BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
SB 73XX - Alpert Hearing
Date: May 22, 2001 S
As Introduced: May 17, 2001 FISCAL B
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DESCRIPTION
This bill is intended to establish a policy whereby
wholesale electricity purchasers would establish a maximum
price to pay for power and manage service interruptions
that resulted if they couldn't purchase enough power at
that price.
Specifically, if a "cost-effective" electric supply can't
be secured, this bill requires the establishment of
purchasing guidelines for cost-effective power and the
creation of a system of managing interruptions to minimize
disruption to customers.
This bill requires the California Public Utilities
Commission (CPUC) and the investor-owned utilities (IOUs)
to establish a system where large customers or communities
can pay extra for a greater level of reliability.
This bill requires IOUs to notify customers of potential
outages in advance.
BACKGROUND
Electric service is dynamic. Electricity cannot be
effectively stored and neither supply nor demand can be
predicted with 100 percent accuracy. To deliver reliable
service, grid operators have always had to make last-minute
adjustments in supply to balance fluctuations in demand.
Historically, a relatively small amount of power was
purchased at the last minute, often at a relatively high
price. These purchases were necessary to accommodate
ordinary deviations in supply and demand, such as those
caused by unexpected changes in weather. These purchases
were an accepted part of the cost of service that had a
relatively minor effect on overall regulated rates.
The Independent System Operator (ISO) has an obligation to
ensure reliable service. To fulfill this obligation, the
ISO operates markets for energy and ancillary services so
that actual system needs can be met on a continuous basis.
Like other grid operators, the ISO will pay whatever price
is necessary to attract enough supply to meet demand. Even
when price caps were in effect, the ISO would often have to
resort to "out-of-market" calls to buy power at higher
prices when sufficient supplies weren't available at or
below the capped price. In today's market system, many
suppliers can demand prices well in excess of costs. If
the prices they demand are not accepted, these suppliers
have no obligation to sell.
One of the circumstances that has coincided with
skyrocketing electricity prices in the past year is an
increasing reliance on the ISO's real-time markets. This
increase isn't the result of bad forecasting, it's the
result of sellers, and buyers, intentionally
under-scheduling to achieve economic objectives. Sellers
are trying to push transactions into the lucrative
real-time market, where buyers are ill-equipped to
negotiate. Buyers have tried to set a maximum price they
are willing to pay in the day-ahead market. While
scheduling deviations should not exceed a few percent in a
well-functioning system, the ISO has recently been
responsible for buying much more power, at much higher
prices, in real-time. These circumstances have exacerbated
the natural scarcity of electricity and contributed to
reliability problems.
In an effort to control costs, major load-serving entities,
such as the IOUs, and more recently, the Department of
Water Resources (DWR), have attempted to establish a
maximum price. This strategy is undermined by the fact
that the ISO is standing by to buy power on behalf of the
IOUs in real time to meet demand. Using the ISO,
generators have succeeded in forcing the IOUs to pay their
price where DWR would not. When the IOUs ran out of money,
generators succeeded, through lawsuits and FERC orders, in
forcing DWR to pay their price.
This situation exemplifies the fact that there is
insufficient competition among suppliers to allow the
market to yield reasonable prices for electricity. In the
current market, no two sellers are competing to supply the
same electron - California often buys all the electrons all
sellers are willing to sell. This happens as expected when
demand surges as a result of hot weather, but it also
happens at times of relatively low demand if supply drops,
as has been the case for the past several months, when
unprecedented plant outages have caused thin reserve
margins.
In the absence of a competitive market and effective
regulation of wholesale rates, some have suggested that
California change from a policy of buying whatever is
needed at whatever the price may be to a policy of buying
only what is available at reasonable prices. This bill is
intended to create some competition among sellers by
establishing a system where buyers would establish the
maximum price they are willing to pay, or else go dark.
This is intended to eliminate the blank checkbook that
buyers offer now and force suppliers to compete to make a
sale.
The feature of the buyer's cartel proposal missing from
this bill is the seizure of power plants, contracts, or
output owned by generators or marketers who refuse to sell
at the prices offered by buyers.
COMMENTS
1.Buyer's Cartel. The buyer's cartel strategy represents
an effort to organize buyers to match the market tactics
of sellers. The sentiment behind this strategy is that
the wholesale market has departed from the treatment of
electricity as an essential commodity, with generators
and marketers now operating in a virtual state of
lawlessness where rampant opportunism reigns.
This proposal raises an important question for people who
depend on electric service - What happens when the market
doesn't provide adequate service? Restructuring has
purportedly separated the obligation to serve customers
from the obligation to generate the power necessary. In
large part, merchant generators produce and sell power to
meet their own economic ends, but have no obligation to
serve, even if their failure to do so jeopardizes public
health and safety.
The author and the committee may wish to consider whether
the provisions of this bill should include an unequivocal
obligation for companies in the business of supplying
electricity in California to operate consistent with
protection of public health and safety. If a blackout
occurs, and a generator or marketer is found to have
contributed by withholding power, they could be made
explicitly liable for damages and injuries resulting from
the blackout.
2.Go into the red, or go black? Society places a very high
value on reliable electric service, for health and
safety, as well as economic reasons. State and federal
policies clearly and consistently require reliable
electric service at just and reasonable rates. The idea
that electric service would be intentionally sacrificed
to achieve an economic objective is unheard of.
Ironically, sacrificing electric service to achieve an
economic objective is exactly what generators that
withhold power to get higher prices are doing.
The buyer's cartel has the state deciding when price is
more important than reliability. If market-based
electric service has really deteriorated to the point
where such a choice must be made, the author and
committee may wish to consider whether the time has come
to condemn unregulated power plants and pursue a course
of public ownership.
The author and committee may also wish to consider
whether the decision to go black carries with it any
liability for the consequences. If the root cause of a
blackout is a generator withholding power for economic
reasons, the state should be cautious to avoid
inadvertently assuming liability that more properly
belongs to the generator.
3.Who doesn't want more reliability? This bill
contemplates an interruptible program where customers who
want more reliable service would be able to pay a premium
to avoid blackouts. This represents a major policy shift
in that blackouts haven't been assigned according to
economic criteria previously. The practice has been to
grant exemptions from blackouts only for customers who
serve an essential public health and safety function.
Allowing customers to buy their way out of blackouts
raises a whole series of issues, not the least of which
is the likely result of increasing the frequency and
duration of blackouts for the state's least fortunate
citizens. A more basic complication is the existing
distribution system does not allow individual customers
to receive different levels of reliability.
4.What's cost-effective? Provisions of this bill calling
for the establishment of cost-effectiveness criteria for
power purchases need further clarification.
"Cost-effective" could be interpreted to allow very high
prices. The megawatt that is purchased to avoid a
blackout would likely be "cost-effective" (i.e. save more
money that it costs) at virtually any price.
5.ISO priorities must be changed. According to the statute
establishing the ISO (Section 345 of the Public Utilities
Code), the purpose of the ISO is to "ensure efficient use
and reliable operation of the transmission grid
consistent with achievement of planning and operating
reserve criteria no less stringent than those established
by the Western Systems Coordinating Council (WSCC) and
the North American Electric Reliability Council (NERC)."
The WSCC is the regional electric reliability council
that governs the Western Interconnection. NERC is a
non-profit consortium of regional electric reliability
councils, including the WSCC. These councils are
comprised of various public and private utilities
(transmission owners) and power producers. For the WSCC,
compliance with reliability standards is enforced by
financial penalties.
To implement this bill, the role of the ISO would need to
be redefined to make its adherence to WSCC and NERC
reliability standards secondary to cost criteria.
POSITIONS
Sponsor:
Author
Support:
None on file
Oppose:
None on file
Lawrence Lingbloom
SB 73XX Analysis
Hearing Date: May 22, 2001