BILL ANALYSIS 1
1
SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
SJR 2XX - Morrow Hearing Date:
June 26, 2001 S
As Amended: May 30, 2001 Non-FISCAL J
R
X
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DESCRIPTION
This resolution notes that several studies of California's electric
markets have concluded those markets aren't workably competitive,
that high wholesale prices cannot be attributed to underlying cost
increases or changes in the balance between supply and demand, that
there is evidence to support a presumption that high wholesale
prices were the product of deliberate actions by generators and
marketers to withhold supply and increase market prices, and that
analysis of capacity withholding has been constrained by a limited
availability of data.
This resolution further notes that the Federal Energy Regulatory
Commission (FERC) has determined that wholesale prices have not
been just and reasonable, but has not taken meaningful corrective
regulatory action.
This resolution finds that further study is needed to support the
efforts of policymakers to design appropriate remedies and to
determine whether FERC properly discharged its duties, and that
full study requires access to confidential data held only by FERC.
This resolution memorializes FERC to do all of the following:
Using confidential data and working with the U.S. Department of
Justice (DOJ) and the Federal Trade Commission (FTC), provide
cost estimates to obtain more precise measures of appropriate
competitive price levels;
Using confidential data, obtain better measures of potential
capacity withholding by generators, and determine the role of
marketers in the production and bidding behavior of generators;
Examine the behavior of generators outside of California to
determine why electric imports declined;
Conduct formal hearings on illegal pricing and capacity
withholding;
Extend the 60-day refund deadline pending the findings of these
hearings;
Impose temporary (until March 1, 2003), just and reasonable
load-differentiated demand rates or cost-of-service based rates
applicable to electricity from generators in service prior to
June 1, 2001.
This resolution memorializes Congress to do all of the following:
Hold oversight hearings to ensure FERC completes the work
described above;
Determine whether FERC has met its mandate under the Federal
Power Act (FPA) to ensure a competitive wholesale electric
market;
Ensure that FERC has the necessary accountability and resources,
including those of the DOJ and FTC, to accomplish all of the
above;
Require FERC to enforce the FPA to ensure rates are just and
reasonable.
BACKGROUND
Under the FPA, FERC has an obligation to ensure that wholesale
electric rates are "just and reasonable." As wholesale markets
have been deregulated, FERC has decided that market mechanisms,
rather than traditional cost-of-service regulation, can produce
just and reasonable rates that satisfy FPA requirements. Since the
summer of 2000, California representatives have consistently argued
that wholesale electric rates far exceed just and reasonable
levels. The following is a chronology of FERC actions to address
wholesale electricity prices in California:
July 26, 2000: FERC issues an order directing a staff fact-finding
investigation into wholesale electric markets.
August 23, 2000: FERC institutes proceedings to investigate
reasonableness of wholesale rates in California.
November 1, 2000: FERC issues a proposed order finding that
sellers had the potential to exercise market power, and that rates
sometimes exceeded just and reasonable levels.
December 15, 2000: FERC issues an order implementing a $150 break
point. Sales above the break point require reporting of costs to
FERC and are subject to refund.
March 9, 2001: FERC orders specified sellers to provide refunds
for sales during January 2001 over $273/MWh during a Stage 3
emergency, or to alternately provide further justification for such
charges. Total refund liability is $69 million.
March 14, 2001: FERC orders Williams Energy Market & Trading
Company and AES Southland to show cause why they should not be
found to have engaged in violation and directed to make refunds of
approximately $11 million. FERC later enters a confidential
settlement with Williams and AES in exchange for $8 million.
March 16, 2001: FERC orders specified sellers to provide refunds
for sales during February 2001 over $430/MWh during a Stage 3
emergency, or to alternately provide further justification for such
charges. Total refund liability is $55 million.
April 16, 2001: FERC orders specified sellers to provide refunds
for sales during March 2001 over $300/MWh during a Stage 3
emergency, or to alternately provide further justification for such
charges. Total refund liability is $587,000.
April 26, 2001: FERC issues an order replacing the price
mitigation plan adopted in its December 15, 2000 order, effective
May 29, 2001. The order sets a market clearing price for sales to
the ISO during Stage 1, 2 and 3 emergencies. Price is set
according to the theoretical cost of running a "marginal unit"
(i.e., an inefficient peaking unit that buys spot gas and NOx
credits). Generators with lower costs get the market clearing
price. Generators with higher costs may bid higher.
May 14, 2001: FERC publishes a proxy price for April 2001 of
$318/MWh, applicable to sales during a Stage 3 emergency. Because
no Stage 3 was called in April, no refunds are ordered.
June 15, 2001: FERC orders specified sellers to provide refunds
for sales during May 2001 over $267/MWh during a Stage 3 emergency,
or to alternately provide further justification for such charges.
Total refund liability is $414,183.
June 19, 2001: FERC issues an order replacing the price mitigation
plan adopted in its April 26 order, essentially expanding the scope
of the plan to apply to spot market sales throughout the West in
all hours. Price for all sellers is still set according to the
theoretical cost of a marginal unit, rather than according to each
unit's actual operating cost (which is the pricing methodology that
this resolution seeks). The order entitles sellers to an
additional 10 percent credit risk premium. The price mitigation
plan adopted remains in effect through September 2002.
COMMENTS
1)Supply-Side Deficiency or Market Power? The first "whereas"
clause in the bill (beginning on Page 2, Line 1) describes the
problem of high electricity rates as primarily a supply-side
deficiency. This is not the prevailing opinion among many
California representatives and market experts. Some would
describe the problem as the result of tight supplies which
generators and marketers have exploited. Others might look to
the fact that between 1999 and 2000 the demand for electricity in
California increased by approximately 4% but the prices charged
for electricity went up 266% as evidence that the current high
prices are caused primarily by the exercise of market power.
2)Too Little, Too Late? Many of the actions called for in this
resolution have already been undertaken by FERC or the Congress.
For example, while just and reasonable rates remain ill-defined,
FERC has established what it considers an appropriate competitive
pricing level using the "proxy price" methodology in its recent
orders. FERC has consistently declined to adopt the
unit-specific price caps, based on actual operating costs, called
for in this resolution.
Since the adoption of the June 19 order, Governor Davis and other
California representatives have shifted their focus from price
caps going forward to refunds for past charges and the renewal of
certain sellers' authorization to sell at market-based rates.
3)Confidential Data. This resolution makes several references to
the need for federal agencies (FERC, DOJ and FTC) to use
confidential industry data to investigate the causes of high
energy prices. It can be inferred that this resolution supports
the proposition that this data should be available only to
federal investigators.
The California Public Utilities Commission (CPUC) has sought
industry market data to support state investigations, but has
received limited cooperation from FERC. The author and committee
may wish to consider whether this resolution should be amended to
urge FERC to cooperate with the CPUC and other state
investigators, such as the Attorney General.
4)FERC Resolutions Runneth Over. In addition to SJR 2X, there are
at least five other resolutions pending which seek FERC action
with respect to setting cost-based rates and/or ordering refunds:
SJR 7 (Alpert) supports federal legislation to require FERC to
order refunds for charges in excess of just and reasonable rates
and to temporarily impose cost-based rates throughout the West.
SJR 7 is awaiting concurrence in Assembly amendments on the
Senate Floor.
AJR 1XX (Vargas) demands FERC set cost-based rates for the West
and order refunds of charges in excess of just and reasonable
rates. AJR 1XX is pending in the Senate Rules Committee.
AJR 10 (Cohn) urges FERC to set temporary cost-based rates
throughout the West for 18 months. AJR 10 is pending in the
Assembly.
AJR 11 (Cohn) calls on FERC to impose cost-of-service regulation
on companies found to have manipulated the market and to impose
interim price caps until the market has stabilized. AJR 11 is
pending in this committee.
ACR 72 (Frommer) urges FERC to enact price caps and urges
Congress to require FERC to investigate market manipulation and
price gouging and to impose refunds. ACR 72 further requests
that the Federal Emergency Management Agency declare a state of
emergency and provide no interest loans to pay off the debt of
California utilities. ACR 72 is pending in the Assembly
Utilities and Commerce Committee.
To the extent the Legislature wants to adopt multiple resolutions
urging FERC action with respect to energy prices, it should
ensure that the message is coordinated and consistent.
5)Findings May be Outdated. Should the committee recommend
adoption of this resolution, the author and committee may wish to
consider updating the findings to reflect relevant events that
have taken place since its introduction, such as the adoption of
the recent FERC orders. For example, does the Legislature still
believe that FERC has not taken meaningful corrective action to
address high prices?
POSITIONS
Sponsor:
Author
Support:
Sempra Energy
Orange County Taxpayers Association
Oppose:
None on file
Lawrence Lingbloom
SJR 2X Analysis
Hearing Date: June 26, 2001