FERC Filings
COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION ON THE PROPOSED MARKET STABILIZATION PLAN OF THE CALIFORNIA INDEPENDENT SYSTEM OPERATOR-San Diego Gas & Electric Company-Complainant v. Sellers of Energy and Ancillary Services Into Markets Operated by the
1. THE CAISO BOARD IS NO LONGER AN INDEPENDENT ORGANIZATION TO WHICH THE COMMISSION SHOULD DEFER
A. The Commission’s Prior Orders Documented the Shortcomings of the CAISO Board’s Governance Structure.
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-based transmission, and would act to discourage participation in the CAISO by out-of-state entities thereby denying them meaningful representation. 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.”
<sup>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.</sup>
The November 1 Order proposed, therefore, the establishment of a new CAISO Board with the expertise to operate the 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.
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 1 Order and the December 15 Order, the requirement of an independent CAISO Governing Board remained a critical element of the Commission’s requirements. 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. 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….”
The December 15 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 15 Order, then the Commission ordered that the procedures proposed in the November 1 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. 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. 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 15 Order.
On January 18, 2001, however, the governor of California signed into law A.B. x5 which 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. 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 vacate their offices. 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. The power purchased on the wholesale market would be used to serve retail customers in California.
B. The Commission Should Enforce its December 15 Order and Replace the Existing CAISO Board with an Independent Body
Subsequent to the Commission’s December 15 Order, the State of California has moved beyond simple regulation to become a dominant participant in the California energy markets. At the same time, the CAISO has been transformed from an “independent operator” of interstate transmission resources to a partisan advocate for the State of California. Because of the conflicts inherent in the politicization of the CAISO, there exists a more urgent need for the Commission to remedy the situation than was the case in November 2000. In the past, the Commission has declined to consider filings tendered by utilities at the direction of a state regulatory agency. Congress has also given the Commission the authority to seek judicial enforcement of its orders. EPSA believes that the time has come for the Commission to enforce its December 15 Order mandating a truly independent CAISO. The first step in such enforcement is to replace the incumbent CAISO Board with an independent Board.
There can be no doubt that the State of California has become a dominant, if not the dominant, market participant in California. By virtue of legislation requiring the DWR to purchase wholesale electric energy for resale, the DWR has acquired substantial long-term contracts for energy to serve retail load. This market dominance and influence will only increase as the State of California presses to acquire direct ownership of transmission and generation assets. For example, the recently announced MOU between Southern California Edison (SCE) and the governor gives the DWR increased control over SCE’s generation. Beyond acquisition of the Utility Distributing Companies’ (UDCs) transmission assets, the governor of California has also proposed a State Public Power Authority that would construct, own and operate generating plants.
At the same time, the incumbent CAISO Board has been subject to executive, legislative, and regulatory authority of the State of California, which has wholly undermined its independence. As the result of A.B. x5, the CAISO Governing Board now serves at the pleasure of the governor of California. If the governor is dissatisfied with the Board’s decisions, he can appoint a new Board and direct the state attorney general to file suit to compel the resignation of the current governors. Alternatively, he can simply issue an executive order directing the Board to undertake whatever action the governor desires. A substantial portion of the CAISO’s MSP can be traced back to executive orders issued by the governor of California. The consequences of the political power being exercised over the CAISO are palpable. The CAISO has taken positions before the Commission, unrelated to the reliability of the transmission system, which were unashamedly intended to favor the interests of the State of California and DWR over other market participants in negotiations for the sale of energy.
One need only contrast the recent rhetoric from the CAISO with the conciliatory tone prior to the change in the Board. Moreover, the CAISO has taken action in direct contravention of the Commission’s directives. For example, the chief executive officer of the CAISO recently testified before the House Committee on Government Reform that he had instructed his personnel to continue issuing emergency dispatch orders in defiance of the Commission’s February 14 and April 6 Orders to the contrary. In addition, the CAISO has yet to file a revised congestion management plan, despite the Commission’s clear direction and the urgent need to do so.
The CAISO’s responsibility and authority under its tariff, emergency and otherwise, is and should remain limited to ensuring the physical reliability and safe operation of that portion of the interstate electric transmission system located in California. The politicization of the incumbent CAISO Board has led to an apparent shift in focus from system reliability to maximization of available generation. Such an approach may have devastating consequences in the near term if operation and maintenance requirements of aging generators are sacrificed for political expediency. Equally important, 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.”
As part of its market-monitoring plan, the Commission should implement appropriate measures to enforce its December 15 Order, including the decertification of the CAISO Board. The Commission should seek to reengage the State of California in discussions to revise the CAISO structure. If the State of California is unwilling to work with the Commission to develop a truly independent CAISO Board, then the Commission must give serious consideration to other measures, including seeking judicial enforcement of its December 15 Order, to restore independence to the CAISO.