FERC Filings

MOTION TO INTERVENE, PROTEST AND REQUEST FOR CONSOLIDATION OF THE ELECTRIC POWER SUPPLY ASSOCIATION-California Independent System Operator Corporation-Docket No. RT01-85-000;San Diego Gas & Electric Company-Docket No. RT01-82-000; Pacific Gas & Electric

II. PROTEST

A. The Current Composition of the CAISO Board Does Not Meet the Independence Requirement of Order No. 2000

The fundamental principle of Order No. 2000 is that an RTO must be independent from market participants. That independence must be in both reality and perception. As set forth below the current composition of the CAISO adopted after the December 15th Order, juxtaposed with the fact that the DWR, a state agency, will be a significant market participant in the West, clearly fails this fundamental test. Indeed, the current CAISO Board would not meet the requirements of Order No. 888, much less the bedrock principle of independence expressed in Order No. 2000.

In its November 1, 2000 Order, the Commission proposed to eliminate the existing CAISO Board and replace it with a non-stakeholder board. The Commission recognized that an ineffective ISO, riddled by political influence from outside forces, will impact all markets in the Western interconnection, not just California.

^{The ISO is an institution that is central to the functioning of wholesale power markets in the West and, unless it is able to resolve matters in a timely manner and is independent of market participants, we cannot be assured that rates, terms or conditions of its jurisdictional services will be just, reasonable and not unduly discriminatory or preferential. The transmission assets that the ISO operates are a critical part of the interstate transmission grid located in the Western Interconnection which provide essential support to the electric market. Any failings by the ISO in its obligation to ensure reliable operation of the transmission grid would have grave consequences for the residents and business in the Western states. Operation of this interstate transmission grid must be controlled by an expert board that is free from the influence of any market participant or market segment. (emphasis added)}

The new board with the expertise to operate these crucial assets was supposed to consist of seven members with experience in corporate leadership (at the director or board level) and professional expertise in either finance, accounting, engineering or utility law and regulation. More importantly, the Commission wanted members with experience in the operation and planning of transmission systems. The CEO of the CAISO was to be a voting member with the other six voting members selected by the current CAISO board from a slate of candidates developed by an independent consultant. The independent consultant was to be chosen by the CEO of the CAISO. While certain aspects of the Commission’s requirements with respect to the CAISO board changed between the November 1st Order and the December 15th Order, the requirement of an independent board remained a critical element of the Commission’s requirements.

As such, the Commission specifically rejected the notion that new board members could be chosen by the Governor of California or by other parochial interests in the State. Indeed, in the December 15th Order, the Commission indicated a willingness to consider state involvement in the board selection process so long as the independence of the board members could be assured. The Commission stated:

^{State selection of all the board members is not a reasonable position in light of our prior determinations and the current procedures which only allow the state to veto approximately half of the prospective candidates.}

The California Legislature and its Governor have acted in direct contravention of this statement and the requirements of the December 15th Order. ABX 5, passed by the California Legislature creates a five member Electricity Oversight Board (“EOB”) to oversee the Independent System Operator and to exercise the exclusive right to appoint the members of the CAISO. The legislation replaces the existing CAISO and replaces it with a five member Board appointed by the Governor. Appointments are for a one year term. The EOB has the responsibility to revise the articles of incorporation and the bylaws of the Independent System Operator and make such filings at the Commission as it deems necessary. Finally, the ISO may not enter into a multistate entity or a regional organization unless that entry is approved by the EOB.

At the same time that the California Governor was putting in place a CAISO board geared solely to state interests, the California Legislature passed ABX1. That bill authorizes the state DWR to enter into contracts for the purchase of electricity from any person under such terms and for such periods as the DWR deems appropriate. The power purchased on the wholesale market would be used to serve retail customers in California.
The DWR will be a market participant under Order No. 2000 because it will be an entity that (a) sells or brokers electric energy and (b) as a significant player in California, its “economic or commercial interests (…) would be significantly affected by the Regional Transmission Organization’s actions or decisions.” With the DWR a significant market participant, Order No. 2000 mandates that an RTO Board be independent and demonstrate a decisionmaking process that is independent of this market participant.

The current structure of the CAISO Board cannot make that showing. The DWR is a significant market player in the wholesale market and the ISO operates the transmission grid. Both have common interests. In short, California has essentially reverted to a vertically integrated electric utility, much like any other public utility operating under an Order No. 888 Open Access Tariff that is not part of an ISO, with the DWR and the CAISO operating under the common control of the Governor of California. Both the head of the DWR and the newly constituted CAISO Board are appointed by the Governor. Moreover, the head of the DWR and the newly appointed Board, are all California residents. As such, these two entities will be suspect to California parochial interests since none have any experience in operating and planning a transmission system to create a competitive bulk power market in the West. In short, the CAISO should not be considered as an RTO under Order No. 2000 until the critical issue of independence is met.

B. The CAISO Board Will Not Facilitate The Development Of A Seamless Interconnected Grid Throughout The West

While California may currently perceive that the newly constituted CAISO Board meets its needs, it will not meet the needs of its Western neighbors for a seamless interconnected grid among the RTOs being planned in the region, i.e. RTO West and Desert Star. Moreover, an insular CAISO will not meet the DWR’s needs when it seeks to purchase electricity at the lowest possible cost. The current supply situation in California and the West can be addressed, in part, by an efficient and well-functioning transmission system.
As the Commission is well aware, the structure and duties of the original CAISO Board and oversight by entities of the California state government over the CAISO provoked a jurisdictional conflict when the Commission sought to ensure that the interests of California residents not be placed ahead of non-California entities that participate in the CAISO. The Commission rejected the notion that California interests should be favored since the CAISO would not impact interests outside California. The Commission said that notion was “simply incorrect” adding that the ISO will affect the terms and conditions under which suppliers and consumers outside of California will be able to participate in the California market and how energy is transmitted from or through California.

As a result, the Commission consistently rejected two policies aimed at benefiting California residents only – (1) that the CAISO board could consist solely of California residents and (2) that the EOB or other California entity could control the rates, terms and conditions of service administrated by the CAISO, a FERC regulated entity. The Commission even threatened an action in Federal District Court because such actions would go beyond the traditional State areas of oversight and infringe on the Commission’s jurisdiction to regulate the rates, terms and conditions of wholesale sales and transmission service and thus pre-empted by Supremacy Clause of the United States Constitution. The controversy subsided only when the Commission found that the oversight by California entities would not (a) give the state of California any undue power over any regional transmission body that otherwise would form in the Western region, (b) create a disincentive to the establishment of a Western Regional Transmission Organization and (c) adequately protect the progress toward regional market structures.

In the face of the Commission’s clear direction, the California legislature would prevent the CAISO from joining a larger regional entity unless the EOB approves its participation. That will clearly be a disincentive to create a Western Regional Transmission Organization and hinder the development of Western power markets. Recent events show that adverse events in California impact the entire region. California is not an electrical island.

Indeed, the Commission specifically found in its November 1st Order that the Western region of the United States is an integrated electricity market and attributed, at least in part, problems in California “to the continued balkanization of the Western grid and the absence of a true RTO with regional scope.”
As such, the Commission must not be deterred by unconstitutional State action but instead must again take bold action to ensure that an RTO in the West serves a region of sufficient scope and configuration to support efficient and non-discriminatory power markets, maintain reliability, and otherwise effectively perform the required functions of an RTO. An RTO with an appropriate scope and configuration can facilitate competitive bulk power markets by resolving loop flow issues, offering transmission service at non-pancaked rates, improving the planning and coordination of transmission expansion and the interconnection of desperately needed new generation. In short, with California and the entire West critically short of generation, the West must have an efficiently run transmission system not one geared solely to California interests. Accordingly, EPSA urges the Commission to take an active role in establishing a unified regional market for the entire Western Interconnection. The goal, much like the Commission’s efforts in the Northeast between PJM, the New York Independent System Operator Corporation and the New England Independent System Operator, should be to create a seamless market in the West by the date of operational start-up of the various RTOs, i.e. December 15, 2001. To that end, the Commission should order the three investors owned utilities to join either Desert Star or RTO West, whichever RTO makes the most sense for the standpoint of business or physical interconnection for those companies.

C. The CAISO Should Adopt Standardized Interconnection Procedures

A RTO must administer its own transmission tariff, be the only provider of transmission service over the facilities under its control, and have authority to review and approve requests for new interconnections. Presently, the CAISO has authority to review and approve interconnection requests. However, important transmission services (including generation interconnection) and important functions (including grid expansion) remain under the control of Transmission Owners (“TOs”). These entities continue to possess both the motives and the means to thwart non-discriminatory access, the interconnection of new generation to the grid, and the unbiased assessment of all competitive alternatives to new transmission facilities - all of which are discriminatory practices that Order No. 2000 is intended to eliminate.

California is in desperate need for new generation and yet there are no procedures for generators to follow in interconnecting new generation to the grid. In its December 15th Order, the Commission directed the ISO and the Participating TOs to file standard interconnection procedures by April 2, 2001. EPSA supports that decision since developers planning to build new generating facilities require: (1) clearly defined rules and procedures to govern their requests for new interconnection and (2) a knowledgeable, independent entity to timely respond to interconnection requests, timely execute study agreements, interconnection agreements and complete the interconnection.

The current CAISO gives each TO far too much latitude to determine interconnection standards and procedures and specific policies for charging for system upgrades and crediting for system benefits. Standardization over these critical policies and procedures is needed and the Commission must give the RTO the authority to implement those standards. Thus, consistent with Tennessee Power Company, the CAISO should have an open access transmission tariff that provides specific rules and procedures for requesting and executing new generation interconnection. Such rules and procedures should clearly set forth the requirements, processes, and response deadlines for obtaining interconnection and for executing an interconnection agreement setting forth the rates, terms and conditions for interconnection service.

D. Congestion Management

The Commission requires an RTO to develop and operate “market mechanisms to manage transmission congestion.” In addition, the Commission has determined that the “existing congestion management method is fundamentally flawed” and has identified the need for “a comprehensive replacement congestion management approach.” In the December 15th order, the Commission directed the CAISO to file its congestion management redesign proposal no later than January 31, 2001. At the present time, however, the CAISO has not circulated a final proposal and has deferred submitting its filing. The inability of the ISO to file a timely congestion management plan suggests that the ISO may not be capable of performing this basic function of an RTO.

The Market Monitoring Function of the CAISO Should Be Restructured

Order No. 2000 declares that one of an RTO’s functions is to monitor markets for transmission services, ancillary services and bulk power to identify design flaws and market power. EPSA is providing the following general guidelines on how market monitoring should be structured in an RTO for California. As the events of this past summer have shown, market monitoring should not be used as a substitute for structuring the RTO rules properly to begin with. Properly structured, well-functioning bulk power markets will produce consumer benefits. RTO rules must be structured to ensure fair and open access to transmission, reliability, and effective competition. There are key tasks that a Market Monitoring Unit (“MMU”) should accomplish. While California does have a Market Surveillance Committee, it was not designed with all of the elements discussed below, and its future is in question given the present uncertainty as to governance and market structures.

The primary role of the MMU should be to serve as an early warning system. If, for example, market rules are no longer promoting competition or supply and demand are getting out of balance, the MMU, through periodic market reviews and reports, should bring these concerns to light.

The MMU should (a) detect abuse of the rules; (b) when necessary, compile evidence of those abuses for FERC or other regulatory agencies; and (c) where appropriate, work with market participants to recommend changes to market rules to allow the market to work more smoothly.

While there are unique features of every market, the standards for market monitoring should be fundamentally the same in California and in other RTOs.

The process of market monitoring is as important as the technical approach. The MMU must be independent of the RTO, particularly in California given the concerns expressed about the independence of the Board. It must also assure transparency and confidentiality, allow for due process, and be limited to monitoring without enforcement authority.

Market power assessment is only one function of the MMU. Abnormally high prices and market fluctuations in recent months have brought allegations of anti-competitive behavior. EPSA has consistently argued that such behavior must be identified and remedied, since anti-competitive behavior hurts competitors as well as consumers.

High prices, in and of themselves are not proof of anti-competitive behavior or market power abuse. They may be due to market fundamentals such as supply scarcity, high demand growth in a short period, or rising variable costs.

If the MMU has concerns about the abuse of market power, it should conduct a two level assessment. In the first level, the MMU would identify which prices exceed a competitive screen. In the second level, the MMU would investigate possible anti-competitive actions in only the time periods with prices which exceed the screen.

In the first-level assessment, before concluding that a high price is due to the exercise of market power, it is imperative that factors such as capacity value, opportunity costs, scarcity value and risk be taken into consideration.

In the second-level screen, the MMU must identify specific anti-competitive action and show that they caused higher prices. It must also show the action was profitable. Also in the second-level screen, the MMU must define safe harbor documentation for outages, failing to bid, and variations in bid behavior.

Enforcement should be left to the Commission or the Department of Justice (“DOJ”).

It is imperative that the MMU role be carefully prescribed and clarified so that market design corrections, in the guise of market monitoring, not do more harm than good.
An MMU assessment of market efficiency must take into account the effect of specific market rules, such as mandatory use of spot markets by regulated load-serving entities and prohibitions on use of risk management tools such as forward contracts found in California. The MMU should also examine the ability of end-use customers (or their agents) to respond quickly to changes in commodity prices. By identifying anomalous market rules and recommending changes early on, a market monitor may be able to prevent troublesome outcomes by making the market work more efficiently. If this can be achieved, the need for further market monitoring would be reduced significantly.

When focused on commodity energy markets, the MMU
should not intrude into or try to “make” the market, but should:

(a) Evaluate the operation of the market to detect either design flaws in the operating rules, standards, procedures, or practices as set forth in the tariff, manuals and other prevailing documents or to detect structural problems in the market that may need to be addressed in future collaborative efforts;

(b) Monitor and report on issues relating to the operation of the market, including the determination of transmission congestion costs or the potential of any market participant(s) to exercise market power within the specific control area;

(c) Evaluate any proposed additional monitoring and reporting mechanisms that are necessary to assure compliance with market rules; and

(d) Facilitate a monitoring program in an independent and objective manner.

Beyond commodity markets, the MMU also should be monitoring for and reporting abuse of market power in the transmission system. The MMU should be monitoring all aspects of the market to ensure that an RTO in California is properly managing the transmission system. The MMU should look for situations that (a) creates barriers to entry for new competitive generation through onerous and extended interconnection procedures and (b) disrupts markets with inaccurate ATC calculations.

Market review by the MMU also should include review and assessment of the behavior of the market’s buyers. Often easily overlooked, the load’s influence on the market is indeed significant and plays a major role in shaping the direction and progress of the markets.
Although the market monitor must rely on RTO systems and data, the market monitor must be independent from the RTO and the transparency and confidentiality of any analysis should be assured. Just as the market monitor in the ISO/RTO should be independent, there is an equal need for an independent market monitor in new RTO structures, such as any transcos which might develop in California.

Due to the need to expand regional markets, the Commission should encourage the development of regional independent market monitors to support the development of large seamless regional trading markets. An independent regional entity would be free from any local political or market sector interests, therefore allowing better integration among neighboring regions. Indeed, reasoned and efficient decisions made by fully independent entities that lack bias and are not captive to one administrative structure will improve confidence in the process and in the market rules themselves.

Finally, the primary role of the market monitor should be to provide the diagnostic analysis and, when needed, recommend rule changes to the RTO’s Board of Directors in a collaborative manner to address anti-competitive behavior. The MMU cannot unilaterally impose rule changes on the market, and the Commission cannot delegate enforcement and rate changing authority to the MMU. That process should be a collaboration among the RTO, stakeholder participants, administered by the Commission. The MMU cannot have authority to change or dictate prices or to enforce sanctions on market participants.

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