FERC Filings

MOTION FOR LEAVE TO INTERVENE AND PROTEST OF THE ELECTRIC POWER SUPPLY ASSOCIATION California Independent System Operator Corp. ) Docket No. L00-95-030

II. A THE COMMISSION SHOULD REJECT THE CAISO’S PROPOSED AMENDMENT

A.The Commission’s Prior Orders Required an Independent CAISO Board

The April 26th Amendment filed by the CAISO culminates a debate over the governance of the CAISO that began with its inception. As early as November 1996, the Commission addressed the importance of an independent CAISO. The Commission’s November 26, 1996 Order rejected a proposal that would have limited participation on the CAISO Governing Board to California residents because it was unduly discriminatory, inconsistent with the Commission's goal of ensuring broad-base transmission, and would act to discourage participation in the CAISO by out-of-state entities thereby denying them meaningful representation³. The Commission also
rejected a permanent role for the California Electricity Oversight Board (EOB) in the governance or operations of the CAISO, or appellate review of CAISO Board decisions, because the EOB’s role would not have been limited to matters subject to the jurisdiction of the State of California and concerned matters within the Commission's exclusive jurisdiction.

In its August 5, 1999 Order accepting the modified CAISO governance structure in California Senate Bill 96 (S.B. 96), the Commission acknowledged its concern that “to the extent the governing board selection is controlled by a single state, or limited to residents of a single state, it will serve to hamper the progress [towards] regional market structures….” The Commission approved the modified CAISO governance structure “[b]ased on the intent expressed in S.B. 96 and in the EOB’s Petition to promote the development of regional electricity transmission markets in the western states, as well as the legislature’s stated intent that the CAISO and California Power Exchange (PX) evolve into regional organizations.” ⁴

During the events of last summer it became apparent that the existing CAISO “stakeholder” Board of Governors was incapable of effectively carrying out its responsibilities⁵. Therefore, in its November 1, 2000 Order, the Commission proposed to eliminate the existing CAISO Board and replace it with a non-stakeholder board.⁶ The Commission recognized that an ineffective CAISO, riddled by political influence from outside forces, would impact all markets in the western interconnection, not just California.

The November 1st Order proposed, therefore, the establishment of a new CAISO Board with the expertise to operate these critical transmission assets. The Board would 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. Finally, the Commission proposed that members were to be selected from a slate of candidates developed by an independent consultant.⁷

In its December 15, 2000 Order, the Commission took decisive action to correct structural defects in the California market. 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 CAISO Governing Board remained a critical element of the Commission’s requirements⁸. The Commission firmly reiterated that state selection of all the Board members was not a reasonable position in light of the Commission’s prior determinations and the current procedures that allowed the state to veto approximately half of the prospective candidates.⁹ The Commission emphasized that the state may have an appropriate role in Board selection only “as long as the independence of the board members can be assured…¹⁰”

The December 15th Order directed that the CAISO Governing Board be replaced with a non-stakeholder Board and that the members selected to serve on the new Board be independent of market participants. The Commission expressed its intention to establish further on-the-record procedures to discuss with state representatives the selection process for the new CAISO Board. If no consensus was reached regarding an acceptable means to select new CAISO Board members within 90 days of the December 15th Order, then the Commission ordered that the procedures proposed in the November 1st Order were to be carried out.

The Commission also directed that, on January 29, 2001, CAISO Governing Board members must turn over decision-making power and operating control to the management of the CAISO, but would be permitted to continue functioning as members of a stakeholder advisory committee.¹¹ Thus, the stakeholder advisory committee was to provide input to CAISO management until such time as a new Board was seated, or until April 27, 2001, whichever occurred sooner.¹² On January 29, 2001, the CAISO Governing Board's bylaws became null and void to the extent they were inconsistent with the Commission’s December 15th Order.¹³

Subsequent to the Commission’s Order, a series of political events unfolded in California which give rise to the present proceeding. On January 18, 2001 the Governor of California signed into law A.B. x5 that unilaterally directed the replacement of the existing CAISO Board with a five-member board to be appointed by the Governor and subject to confirmation and oversight by the EOB. In addition to reconstituting the CAISO Board, A.B. x5 expressly prohibits the CAISO from entering into a multistate entity or a regional organization unless that entry is approved by the EOB. On January 23, 2001, in an emergency meeting, the EOB confirmed the Governor’s appointments to the new, five-member CAISO Board. That same day, California’s attorney general filed a suit in quo warranto in Sacramento County Superior Court to compel the 26 stakeholder members to vacate their offices.¹⁴

Meanwhile, the California Legislature also enacted legislation authorizing the California Department of Water Resources (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.¹⁵ The power purchased on the wholesale market would be used to serve retail customers in California.

The CAISO now asks the Commission to accept its amended bylaws, adopted to comply with the provisions of A.B. x5. This is clearly an unacceptable result. The Commission must stand behind its earlier commitment to an independent ISO Board and reject the Amended Bylaws submitted by the CAISO.

The importance of an independent CAISO Board has been repeatedly recognized by the Commission and cannot be overstated:

<center>The CAISO 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 CAISO 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 CAISO 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.¹⁶</center>

Now, more than ever, the establishment of an independent CAISO is vital to the long-term resolution of California’s energy problems and the stability of the entire western region. The continued influx of capital for new or expanded in-state generation, the willingness on the part of out-of-state suppliers to sell into the California market, and the ability to seamlessly integrate California’s grid with other western regional transmission organization (RTOs) will require a CAISO that can function as an “honest broker.”¹⁷ The Commission must, once again, affirm this bedrock principle and reject the Amended Bylaws that would institutionalize a political CAISO Board appointed by Governor Davis. Now, more than ever, the establishment of an independent CAISO is vital to the long-term resolution of California’s energy problems and the stability of the entire western region. The continued influx of capital for new or expanded in-state generation, the willingness on the part of out-of-state suppliers to sell into the California market, and the ability to seamlessly integrate California’s grid with other western regional transmission organization (RTOs) will require a CAISO that can function as an “honest broker.” The Commission must, once again, affirm this bedrock principle and reject the Amended Bylaws that would institutionalize a political CAISO Board appointed by Governor Davis.

This need is particularly compelling in light of California’s apparent rejection of the Commission’s call for the development a western RTO. In the Commission’s April 26th Order on market mitigation and monitoring, the Commission conditioned the implementation of market mitigation measures on the CAISO and the three investor owned utilities’ (IOUs) filing by June 1, 2001, an RTO proposal consistent with the requirements of Order No. 2000.¹⁸ While this is clearly a preferably result to a stand-alone, single-state California ISO, the immediate political reaction was fiercely negative. If, as the California ISO Chairman has publicly declared, the CAISO and the IOUs fail to make a meaningful RTO filing as the Commission has recommended, the governance of the CAISO becomes an even more pressing and immediate problem. In addition, even if a June 1st filing that complies with Order No. 2000 is made, it will take some extended time, likely 18 to 24 months at the least, to get the RTO up and running. In the interim, the CAISO will remain the grid operator and the need for independence is crucial. Therefore, the time is now for the Commission to address and clarify this important issue. ³Pacific Gas and Electric Co., et al., 77 FERC 61,204 at 61,817-18 (Nov. 26, 1996) (Nov. 26 Order), aff'd, 81 FERC 61,122 (1997), motion for stay denied, 82 FERC 61,223 (1998)


⁴ See California Electricity Oversight Board, 88 FERC 61,172 (1999), reh'g denied, 89 FERC 61,134 (1999), appeal dismissed in Western Power Trading Forum, et al., v. FERC, __ F.3d __, 2001 U.S. App. LEXIS 6031 at *14 (D.C. Cir., Apr. 10, 2001) (No. 99-1532)


⁵San Diego Gas & Elec. Co., 93 FERC 61,121 at 61,363 (Nov. 1, 2000) (November 1st Order).


⁶Id. at 61,364.


⁷Id.


⁸December 15th Order


⁹Id.


¹⁰Id.


¹¹Id.


¹²Id. at 62,014


¹³Id.


¹⁴California Attorney General Press Release 01-006, “Attorney General Sues to Remove Stakeholder Members of CAISO Board” (Jan. 23, 2001) available at http://caag.state.ca.us/press/.

¹⁵A.B. 1, 2001, 1st Ex. Sess. (Ca. 2001).


¹⁶ 93 FERC at 61,364 (emphasis added).


¹⁷The need for an “honest broker” is particularly important given PG&E’s recent bankruptcy filing. The CAISO is PG&E’s largest creditor. Yet, these funds are earmarked for market participants who provided service and have not been paid for the service provided.


¹⁸ San Diego Gas & Electric Co. v. Sellers of Energy and Ancillary Services into Markets Operated by the California Independent System Operator et al., 95 FERC 61,115 (2001) (April 26th Order).

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