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

THE COMMISSION’S PROPOSAL FOR AN AS-BID AUCTION SHOULD NOT BE UNDERMINED BY A SOFT CAP THAT LACKS CLEAR STANDARDS AND EXPEDITED PROCEDURES FOR ITS APPLICATION

There is no evidence suggesting that a pay as-bid auction is more appropriate than a single price auction or would have led to lower prices in California or elsewhere. Moreover, most economists continue to believe that a single price auction is the appropriate pricing method. That said, for a limited period of time EPSA does not object to limiting the role of the single price auction or to instituting an as-bid auction based on a threshold bid level. EPSA also embraces the Commission’s elimination of the ISO’s price cap authority. However, the vagueness of the Proposed Order’s “soft cap” discussion raises concerns that could jeopardize the functioning of the reformed wholesale markets. As stated above, market reforms should be assessed against the criteria of fostering accurate price signals for new investment. The soft cap proposal, as now written, deprives suppliers of any type of certainty that they may realize scarcity rents or recover their opportunity costs, and exposes all suppliers to endless uncertainty regarding their risk of refunds. No new investor will welcome rules that state that revenues are subject to 24 months of scrutiny and possible rescission at any time during, and possibly even after, that period.

Moreover, the Commission must ensure that its imposition of a soft cap does not become a universal standard for capping prices, thereby stifling development of new generation particularly of peaking units. As ESPA has said:

Units that operate only a few hours a year have to recover all of their fixed and operating costs over those limited hours of operation. From April 1999 to March 2000, generators supplying the last 10% of the California ISO’s peak demand ran less than 33 hours. To recover just fixed and variable costs, with no earnings, the price would need to be over $1,450 per megawatt hour. Of course, these generation owners assume the risk that these peaking units will run during these 33 hours, which may not be the case if sufficient new generation is built. 33

Already, Puget Sound Energy has filed 34 with the Commission seeking price caps in the Northwest to mirror any price caps the Commission might impose in California. The Northwest, like California is in critical need of new generation and the NPPC Report indicated that prices this summer reached the level necessary to facilitate new entry35 The NPPC Report says:

The Council’s analysis of power supply adequacy indicated that market prices would not be sufficient to support the development of “merchant” power plants, i.e. plants selling into the spot market exclusively, until 2004. The Council has also done analyses looking at actual market prices over the past year to see if prices had been sufficient for a new entrant to cover its variable operating costs and its fixed costs and earn a reasonable rate of return. Until this summer the answer is “no”. With the electricity and gas prices experienced over the past year, the answer has become “yes”.
The Report concludes:

if electricity and gas prices of the past year were to continue, there would be substantial incentive for the construction of new generation. 36

Similarly in New York, another area desperate for new generation, market participants, rather than taking steps to solve the problems in the New York market37 are now discussing a $250 price cap, citing the level imposed by the CAISO. A price cap at that level would cripple whatever development can occur, given the longstanding siting problems that exist in the state.38 EPSA underscores its opposition to arbitrary price caps that short circuit market pricing and, by design, and without case by case justification, deprive suppliers of opportunities to receive scarcity rents that are critical to providing the market incentive that new generation investment needs. This is especially so during the next few years as California transitions more completely to competitive wholesale and retail electricity markets. The soft cap, if left to ambiguous application, will discourage new investment during this critical transition period.
Accordingly, EPSA offers the following recommendations which are intended to refine the soft cap concept in three respects: (1) by restricting the bids that merit review by the Commission and, correlatively, reducing the burden of data submission and collection; (2) by prescribing clear standards for consideration of circumstances when transaction prices may be scrutinized and adjusted; and (3) by limiting the refund and price mitigation period to a few weeks after each transaction.