FERC Filings

COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION-San Diego Gas & Electric Company -Complainant v. Sellers of Energy and Ancillary Services Into Markets Operated by the California Independent System Operator and the California Power Exchange-Respondents D

Preface

The Commission is to be commended for its prompt investigation of the California wholesale power markets, which culminated in its Staff Report on Western Markets and the Causes of the Summer 2000 Price Abnormalities. (“Staff Report”)3 The Staff Report provides an in-depth account of the causes of the increased prices and price volatility that occurred throughout the summer of 2000 in the spot markets administered by the California Independent System Operator Corporation (“CAISO”) and the California Power Exchange (“PX”). These wholesale price increases have been seized upon by certain California state officials and market participants as the reason that retail customers in San Diego faced dramatically higher monthly bills this past summer than in the two previous summers. Moreover, political charges have been leveled against generators and suppliers of price gouging, abuses of market power, making unjust and unreasonable bids into the bulk power markets, and receiving unjust and unreasonable prices in the CAISO and PX markets.

The Staff Report looked beyond this political rhetoric and examined the patterns of supply bidding, load scheduling, and market clearing prices that occurred this past summer. The Staff Report examined in detail a myriad of supply and demand factors that were at work in the competitive wholesale markets and took account of retail market factors that affected the price volatility experienced this summer in the wholesale market. The Staff Report’s findings convincingly demonstrate that the price spikes and price increases of the summer of 2000 are not attributable to the exercise of market power by any individuals or classes of suppliers. Rather, such increases are the result of the interplay of supply and demand conditions, in combination with rising natural gas and air emission compliance costs and certain seriously flawed, state developed market rules, i.e. the requirement to buy into and sell through the PX and restrictions on forward contracting, that exposed California investor owned utilities to spot market volatility.

The Commission’s Proposed Order strips away political rhetoric and focuses parties on the principal problems in the market and appropriate remedies for such problems that are within the Commission’s jurisdiction. In so doing, the Commission acknowledges that the long-term problem in California, as elsewhere in the nation, is a shortage of generation and transmission capacity. The solution to such shortages is to maintain and strengthen competitive bulk power markets, so that market incentives and price signals will attract investment for building new, cleaner, and more efficient generating plants. California needs substantial new investment to meet growing demand, both within the state and throughout the Western region, to allow for replacement of older facilities, and to achieve improved efficiency and environmental performance. Thus, EPSA applauds the Commission’s focus on remedies that will strengthen wholesale markets, provide more choice to market participants, and avoid recriminations and litigation surrounding whether bids made or prices received this summer were just and reasonable.

In these comments, EPSA emphasizes the importance of the effect of market reforms on price signals for new investment. Above all, the Commission should remain steadfast in resisting proposals that will return electricity markets to cost-based ratemaking and command and control regulation.

The Staff Report concluded that “[t]he data clearly show that a general scarcity of power in the West and increased costs to produce power were factors causing high prices.” 4 If markets are to attract new entrants and new investments to meet this scarcity, market prices must be allowed to seek the level at which scarcity rents can be realized in many circumstances. The presence of scarcity rents, with prices at times above generators’ marginal operating costs, is not a sign of market power or of market failure, but of a competitive wholesale market in which price signals are being appropriately sent to attract needed new investment. In a properly functioning market, the presence of scarcity rents also results in reduced demand.

In light of this supply shortage, it is particularly important that the Commission reject the notion that there is a difference between prices that approximate competitive market levels for the benefit of consumers, and prices sufficient to induce sufficient investment in capacity to ensure adequate service for the benefit of consumers.5 While both goals are important Commission considerations, it implies that competitive market levels may generate lower prices than are needed to attract new investment. This implication, if intended, is plainly incorrect. The Commission’s final order should reject this approach and reiterate that competitive markets must, to sustain themselves, foster price levels that are sufficient to attract new investment while there is a demand-supply imbalance. To do otherwise plainly would be inconsistent with the Commission’s statement in the Proposed Order to the effect that:

Today, however in states such as California, the adequacy of local power resources depends, not just on state requirements, but also on whether market prices are sufficient to elicit adequate supplies, through construction or otherwise. In other words, when supply is driven by market price instead of regulatory requirements, ratepayer interest may no longer depend solely on whether current prices are deemed too high, but also on whether prices are too low to elicit new supplies over time. 61 EPSA is the national trade association representing competitive power suppliers active in U.S. and global power markets. EPSA’s members, which include power generators, power marketers and suppliers of goods and services to the electric power supply industry, share a commitment to bringing the benefits of competition to all electric customers. The comments contained in this filing represent the position of EPSA as an organization, but not necessarily the views of any particular member with respect to any issue.

2San Diego Gas & Electric Company v. Sellers of Energy and Ancillary Services, 93 FERC 61,121(2000). Herein, page citations to the Proposed Order are to the slip opinion.

3The Staff Report was issued on November 1, 2000, to accompany the Proposed Order.

4Staff Report at 1-4.

5See Proposed Order at 4.

6Proposed Order at 20.