate stabilization program for SDG&E customers that he said would stabilize the average residential bill at approximately $64 per month over the next one to two years.

Second, the Governor called on President Clinton and FERC Chairman Hoecker to expedite FERC’s investigation into wholesale electric rates and requested that FERC make a finding that California’s wholesale rates are "just and reasonable" or – if unable to make such a finding – to order generators to rebate excess charges to customers.

Finally, the Governor announced a voluntary agreement with grocery retailers to reduce their energy consumption during Stage I emergencies by 10 percent.

Recent Actions of the California Public Utilities Commission

At its August 3, 2000 hearing, the CPUC approved several actions by California's investor-owned utilities designed to address the recent rise in electricity rates in San Diego and the possibility of seasonal shortages over the next year. Those actions include:

1. Initiated an investigation into the functioning of the wholesale electric market and the impact it has on retail rates, including the summer price spikes in San Diego.
2. Denied a petition by the Utility Consumers' Action Network (UCAN) to freeze summer rates for residential, small commercial and street lighting customers.
3. Authorized San Diego Gas and Electric (SDG&E) to provide a refund to ratepayers of approximately $100 million of ratepayers funds over-collected during the transition period, and to extend its level payment plan to street lighting customers.
4. Granted SDG&E the authority to participate in the electricity forward market.
5. Allowed Southern California Edison (SCE) and SDG&E to offer financial incentives to non-utility electricity production facilities to make additional electricity available during peak demand hours.
6. Authorized Pacific Gas & Electric (PG&E) and SCE to enter into bilateral contracts to purchase energy and other services and products and to set up accounts to track related costs. 

Potential Solutions

A number of other short and long-term remedies have been suggested. Summarized below are informal proposals presented to the Committees to date.

Temporary Rate Freeze

Consumer groups have asked the CPUC to temporarily freeze the rates for San Diego customers. UCAN proposes rates for residential, small commercial and lighting customers not exceed 115% of 1999 rates for the months of August, September and October. This proposal would lock customers into a 45% increase for the rest of the summer, but provide relief from the 240% increase they currently face. The CPUC declined to approve this proposal at its August 3, 2000 meeting.

Set Retail Electric Rates to Encourage Conservation

Current rate schedules establish a quantity of electric service that can be purchased at low cost to meet essential customer needs. The CPUC could establish a third, more costly tier of electric rates for high usage customers, with the goal of encouraging conservation.

Establish Expedited Power Plant Permitting Procedures

Regulators have been asked to consider providing an expedited, streamlined review process for permitting at both new and existing power plant sites. Proponents believe that such a review could be conducted without sacrificing environmental standards. The Energy Commission can utilize its Small Power Plant Exemption process to speed approval of power plants less than 100 MW.

Provide Priority Siting for Clean and/or Green Power Plants

Environmentally preferable power plants could benefit from fast-track siting authority at the CEC as a means of encouraging cleaner power production. Alternatively, power plant developers could be encouraged to provide a specified level of conservation or load shifting as a means of speeding the siting process.

Authorize Peaking Facilities

Generators indicate generation capacity can be added to existing plants and/or abandoned plants within 6–9 months through an expedited permitting process, providing additional generation for next summer.

State Partnership in Generation

Utilize revenue bonds or general funds to finance the construction of plants that would be willing to have their costs of energy regulated in exchange for financing assistance.

Facilitate Deployment of Distributed Generation

Establish a clear set of air quality standards and interconnection protocols to integrate distributed generation sources into the supply portfolio.

 

Operate Back-up Generation

Many industrial plants and other commercial facilities have back-up generators for reliability purposes. These generators could be made operational during emergencies, though air quality effects may be significant.

Increase or Maintain Production at Existing Central Station Power Plants

Several specific generation units could be brought back on line or have their air quality retrofits delayed to make them available to produce electricity in 2000 and 2001.

Accelerate Installation of Generation on Sewer Plants and Landfills

Some believe this could generate 25 MW by 2001.

Provide Specific Transmission Fixes in San Diego and the San Francisco Bay Area

Additional transmission capacity will permit more electricity imports into San Diego and will enhance reliability for the San Francisco Bay Area.

Allow Expanded Operation of Qualifying Facilities

Utilities could amend their contracts with Qualifying Facilities to increase energy production during high demand periods.

Partner with Municipal Water Utilities

Municipal water utilities may be able to use their back-up generators to provide power during peak periods. Regulators may consider waiving air emission standards during those periods in exchange for the provision of power during peak periods.

Price Caps in Conjunction with Capacity Payments

Generators may accept price caps if the caps are coupled with a capacity payment that would allow them to recover their investment. The energy could then be sold under some sort of cost basis where they could recover the cost calculated for the energy at the time it is called upon.

Enhanced Energy Conservation Efforts

The CPUC has received numerous proposals for energy conservation. A wide range of energy conservation programs can be considered that focus on a broad spectrum of customers. Some specific suggestions include increased funding for the existing Energy Star New Home program, incentives for residential duct repair and air conditioner maintenance, and utility rebate programs for purchase of energy efficient air conditioners.

Increased Focus on Demand Side Management

There has been few if any new products aimed at shifting electricity usage to non-peak times. It is important that the load participation programs continue to be further developed.

Enhanced Public Awareness

A general public awareness campaign may encourage enough voluntary public conservation to help avoid energy alerts.

Use of Real Time Meters

Real time meters provide a mechanism to allow customers to be more price sensitive in their energy usage patterns. SB 1388 (Peace) proposes to institute a pilot program in each IOU service territory as they end the rate freeze.

Improve Energy Efficiency in New Buildings

Enforce existing building standards and upgrade existing standards.

Use Shade Trees and Light Colored Roads and Roofs to Cool Urban Centers

These measures can reduce peak energy demand.

Create New Incentives to Shut Down Nonessential Lighting and Slightly Raise Thermostats at Peak Periods

The President and the Governor have both ordered such practices in federal and state buildings. Local governments, as well as private sector buildings, could initiate similar programs.

Encourage the Federal Government to Establish New Appliance Standards

The Energy Department is considering establishing new appliance standards.

Review Current ISO Fee Structure

Urge the ISO to revisit its current fee structure as it relates to co-generators. Some large co-generators that have the ability to provide generation on the ISO grid have chosen to disconnect from the grid because the fee structure associated with their purchases on the grid exceed the market value of the power.

Change Governance of ISO and PX

Replace the existing governing boards with publicly-appointed boards. Establish the duty of the ISO and PX to serve California's consumers and economy.

Revisit ISO Purchase Policies

The ISO focus has generally been on reliability at any cost. The recent focus on price caps in the ancillary services market indicates that regulators should urge the ISO to revisit its policies to ensure reliability at the minimal cost.

Revise PX Bidding Protocols

The PX currently operates its spot market through a uniform price auction resulting in all power prices being set at a single price – i.e. the highest clearing price. Consider developing a continuous bid/ask market as an alternative to the price auction.

 

Bilateral Contracts within PX

IOU's have requested the ability to enter into long term contracts. They’ve been able to hedge prices using monthly products in the PX Block Forward Market, but have historically found that medium and long term agreements result in better terms and conditions. Delivery of power would still occur through a PX bilateral delivery option. IOUs indicate they would be able to avoid severe price spikes during high energy demand periods. CPUC authorized at August 3, 200 meeting.

Bar Further Divestiture of Utility Generation Assets

Utilities currently own nuclear and hydro generation assets. Barring divestiture of these assets could enhance the state's ability to control price spikes.

Establish an Excess Profits Tax on Non-Utility Generators

Funds from an excess profits tax could be used to mitigate price spikes for customers.

Sanction Market Abuse

Pursue legal investigations into allegations of market abuse through California Attorney General, CPUC and FERC. Impose sanctions for unjust and unreasonable practices.

Aggregation

Encourage community aggregation to create additional options and buying power for small customers.

Resolve Issues Regarding Air Emissions Credits

Review current policies and through collaborative efforts resolve issues associated with emission credits and plant operations. In the midst of the electricity shortage, some power plants were forced to shut down to avoid exceeding their air emission credits.