FERC Filings
MOTION OF THE ELECTRIC POWER SUPPLY ASSOCIATION-Docket No. EL01-1-000
D. A Return to Cost-based Rates Is Unnecessary and Counterproductive
The Commission, the electricity industry and, indeed, the country, are well aware of the difficulties being experienced in California. It appears equally clear that, for some, assigning blame and championing politically driven “quick fixes” is easier than developing real solutions. Contributing to the difficulty are confusion, a lack of understanding regarding the facts of the situation (i.e., how to properly interpret economic data such as price information) and how to define the problem. Defining high prices during periods of high demand as the “problem,” as CMUA does, leads to inappropriate and ineffective “solutions,” such as cost-based rates, price caps and other regulatory interventions that suffocate markets.
Generally expressed, the problem is the prolonged transition to fully competitive markets -- largely due to the continued focus on regulatory “solutions” to market problems. The relief CMUA seeks would actually prolong and intensify California’s difficulties. California needs to attract more supply; cost-based rates would discourage that. California needs to promote hedging and price risk management; cost-based rates would discourage that.
California markets need liquidity and accurate price signals; cost-based rates would discourage that. California needs to attract investment in new generation; cost-based rates would discourage that.
To achieve the Commission’s goal of robust, well-functioning competitive wholesale markets, we must respond to the real challenge of protecting small consumers while promoting truly competitive markets. What most everyone acknowledges is that tight supply, rising fuel prices, increases in demand, extreme weather conditions and delays in building power plants have all conspired to produce high prices in the California markets.
Adding to this mix are the existing Cal ISO bid caps that chase power away from where it is most needed, and market rules and California Public Utilities Commission (CPUC) orders that prohibit or limit hedging and the negotiation of bilateral contracts by load serving entities (LSE).
To create true downward pressure on prices, and dampen price volatility, the Commission’s rules need to send clear price signals to incent development of new generation facilities that could help relieve capacity constraints contributing to price increases and revise California market rules to allow and encourage LSEs to take advantage of alternating supply and hedging options. The cost-based rates proposed by CMUA not only fail to address any of the real problems facing the California markets, they would make the situation worse.