Senate Energy, Utilities and Communications Committee
Debra Bowen, Chairwoman

Informational Hearing
Federal Energy Regulatory Commission’s Proposed Order

State Capitol, Room 4203
November 13, 2000
10:00 a.m. to 1:00 p.m.

I. Opening Comments

• Senator Debra Bowen, Chairwoman

II. Perspectives on the Federal Energy Regulatory Commission’s Proposed Order

• Michael Kahn, Chairman, Electricity Oversight Board
• Mike Florio, The Utility Reform Network
• Dorothy Rothrock, California Manufacturers & Technology Association
• Jan Smutny-Jones, Independent Energy Producers Association
• Kent Palmerton, Williams Energy
• George Sladoje, California Power Exchange
• Stephen Greenleaf, California Independent System Operator
• Jerry Jordan, California Municipal Utilities Association
• Dick Ferriera, Sacramento Municipal Utility District
• Robert Foster, Southern California Edison Company
• Dede Hapner, Pacific Gas & Electric Company
• William Reed, Sempra Energy

Federal Energy Regulatory Commission’s Proposed Order
Issue Overview
November 13, 2000

On November 1, the Federal Energy Regulatory Commission (FERC) issued a proposed order designed to improve the condition of California's wholesale electric market and released a report of its investigation of the California market.

On November 9, FERC held a conference in Washington, D.C. to take testimony on its proposed order from interested parties. A second conference will be held in San Diego on November 14.

FERC will accept public comment on its proposed order until November 22, and is expected to issue a final order before the end of the year.

Briefly, the proposed order consists of the following provisions:

Findings

The market structure for wholesale electricity in California is "seriously flawed" and rates have been, and continue to have the potential to be, "unjust and unreasonable" under certain conditions. FERC was unable to reach definitive conclusions about the actions of individual sellers with respect to the exercise of market power.

Actions FERC Proposes To Take

1. Eliminate the requirement that investor-owned utilities buy and sell their electricity through the Power Exchange (PX).
2. Require that 95% of transactions be scheduled in day-ahead markets and establish financial penalties for scheduling deviations in excess of five percent of hourly load requirements.
3. Eliminate the uniform price auction for bids above $150 per megawatt hour. Sellers bidding above $150 would be paid their bid price and wouldn’t set the market-clearing price. Bids under $150 would continue to be subject to the uniform price auction, with the highest successful bid setting the clearing price for all transactions. Sellers receiving more than $150 would be monitored by FERC and required to submit cost information.
4. Make wholesale electric rates charged between October 2, 2000 and December 31, 2002 subject to refund. FERC may order refunds if it finds wholesale markets are unable to produce just and reasonable prices or that market power is exercised to produce an unjust and unreasonable rate. The potential refund liability would be limited to amounts in excess of sellers’ marginal costs or legitimate and verifiable opportunity costs.
5. Replace the Independent System Operator (ISO) and PX stakeholder boards with independent, non-stakeholder boards. The existing ISO and PX boards would select their successor boards.
6. Require the ISO to submit a congestion management reform proposal to FERC within 60 days after its new board is seated.
7. Require the ISO to file tariffs to standardize the process for interconnecting new generators to the electricity grid.
8. Eliminate all price mitigation measures as of December 31, 2002.

Actions FERC Is Asking California To Take

1. Eliminate impediments to the investor owned utilities acquiring power on a long-term basis or at future dates.
2. Increase generation and transmission capacity.
3. Implement additional demand response mechanisms.

Actions FERC Suggests That Other Parties Take

1. The ISO and load-serving entities should consider what market rules are needed to ensure sufficient supply is available to meet loads and reserve requirements.
2. The ISO and PX should consider whether alternatives to the single price auction are appropriate.
3. The ISO should consider demand bidding programs so that users can bid offers to reduce demand to compete with offers to supply.
4. Electricity sellers should offer contracts for power to be delivered at future dates (i.e. forward contracts).