<DOC>
[108th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:87231.wais]
CALIFORNIA ENERGY MARKETS: REFUNDS AND REFORM
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY POLICY, NATURAL
RESOURCES AND REGULATORY AFFAIRS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
APRIL 8, 2003
__________
Serial No. 108-14
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
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COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky DANNY K. DAVIS, Illinois
JO ANN DAVIS, Virginia JOHN F. TIERNEY, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania WM. LACY CLAY, Missouri
CHRIS CANNON, Utah DIANE E. WATSON, California
ADAM H. PUTNAM, Florida STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia CHRIS VAN HOLLEN, Maryland
JOHN J. DUNCAN, Jr., Tennessee LINDA T. SANCHEZ, California
JOHN SULLIVAN, Oklahoma C.A. ``DUTCH'' RUPPERSBERGER,
NATHAN DEAL, Georgia Maryland
CANDICE S. MILLER, Michigan ELEANOR HOLMES NORTON, District of
TIM MURPHY, Pennsylvania Columbia
MICHAEL R. TURNER, Ohio JIM COOPER, Tennessee
JOHN R. CARTER, Texas ------
WILLIAM J. JANKLOW, South Dakota BERNARD SANDERS, Vermont
MARSHA BLACKBURN, Tennessee (Independent)
Peter Sirh, Staff Director
Melissa Wojciak, Deputy Staff Director
Randy Kaplan, Senior Counsel/Parliamentarian
Teresa Austin, Chief Clerk
Philip M. Schiliro, Minority Staff Director
Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs
DOUG OSE, California, Chairman
WILLIAM J. JANKLOW, South Dakota JOHN F. TIERNEY, Massachusetts
CHRISTOPHER SHAYS, Connecticut TOM LANTOS, California
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
CHRIS CANNON, Utah DENNIS J. KUCINICH, Ohio
JOHN SULLIVAN, Oklahoma CHRIS VAN HOLLEN, Maryland
NATHAN DEAL, Georgia JIM COOPER, Tennessee
CANDICE S. MILLER, Michigan
Ex Officio
TOM DAVIS, Virginia HENRY A. WAXMAN, California
Dan Skopec, Staff Director
Melanie Tory, Clerk
Paul Weinberger, Minority Counsel
C O N T E N T S
----------
Page
Hearing held on April 8, 2003.................................... 1
Statement of:
Winter, Terry, president and chief executive officer,
California Independent System Operator; Karen Tomcala, vice
president, regulatory relations, Pacific Gas and Electric
Co.; Gary Ackerman, executive director, Western Power
Trading Forum; Jan Smutny-Jones, executive director,
California Independent Energy Producers; and George Fraser,
general manager, Northern California Power Agency.......... 50
Wood, Patrick, III, chairman, Federal Energy Regulatory
Commission................................................. 6
Letters, statements, etc., submitted for the record by:
Ackerman, Gary, executive director, Western Power Trading
Forum, prepared statement of............................... 76
Fraser, George, general manager, Northern California Power
Agency, prepared statement of.............................. 90
Ose, Hon. Doug, a Representative in Congress from the State
of California, prepared statement of....................... 4
Smutny-Jones, Jan, executive director, California Independent
Energy Producers, prepared statement of.................... 84
Tomcala, Karen, vice president, regulatory relations, Pacific
Gas and Electric Co., prepared statement of................ 69
Waxman, Hon. Henry A., a Representative in Congress from the
State of California, prepared statement of................. 31
Winter, Terry, president and chief executive officer,
California Independent System Operator:
Information concerning a review on LMP................... 51
Prepared statement of.................................... 58
Wood, Patrick, III, chairman, Federal Energy Regulatory
Commission, prepared statement of.......................... 9
CALIFORNIA ENERGY MARKETS: REFUNDS AND REFORM
----------
TUESDAY, APRIL 8, 2003
House of Representatives,
Subcommittee on Energy Policy, Natural Resources
and Regulatory Affairs,
Committee on Government Reform,
Washington, DC.
The committee met, pursuant to notice, at 2 p.m., in room
2157, Rayburn House Office Building, Hon. Doug Ose (chairman of
the committee) presiding.
Present: Representatives Ose, Sullivan, and Van Hollen.
Staff present: Dan Skopec, staff director; Barbara Kahlow,
deputy staff director; Melanie Tory, clerk; Yier Shi, press
secretary; Paul Weinberger, minority counsel; Earley Green,
minority chief clerk; and Christopher Davis; minority staff
assistant.
Mr. Ose. Good afternoon. Welcome to today's hearing of the
Subcommittee of Energy Policy, Natural Resources and Regulatory
Affairs. Today we are going to look at the California
electricity markets' refunds and reform.
We are going to discus two items. First, the actions taken
by FERC on March 26th of this year regarding the California
energy crisis, and second, the progress California has made in
reforming its electricity market structure.
As many of you know, on March 26th, FERC issued a report
following its investigation of western energy markets. They
concluded that an imbalance of supply and demand, coupled with
a flawed market design, created conditions that led to market
manipulation in California and other western markets.
Consequently, FERC issued several show cause orders that will
potentially result in prohibiting violating companies from
selling electric power and natural gas at market-based rates.
I support FERC's effort to punish those who have been found
to manipulate the market. This sends a strong message to future
would-be violators that if you break the rules, you not only
will have to refund the money, but you also will not be able to
participate in energy markets in the future.
FERC also increased the amount of refunds due to California
by taking into account the manipulation that occurred in
natural gas markets. The Commission plans to continue to
investigate specific acts of market manipulation and make a
final ruling on refunds by the end of the summer. I encourage
FERC to vigorously and promptly complete its investigation.
California and its citizens deserve to get back every dollar
that was overcharged during the energy crisis. It's been almost
3 years since the crisis erupted. It's time to refund the
overcharges so Californians can get the relief they deserve.
The second purpose of this hearing is to discuss efforts to
reform California's electricity market. While politicians from
all corners can argue about who owes what to whom, we must not
lose focus of one important point; that is, a leading cause of
the energy crisis of 2000 and 2001 was a fundamental lack of
electricity supply and a seriously flawed market design. Almost
3 years later, California has failed to fix this problem and
its electricity market still needs reformation.
In February 2002, this subcommittee held a hearing to
discuss the leading market reform proposal known as Market
Design 2002. At that hearing, I made the following statement:
``In reality, California is not out of the woods yet, not by a
long shot. As the witnesses at today's hearing will tell you,
the fundamental factors that exacerbated the energy crisis are
still with us today. California still lacks adequate energy
supply. Our transmission system is old and overburdened, and
most importantly, the structure of the electricity market is
dysfunctional. The market suffers from inefficiencies in terms
of pricing, transparency, transmission and settlement
policies.''
To my great regret, this statement is almost as true today
as it was then. Since last year's hearing, the California
Independent System Operator has introduced Market Design 2002,
which we are hereafter going to refer to as MD02. It's CAISO's
comprehensive proposal to reform California's electricity
market. I applaud the efforts of CAISO to recognize the market
flaws in the current system and attempt to solve them. However,
I remain concerned that the reform process is moving too
slowly. Time delayed is money lost for Californians. Already,
several implementation deadlines have been pushed back.
I am particularly concerned about the delay in the resource
adequacy standards that are central to any market reform. One
of the key regulatory failures of California's restructuring
was the California Public Utility Commission's refusal to
provide utilities with the ability to enter long-term contracts
under safe harbor provisions. Resource adequacy would return
the obligation to serve customers to the utilities by requiring
utilities to produce adequate levels of power to serve its
customers, plus a certain reserve amount. Utilities could meet
these standards by signing long-term contracts with generators,
thereby providing financial certainty and incentive to build
more energy supply in California.
However, this key component has been pushed back to the
final phase of MD02. The CAISO is currently awaiting a
rulemaking by the CPUC before it proceeds. We have been waiting
for that rulemaking since April 2002, when this subject first
came up.
Given the abysmal history of the CPUC regarding long-term
contracts, I am seriously concerned about the fate of this
particular matter. In today's hearing, I have asked the
witnesses to discuss the progress of MD02. I would like to
direct the witnesses' attention to a January 2003 report
produced by the Public Policy Institute of California entitled
the California Energy Crisis: Causes and Public Options. This
report does an excellent job of enunciating the need for
electricity market reform. The report states that any market
reform must meet the following goals: one, lower prices; two,
system reliability; three, efficient use of resources; four,
administrative feasibility; and five, environmental enhancement
and protection.
I wholeheartedly agree with these goals and ask the
witnesses to keep them in mind today as we discuss the details
of MD02. I intend for this to be an opportunity to discuss the
details of reform and debate possible alternatives. But this
process must go forward. It must. California cannot continue to
live in an energy purgatory where we neither know right from
wrong, up from down, or no power from power. The State's
economy remains soft and today energy prices are low.
But this will not continue forever. This is an opportunity
we need to seize. We need to keep in mind that it takes years
to propose, site and build a power plant. Up and down the
State, power plant construction is being delayed and companies
are scrapping plans to build more generation. Energy companies
cite political and regulatory uncertainty as a principal
obstacle to new energy supply. Wall Street refuses to invest in
such an unstable environment.
Yet experts predict that California will experience
shortages again in a few short years. It is therefore essential
that we get on with the reform process in order to encourage
investments in energy generation and transmission. A stable
marketplace with clear, rational rules is the only way to
supply the lowest cost, most environmentally friendly energy
that Californians deserve. We simply cannot afford to wait any
longer.
I want to welcome our witnesses today. They include Patrick
Wood III, the chairman of the Federal Energy Regulatory
Commission; Terry Winter, the president and CEO of California
Independent System Operator; Karen Tomcala, the vice president
of Regulatory Relations for PG&E; Gary Ackerman, the executive
director for the Western Power Trading Forum; Jan Smutny-Jones,
the executive director of the Independent Energy Producers; and
George Fraser, a personal friend of mine who is general manager
of Northern California Power Agency.
[The prepared statement of Hon. Doug Ose follows:]
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Mr. Ose. I'd like to recognize the gentleman from Oklahoma
for the purpose of an opening statement.
Mr. Sullivan. Thank you, Chairman Ose, for holding this
hearing. It is important that the causes behind the California
energy crisis be considered. Coming from a State with an
interest in energy markets, it is important to me that the
truth comes out about the situation. Finger pointing by both
sides does the consumer no good in the end.
One of the recurring issues in the debate of California's
energy crisis is whether or not generators physically withheld
power in order to drive up prices. California has repeatedly
claimed that generators did withhold power. In one case, where
FERC staff has reviewed California's withholding allegations
and found them to be overwhelming false and inaccurate, on
September 17, 2002, the California Public Utilities Commission
issued a report claiming that generators had withheld power on
the 6-days when California suffered blackouts and brownouts.
They claimed that had generators made this power available,
blackouts could have been averted. The FERC staff analysis
refuted the CPUC's allegations.
I hope that FERC will look carefully to make sure that
similar claims now being made by California are not equally
false. I look forward to hearing Mr. Wood's statement and hope
that it will shed light on the current state of investigations.
I yield back the balance of my time.
Mr. Ose. I thank the gentleman.
As many of you may realize, this committee is an
investigative committee. We routinely swear in our witnesses.
So Chairman Wood, if you'd rise, please, raise your right hand.
[Witness sworn.]
Mr. Ose. Let the record show that the witness answered in
the affirmative.
Once again, we welcome to our panel the distinguished
chairman of the Federal Energy Regulatory Commission, Patrick
Wood III. Chairman Wood, you are recognized for the purpose of
a statement for 5 minutes.
STATEMENT OF PATRICK WOOD III, CHAIRMAN, FEDERAL ENERGY
REGULATORY COMMISSION
Mr. Wood. Thank you, Chairman Ose, Mr. Sullivan. I
appreciate the opportunity.
I can't help but be struck by the juxtaposition of the two
items before us today, which are a look at what happened in the
past and then a view toward the future, and the importance of
making sure that those two items are connected. Certainly a
large part of the time I've spent since I think I saw you last,
Mr. Chairman, is really trying to bring to a close our
investigation on the activities in the western markets.
Shortly before I even joined the Commission, the Commission
had reviewed the underlying fundamental supply shortfalls as an
issue and looked at the market design in December 2000, the
prior Commission. We have one commissioner with us today on our
Commission that was there at the time. But analysis showed that
those two parts of the problem were a significant aspect of
what went wrong in California.
What we did after I joined the Commission and we began to
explore these issues further was, we recognized that there
were, in fact, those two conditions of significant supply
shortfalls and flawed market design implementation, that those
did create an environment in which market manipulation could
happen. And, in fact, over the last year, a significant part of
our staff, with resources spent for outside consultants to
assist us in this effort, reviewing tremendous amounts of
market data, actually concluded that in fact there have been
instances, in fact some cases, very notable instances of
manipulations in the power and gas markets that took advantage
of this supply and market rules failure.
So our report came out last Wednesday. As a consequence of
that report, the staff recommended that the Commission take
action on 31 different items relating from alterations of how
we calculate refunds in the ongoing California refund case to
recommendations to pursue causes of action against certain
market participants for violations of the rules to a number of
prospective fixes to make sure that these issues never show up
again in California or in any other State.
So the Commission is currently involved in implementing all
those recommendations. We might change a few of them based on
feedback from parties who have provided some commentary on
this, and also based on our own assessment. But our staff
pursued this effort independently, provided this report back to
the Commission late last month. Actually, for most of the
month, we had the opportunity to review this and digest it.
And, I do have to say, I have some reservations about the
activities that are reported here. I think it's without
question that some of the behavior of market participants that
was analyzed, identified and I think fairly balanced throughout
the staff report is the kind of behavior that ought to be, if
it's not illegal now it ought to be. So we are taking actions
to make sure that our rules reflect, on a going forward basis,
the type of things that I would have hoped good common sense
would have kept people from doing. But quite frankly, it wasn't
in some cases written down that some of these issues were
wrong. And, it makes it difficult to tell customers that we are
trying to do justice when in fact we cannot reach to activities
that we all acknowledge are wrong.
Looking forward, I do remember our visit back in Sacramento
at the hearing we had last year with a number of our same
witnesses today, Mr. Chairman. And, I, like you, am concerned
that while we've had a lot of discussion, we don't have the
Market Design 2002 implemented. It's my hope that, even in
2003, that we could get Market Design 2002 implemented. But I
am concerned that even that time line may slip.
It is critical to get these issues addressed so that these
types of opportunities for manipulation and fraud do not ever
make themselves profitable again, even in a stressed market,
which California has had, and may again have in the future.
Good rules can prevent excessive behavior from manifesting
itself.
So it's my hope that certainly from the discussions today
and the activities that the market participants are pursuing,
which I think have been reported on in the witnesses'
testimony, we can make a lot of progress to ensure this never
happens again. Thank you.
[The prepared statement of Mr. Wood follows:]
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Mr. Ose. Thank you, Chairman Wood.
I am asking unanimous consent to enter into the record the
statement of the ranking member of the full Committee, Mr.
Waxman. Hearing no objection, that will be done.
[The prepared statement of Hon. Henry A. Waxman follows:]
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Mr. Ose. We are going to go to questions now. As usual,
Chairman Wood, you are exactly punctual in your 5 minutes, for
which we are appreciative.
I want to go through a particular concept here, and that is
that FERC, has investigated the issue of pricing of natural gas
and the five indices that were used to calculate it. And, on
the basis of that investigation, has ordered refunds in two
cases and asked for additional information I think in eight
additional, as to the activities of eight additional companies.
The question I have is, if we are able to determine
manipulation post October 2, 2000 in the drivers of pricing for
natural gas, would that manipulation spread to all participants
rather than just be constrained in the two, and would that
necessitate a far grander view of whether or not refunds are
entitled?
Mr. Wood. Pre October 2nd or post?
Mr. Ose. Post October.
Mr. Wood. Post October 2nd----
Mr. Ose. We'll get to the pre-October question.
Mr. Wood. I want to make sure, because there are two
different approaches we take.
From October 2nd forward, which is 60 days after the
utility from San Diego filed a complaint saying that they
wanted FERC to take action in the California ISO and PX markets
to do price caps or some other approach to address the concerns
that were raised. From October 2nd forward the Commission has
really looked at, with the refund case, and that's what we kind
of call generically the refund case, the $1.8 billion plus
extra that will fall from last week's action. We looked at all
providers and said, we are not going to allocate fault or
whatever, but we are just going to reset the price at what it
would have been had a competitive market worked as it was
designed to work in California, what would that price be, and
anything above that has basically got to be refunded.
So whoever charged that, we are not looking at intent or
asking them what they were doing that day. It's just kind of a
de facto calculation, here's what the numbers are. So we don't,
for that reason, we have not looked at individual players as to
refunds, because in fact everybody that is over the threshold
has given it back.
Now, the items you referred to, there's a couple of baskets
of things that fell out of last week's order. One of them was,
there were I believe four companies that were electric and
eight on the natural gas side that we went ahead last week and
moved forward with proceedings to consider revoking their
market-based rates based on some activities that are outlined
in the report.
There are different kinds of baskets. We are doing further
work on three other large baskets of items. One is what we call
the Enron gaming strategies, people that participated in those,
some 30 some odd companies, 16 that had business relationships
with Enron, that's a separate basket of orders, and then 9
companies that may have engaged in economic withholding. This
is pre October 2nd.
If any of those things spilled over into post October 2,
2000, then those would be actually available for additional
refunds if we haven't already received them. But our remedial
authority under the law, as it currently is, is focused on a
time period 60 days after a complaint is filed. So that's where
the October date comes from.
And actually, because we do not have penalty authority yet,
we can seek disgorgement of profits from certain transactions
that violate the law or violate the tariff. So we are kind of
in the middle of the stream with a number of these proceedings.
But the ones you referred to are just part of the total.
Mr. Ose. The question I am trying to get at is that you've
made a determination as it relates to two cases that there was
market manipulation. And, I can't remember the companies. I
know we can get that in the record if you like.
It would seem to me that if there is market manipulation
practiced by these two companies, it has unavoidably spilled
over into additional companies, whether innocently or
otherwise, having their prices affected. I don't see how
logically that can be avoided.
Mr. Wood. Correct.
Mr. Ose. If that's the case, the question of how much to
refund is far greater. Now, in the report that FERC did, there
is a reference to rules, or the protocols or the tariffs, I
don't remember the exact word, but the rules that govern
behavior in markets. There are provisions, in some cases vague,
in some cases not, preventing gaming strategies of the like
that you have found.
If that is what you have found, pre October 2nd, does that
give FERC the ability to go and seek refunds for that period of
time prior to October 2nd?
Mr. Wood. Yes, with a caveat. The hook that we've got to go
back on, and the staff identified some tariff language that
they think is the hook, we've got to say that you actually,
you, company, were notified that this behavior was prohibited,
or violated a rule. Then, we prove that they've done that. They
don't have to excuse that, well, you know, I did it because the
lights were going to go off otherwise, or what's a good
mitigating excuse that certainly we would provide that
opportunity to make that.
And then, if those two things are met, if the law was clear
and you violated it, then you get refunds for that. We are in
the process now, because the parties did have the opportunity
to file on March 20th, which was kind of close to the date of
this meeting, their rebuttal to claims that were made by a
number of the California parties and State agencies that a
number of these violations had happened. We indicated at our
March 26th meeting we want to look at the he said and the she
said. So the overlap between the staff report and the parties'
investigations that came to a climax in March, we are looking
at that this month and anticipate for those issues that go
backward to issue orders on those by the April 30th meeting
that our Commission has scheduled.
Mr. Ose. Now, you referenced in, if the gentleman will just
yield a couple more minutes, you referenced in your testimony
the ability to assess penalty and the lack of FERC authority to
do that to date. In the last Congress, I put in a bill to
provide FERC with authority to assess penalties from the date
of filing, and I am advised, having put that same bill in again
this year, that it's been rolled into the Energy Bill that
should be on the floor later this week.
Does FERC support being given the additional authority
envisioned in that legislation?
Mr. Wood. Absolutely. Yes. And we appreciate it. In
addition to moving the date back to the date a complaint was
filed, you also allowed the Commission, in your law from last
year and the one that was put back in the hopper this year, to
not only get disgorgement of profits, but actually assess
penalties, in some cases up to, let me make sure I get it
right, $25,000 per event. It was $500.
Mr. Ose. $500?
Mr. Wood. Per event.
Mr. Ose. Right.
Mr. Wood. And, it is over a broad, over the entire Federal
Power Act electricity title that we live under. So those three
things together, the refund date, the broadening to include the
entire electricity title, and the elevation of the penalty
amount does give the Commission a much stronger tool chest to
use in overseeing markets.
Mr. Ose. I appreciate the chairman's comments on that. My
last question would be, if you found companies that have
engaged in this behavior in violation of the terms of their
certificate or violation of what you call tariffs, what I call
rules, what the proposal has been is to deny them the ability
to sell power or gas at market-based rates. It seems to me that
such companies frankly ought to be put out of business, period.
They ought to get the death penalty, if you will, as a clear
and unequivocal message about this kind of behavior not being
tolerated.
Could you share with us why, if you would, you're only
going halfway? My words, not yours.
Mr. Wood. Well, we've got, I mean, the two tools we've got
are taking away the privilege to do business at market-based
rates. I think, I haven't actually given a lot of thought to
can you just take them out of business altogether and revoke
their license to even have cost-based rates. Can I get back to
you on that one?
Mr. Ose. Yes.
Mr. Wood. We honestly have not looked at that. I think the
perception in the outside world has been that the loss of
market-based rates in a world that's dominated by markets is a
significant penalty, and is one that we certainly have. Again,
it's one of the two things that we have, get the profits back
and yank your market-based rates. To have something on the
intermediate scale, which the penalties would provide, is
certainly something we welcome.
Not all behavior is worthy of putting people out of
business. Certainly errant employees, bad management, you know,
if there is something rotten at the core, certainly that's a
different issue. I think there are gradations, just as a judge
in a criminal case gets to look at. There are gradations of
punishment that a jurist ought to have. And, I'll have to think
about that.
Mr. Ose. Let me show you a flip side of that. The flip side
of that is people in my district who process food, paying two
or three or four times what they had budgeted or expected for
electricity and having to shut down processing lines and lay
people off. Or people in the business that use hot water
basically can't buy the natural gas to heat the water that they
need in their business. And, in effect, they are being shoved
out of the position of being profitable into a position where
they cannot survive. And, if someone is engaging in
inappropriate behavior that creates that, it seems to me that
maybe they ought to share the same fate. Just a different
perspective.
The gentleman from Oklahoma.
Mr. Sullivan. Thank you, Mr. Chairman.
Chairman Wood, I'd like to talk about a FERC staff report
that has not gotten much attention. In 2002, the California
Public Utility Commission alleged that generators had
contributed to the blackouts experienced in California by
deliberately keeping plants shut down rather than running them.
If true, this would be extremely disturbing.
Yet, as I understand it, your staff's investigation found,
``No evidence that any of the generators withheld any material
amount of available power during the hours of the service
interruptions.'' Is this correct?
Mr. Wood. Yes, sir, it's correct. The staff did look at the
days identified in the California PUC's report from last year.
They looked at exactly the days of firm service interruptions,
i.e., when there were blackouts in California due to inadequate
supply. And, I will admit, it was difficult to kind of go
through the, for our staff spent several months going through
the data that the ISO had to actually look at what generators
were available, what they had scheduled, what they had not
scheduled, what was committed elsewise to some other customer.
And, concluded that for 87 percent of the power, the megawatt
hours, that in fact the firm service interruptions happened
when the power was actually not available. It was legitimately
not available through the ISO's records.
Now, admittedly, the ISO does not keep records specifically
for this point. So to give the CPUC, I guess the fair side of
the analysis is, the records weren't just sitting there ready
to be written up. It took a lot of digestion and analysis and
that was really what our staff did at our direction to really
get to the bottom of this. Because whatever the answers are,
we've got to deal with them. If nothing happened and people
should be exonerated, then that ought to be done. And, that's
in fact what we did.
If there is something going on, and again, we are looking
at other hours today, we are looking at other hours than just
these ones in this report to make sure in fact that this didn't
happen in some other period. But in looking at the blackout
periods, which were the crucial times when Mr. Winter and his
colleagues at the ISO were scrambling around the whole west to
keep the lights on, we did look at the claims here and chased
them all the way down.
Thirteen percent of the hours we are unable from the
records to account for. But in total, they did not add up to
the amount that would have prevented a blackout. So while we
don't have a complete answer on the 13 percent, I think the
takeaway is that the, while those megawatts may in fact have
been withheld, they were such significantly small amounts that
they would not have enabled the ISO to keep the lights on.
So that's what our conclusions were on this report. And, as
I mentioned, we are continuing to look throughout all the
records. Some claims have come in as of last week about
physical withholding, which is a really bad practice, if
engaged in for the purpose of elevating market prices, and we
will continue to chase those all the way down as we did these.
Mr. Sullivan. Not only was there no evidence of
withholding, the report goes on to conclude that the evidence
actually refutes the CPUC's allegation that power was withheld.
The report says, ``Approximately 87 percent of the power that
the CPUC concluded was available power not generated was in
fact available.'' Isn't this right?
Mr. Wood. It was actually not available. Yes, sir.
Mr. Ose. Could you clarify that for me, please? Run through
that again. I just want to make sure we get it.
Mr. Sullivan. The full question again?
Mr. Ose. Yes.
Mr. Sullivan. Not only was there no evidence of
withholding, the report goes on to conclude that the evidence
actually refutes the CPUC's allegation that power was withheld.
The report says, ``Approximately 87 percent of the power that
the CPUC concluded was available power, not generated, was not
in fact available.'' Isn't this right?
Mr. Wood. That's correct.
Mr. Ose. Thank you. Keep going.
Mr. Sullivan. While I am concerned because I think this
report directly calls into question the credibility of the
allegations made by the California parties, according to your
staff report, the CPUC was wrong at least 87 percent of the
hours it questioned. Eighty-seven percent is not a small error.
In my view, that report was more of a political document than
an objective analysis.
Now I read of a new or recycled allegations being made by
California where companies have told me the allegations have no
merit. Is the FERC staff going to examine the reliability and
merit of these allegations and eliminate the incorrect ones
before issuing show cause orders to the companies? Giving that
show cause orders tend to assume a company is guilty until
proven otherwise, shouldn't FERC determine how accurate these
latest allegations are?
Mr. Wood. We are, and that is the reason, Mr. Sullivan and
Chairman Ose, that we did not issue the show cause orders in
the other 30 or so companies last week. In fact, the parties I
mentioned a moment ago have the opportunity to respond to the
claims by California parties by March 20th. And, it's about 3
feet high worth of responses. So needless to say, we couldn't
digest those and give both sides proper weight in 6 days. So we
are in the process of doing that now. And, in fact, may indeed
winnow down that list to just focus on not only the specific
companies but the specific companies with specific claims that
appear to have violated tariffs or rules at the time, rather
than just broad brush complaints.
Mr. Sullivan. Thank you.
Mr. Ose. Chairman Wood, I want to make sure I've got this
straight in my head. Under the rules that FERC operates under,
people who are selling in the interstate market come to you for
certificates that dictate the manner in which they can market
their power. Is that accurate?
Mr. Wood. Correct. Prior to 1992, they just came to us to
set their rate. We did cost-based rates for everybody.
Mr. Ose. Now, those licenses, if you will, are called
market-based certificates?
Mr. Wood. Right. And, since 1992, people have come in and
asked for and in most cases been granted the authority to sell
power at market-based rates, i.e., what the market will bear.
Mr. Ose. OK. Now, in November 2001, let me back up here a
bit. The Federal Power Act says that FERC cannot go prior to
October 2, 2000 to order refunds unless sellers violated their
market-based certificates.
Mr. Wood. Or the CAISO tariff or FERC, Federal Power Act or
FERC rules.
Mr. Ose. The question I have has to do with getting the
rules that the certificates are issued under, sufficiently
strengthened so that there is no question, there is no
vagueness, there is no ability to equivocate, everybody knows
what the rules are. Now, FERC recognized this same problem in
November 2001 and has been attempting since then to reform both
the natural gas and electric power tariffs. And yet, the
Commission hasn't been able to come to closure on that to date.
Mr. Wood. That is correct.
Mr. Ose. The question when I go home is, you know, when are
you going to fix this, my constituents say to me. My question
to you is, when are you going to get closure?
Mr. Wood. On the market-based certificates, we actually a
year ago this month, we were at that point a four-member
Commission, came to two-two vote on how to refine the market-
based rate tariff conditions. And, our two-two condition
honestly existed until the end of last year.
Knowing that Mr. Gelinas, who is in charge of putting this
report together, was going to recommend changes to a number of
aspects of market-based rates on both power and gas, we
beforehand had not looked at the gas certificates because I
think we had focused probably unduly on the electric only, but
at that point, we now, it's 1 of the 31 items that we've got to
punch through in the next series of weeks.
So you are correct, sir, to point out that we have not
tightened up this, I don't want to call it loophole, but
tightened up this certificate. But we have not completed that
work yet.
Mr. Ose. In the summary that you, we are going to use the
summary because I can hold it up here, it's not 400 pages, in
the summary you have a number of recommendations that are
enunciated relative to the changes that need to be made. For
instance, in the reporting process, look at page ES6, chapter
3, traders attempted to manipulate price indices through false
reporting. Now, there's a number of recommendations here under
the bullet points that I am willing to go through one by one or
in aggregate send to you in writing. But I am trying to get at
what kind of rules changes you are presently considering to
prevent this market manipulation from occurring again.
Mr. Wood. I could go through these, in fact, because we
have just recently discussed those among my colleagues. They
are all summarized on ES14.
Mr. Ose. All right.
Mr. Wood. The first four under ES14 are basically as we
just discussed, conditioning certificates of electric and gas
companies. It's our intention to get that done. We've got the
open proceeding that you referred to that we had locked two-two
on. That's the vehicle for doing that on the electric side, and
we've got to initiate a new proceeding, as mentioned there,
actually amending our regulations, and they're referenced there
in the first bullet, to do that on the natural gas side.
But that would be, for example, that is the one to provide
explicit guidelines and prohibitions for trading natural gas.
The manipulation of the indices and the behavior that led to
inaccurate price reporting, which shows up elsewhere in the
next series of bullets, actually the fifth, sixth, seventh and
eighth bullet relate to the specific gas price index issue. The
Commission is having a workshop on that on the 24th, I guess
the week after next, on what to do about these natural gas
price indices that a lot of people in the marketplace rely
upon, but which have been called into question not only by this
Commission staff report, but by market participants probably
over the last 6 months.
Mr. Ose. I especially want to go to the eighth one there.
Encourage standard product definitions for published natural
gas and electricity price indices and standard methodologies
for calculating the price indices. This would seem to me to
kind of be at the core of variability in how you calculate
costs versus what's going to be charged. Of the five indices
that were used to calculate natural gas price, if you don't
have a standard product definition for what is or isn't a
market-based product, how do you find that someone's not giving
you square data?
Mr. Wood. I think you've kind of hit the nail on the head.
It's for that reason that we really, as of last week, just
said, we cannot rely for the purposes of calculating the
California customers' refund, we cannot rely on a weighted
basket of these price indices for gas. They might have been
directionally correct, and I'll say certainly, the indices have
the potential to be right on target. But it's not a number that
we on the regulatory side of the fence could really hang our
hat on and say, this is what we know the actual market price of
gas was on that day.
So we went back to a much more regulatory approach to
figuring out what should the input for gas price be and then
provided opportunities for suppliers to show us their receipts
basically, and get their money for what they actually spent.
But you're right, the lack of standardization in the index
reporting definitions and in the collection and computation of
the data do leave some potential for variation that it's hard
to get real comfortable with, from our point of view.
Mr. Ose. In terms of defining a standard product or a
standard methodology, has it gone beyond merely identifying the
problem in the 400 page report, or there is actual effort to
come to conclusion on that?
Mr. Wood. As I mentioned, we teed up an all day workshop
with different people in the industry across the board,
including the current publishers of price indices, which are
all trade press organizations, a committee of chief risk
officers, which are the CROs from all the energy companies and
their customers, the current exchanges, NIMEX, ICE,
Intercontinental Exchange and I believe one other are also on
the list, and some customers and users that are also involved.
So it's my expectation based on the questions we ask them
to respond to which are these, the ones here and broader. The
definition of the product I don't think is going to be that big
of an issue. I think the gas market today has pretty much a
level maturity as to what the product is. It's what you do with
the price as reported for purchases of those products or sales
of those products, how are they averaged, how do you throw out
the high numbers and the low numbers, what statistical sampling
technique is used. I think it's those types of things that
parties may want to explore, and will be exploring, I expect,
on the 24th.
Mr. Ose. Now, similarly, there's clear indication that
there were gaming strategies being employed at some point in
this marketplace. Similar to a definition of a standard product
or standard methodology for fixing price or calculating price.
I am not aware of any clear or definite tariffs, rules, that
say this gaming strategy is illegal, this one's illegal, this
one's approved, that one's illegal. What progress is FERC
making on that?
Mr. Wood. Well, we published last summer our standard
market design rulemaking on the electric side. Just to say up
front, we've made no progress at all on any of these relating
to the gas side, other than indicating we are going to take
action in the first two bullets proceedings on the gas gains
and the gas reporting. But on the electric side, primarily
based on our experience in the California market, we did put
forth, well, not 10 commandments, I think there were 7.
But in the proposed rule that is not being commented on and
that the Commission is actually shifting its focus to, to
really finalize that rule. But there are a number, I mean,
certainly looking at wash trades, looking at false reporting,
misreporting load for the purposes of gaming the congestion
management system. I think there were four more, I'd have to
look those up and report those back. But we have kind of laid
those out for the electric side. I think the real lesson from
this report is, we need to attend to the gas side as well.
Mr. Ose. At the end of the day, I don't know whether
history will show this got dropped in your lap or otherwise. I
mean, that you came into something midway through and it just
blew up, just by chronological coincidence or otherwise. But I
have to say, I just find it amazing, given the volume of
natural gas and electricity that transacts on a day-to-day
basis or in the forward markets and the like, that we don't
have any clear definition of what a market product is, a
methodology for factoring it into these prices, what is or
isn't a legal trading strategy and the like.
We have to get to the bottom of this. We have to have
defined rules so that we can stop this gamesmanship. Because I
can tell you, for every 10 good traders out there, people who
are trying to do the responsible thing and abide by the tariffs
and the rules for FERC and CAISO and everybody else, there's
one out there who's going to try and game it. I just know that.
And, until we get to a defined set of rules, we are going to be
chasing our tail. And, it's very frustrating up here,
especially as someone who has to pay for all this stuff, living
in California.
Mr. Wood. Again, I could not agree more. It wasn't
certainly with my eyes closed that I knew this was going to be
a big part of the job, was cleaning up the mess. But I do think
it's very important for these two critical infrastructure
industries as we go forward to have very well defined rules of
the road. I think it's, I am sure everybody's sick of me
talking about it, but it's the only way to come and get this
thing back on track.
I should add, on the gas side, because it has worked, I
think almost spectacularly well over the last 16 years that
it's been more market based, there's been, the conservative
estimate is $200 billion stayed in customers' pockets that
wouldn't otherwise have been there. The high end is $600
billion over a 16 year period. It has worked very well in many
instances, in most instances. In fact, in probably all
instances except when you had the major use for incremental gas
in California for an electric market that was on the edge.
And, I think any commodity market is going to be pushed
against a tremendous amount of stress when you have kind of a
fundamental market structure design flaw, which relying on the
spot market was, in the California power market. And, when you
also have really severe stress on the supply side, with the
absence of significant amounts of hydro from the grid that
year, it really shifted tremendous reliance to these old, 40
year plus, natural gas plants.
And, I do think that those conditions, as we concluded in
the report, the staff did, made it very fertile ground for
manipulation. But recognize that when those conditions, when
the balanced market rules and the sufficient infrastructure are
in place, it's very difficult to profit from manipulation.
Because if you get manipulation, then someone undercuts you and
takes your customer away. That's how it's supposed to work, and
it has worked very well.
So I share your concern. I am committed, and we will,
before I am done with this job, get these market rules all the
way down and put forth. But recognize that it's not a whole
festering pot of garbage. It is a few bad actors that we are
going to identify and remove, and let the rest of the people
that are participating in this good marketplace continue to
serve customers and serve them well.
Mr. Ose. The gentleman from Oklahoma.
Mr. Sullivan. No questions, thank you, Mr. Chairman.
Mr. Ose. The press reports you're struggling with have to
do with the difference between a short-term contract and a
long-term contract, relative to the pricing of the natural gas
that goes into the formula for calculating the price of
electricity. Your point being that there may be an influence
that the spot market price for natural gas has on the longer
term markets, but there is some point at which that influence
ceases to be material.
And, the question I have is, at what point in the future,
in your opinion, are forward prices for natural gas divorced
from spot market price influence?
Mr. Wood. One of the things that we have seen in the gas
market actually, and I think the staff has a name for it, it's
backwardation, is today where the spot prices are right around,
say, a month ago, they were in the $6 range, they've fallen
closer to $5 and hopefully will stay in that range or lower.
But the forward price, I think the expectation that the market
has been having is that in 2 years from now, even I think the
expectation has become, we will pick back up and we will kind
of get back on track and demand will be up. But in 2 years from
now, I think the forward curves are looking like they're $1.50,
$1.75 lower than they are today. I think we saw the same thing
in the power markets in California, that the supply crunch of
today will not be perpetuated years and months on end in the
future.
I think that happens. I think in commodity markets you can
have short-term increases but recognize that over time they
will settle back down to a lower level. We've seen that, and in
fact, the last time, last week I looked at the forward curves
on gas, it was still, it wasn't as high as $6, it was closer to
$5. But there was still a forward curve that was lower in the
future months than it is today. I hope that's correct.
Mr. Ose. You have the difficulty of calculating just and
reasonable prices on short-term and long-term contracts. So how
do you factor in the price curve that you've just described on
a long-term contract? If you're going to order a refund on a
long-term contract, how do you know whether the price curve on
natural gas or electricity is appropriate or not?
Mr. Wood. One of the things that we asked our staff to do
in this report, the fat one, was to look at the correlation
between spot market and, which is defined as the 24 hour or
less market, and the longer term markets. And, in chapter 5 of
that report, they in fact looked at all the contract data and
had a statistical consultant from the outside, let me see who
it was. I'll have to look up his name later. Actually he
compared all the costs of all the contracts that were entered
into in the California market. And, on page D-17, did actually
pull together a relationship chart, demonstrating the
relationship between spot market prices and contracts based on
the length of various contracts. As I think your question
anticipated, had a much more pronounced linkage in the 1 to 2
year timeframe than it did in the 3 to 4 or in the 5 to 8 year
timeframe.
So it is one factor that we've got to take into account in
looking at any sort of contract claims. And, we do have some
before us, as you know.
Mr. Ose. Is it your opinion, then, that the relationship
between the spot and the forward market breaks at some point?
That irrespective of whether there's been manipulation at some
point chronologically into the future it washes out?
Mr. Wood. That's what I've got to think, what I think about
it, because quite frankly, we are in the process now of, with
the pending cases, grafting this together. But I would say that
the staff analysis that I referred to in chapter 5 there does
indicate a tapering off, really, after the 1 to 2 year
timeframe.
Mr. Ose. I have to express some reservations about that. My
rationale being is that if the spot market is manipulated so
that the price is elevated from what it would otherwise be,
then at some point or another beyond a 1 or a 2-year timeframe
you're going to have that reflected in the price curves at the
out years. And, if that's the case, if that manipulation in the
spot market in fact does go into those out years, then does
that constitute rationale for refunds?
Mr. Wood. If in fact it does, it could, Congressman. But
again, I am just reporting back here, they have actually looked
at the actual contracts that were entered into during this
period. This isn't a hypothetical exercise. They actually
looked at all the contracts. We required under subpoena all
these contracts to be provided to the Commission so the
statistical correlation runs could be done, and in fact came up
with a much more attenuated view of the link in the 3 to 4 year
category and the 5 to 8 year category.
Mr. Ose. All right.
The gentleman from Maryland.
Mr. Van Hollen. I yield back my time, Mr. Chairman.
Mr. Ose. You're yielding back for the moment?
Mr. Van Hollen. I am yielding back.
Mr. Ose. All right, we are just going around and around
here.
Mr. Van Hollen. All right.
Mr. Ose. The gentleman from Oklahoma?
Mr. Sullivan. I yield back, Mr. Chairman.
Mr. Ose. I tell you what, I sure like freshmen. [Laughter.]
Commissioner, the market monitoring ability that you have
been able to put in place over at FERC, we've had this
discussion a number of times as to what kind of tools you now
have as opposed to what you didn't have. What is the status, or
can you give us an update on your market monitoring programs so
that we can in turn share that with the public, so that they
can get some level of comfort that we've got the tools to do
the job, or if we don't have the tools to do the job, what we
do need to have in order to be able to do the job?
Mr. Wood. Three things you need to have to make a market
work: infrastructure, rules, which I know we are talking about
on the next panel, and third is vigilant oversight. While we do
have in the different regions of the country, as California
does, as we do here in the Pennsylvania, Maryland, New Jersey
interconnection, as my home State of Texas has and others, a
market monitoring unit on the ground that looks up front at
what is going on with the market, what we were missing at FERC
was really a centralized, professional, experienced cadre of
people who could look at the national perspective and do that
well.
So thankfully Congress did give us appropriation right as I
took over as chairman in September 2001, and we did start at
that point a nationwide search for an office director, senior
staff, and we also had some existing staff at the Commission
who moved to the new office. We've got about 90 people now who
not only enforcement and remedial activities, but the kind of
work like you saw that Mr. Sullivan asked about from the
staff's review on the CPUC fiscal withholding report. Those
folks are here behind me today.
We also have people that look at the health of markets,
these forward curves, we look at where there are interruptions
in gas pipeline service, when there are escalations of gas
price as we saw in the past 2 months, investigating that not
days later but minutes later. And, the ability to do that is
something our agency did not have and does now and acts on it
very quickly. Market participants hear from us often. We
monitor not only electric data and gas data but also oil data.
We regulate, kind of the untold story of FERC is we have
regulated the large oil pipeline industry for their rates for
quite a while. It's one of those aspects that we are really
proud of.
In addition to that, we've now got employees from the FERC
that are out in the marketplace. We have three employees, for
example, at the ISO that----
Mr. Ose. On the floor of the ISO?
Mr. Wood. No, we actually are not allowed to be on the
floor of the ISO. But there are three employees there. We lease
office space from the ISO and our folks there interact closely
with the market monitoring unit as well as with market
participants in the California market. They've been there since
October of last year, when we put in the new market power
mitigation measures that we changed to at that time.
And, we also now just recently announced that we are
putting two in Carmel, IN, to monitor the midwestern markets
which are in the process of being established and are kind of
going through their startup and growth period. So I expect we
will see more of that as the markets mature and develop around
the country. We will make sure that we don't just sit here but
we have folks that are our front line out there as well.
Mr. Ose. My recollection is that you also took the step of
hiring one or two professional traders to come to work for
FERC, the purpose of which is to get not so much the scientific
side but the trader seat of the pants sense of what's
happening. Is that still the case?
Mr. Wood. It is, and actually more than one or two just
came to work at FERC from the industry side. And, it's not just
the trading, but all aspects of both production, on the
production side, on gas, we have some good gas expertise as
well as some electric expertise from different parts of the
industry. It's been, certainly we would rather not have the
downturn in the industry, but it has allowed us to be a more
attractive employer than we otherwise would have been, and have
been able to attract certainly hopefully for longer than short-
term some good, diverse talent to the agency. So I am again
very grateful for the funding and the FTEs from Congress, but
doubly grateful that we've been able to actually attract the
quality people that we've been able to get.
Mr. Ose. One of the things you have in the market
monitoring area is you have a large map of the United States.
And, up on that map you can visually see the, if memory serves,
the path by which power gets to the markets. Now, the purpose
of the map is to identify where you get roadblocks or
impediments or congestion or what have you. How often do you
tweak, if you will, the formula by which you identify where
congestion occurs or where a problem arises?
Mr. Wood. Well, we do rely on certainly the NERC, which is
the North American Electric Reliability Council, does set forth
the criteria under which interruptions would happen. Those are
called transmission loading relief, which means you just
basically take transactions off the grid and say, you can't
send your power that way. Those happen every day. Some of them
are like, I guess, bronze, silver and gold. You've kind of got
a lot of bronzes, maybe a silver every day somewhere and every
so often, a full curtailment of loads. Curtailment doesn't mean
blackout, it just means that commercial transactions don't
happen and customers end up paying more money. So congestion
basically is a money issue.
At extreme times, as we've seen in your home State, it can
be a reliability issue as well.
Mr. Ose. I just want to share, that's not why we are called
the Golden State. [Laughter.]
Are all of these resources we are putting for market
monitoring, will they alone prevent higher prices or blackouts
in the future?
Mr. Wood. No. And, I hope I haven't promised that they
would. But for example, California, let's look at that. In May
2000, the prices in the wholesale market started to rise. We
got a complaint 3 months later from a utility that was paying
these prices and thinking, gosh, I am going to go bankrupt if I
have to sell at this retail price and pay at this wholesale
price.
Sixty days later than that, so a good 150 days after the
fact, customers had some remedy. I just find that unacceptable.
So we want to make sure that if there are issues, that we
identify them the day they are happening, so we can take action
that day so if there is some violation, if it's the normal
forces of the market working, then they should be allowed to
work. And, people curtail their use or buy alternate products,
switch from gas to fuel oil, perhaps, and do economically
rational things.
But if they're the result of somebody taking advantage of
the rules or creating a situation that is illegal or unlawful,
then that ought to be able to be remedied, not 150 days later,
but that day. And, I think, if we continue to maintain the
approach that we've got, in relying on our extensions in the
regions, then that can be very quick activity and not extended,
as we saw in the California crisis.
Mr. Ose. Do you now have the ability to act on an immediate
basis? Or are there things you need from Congress yet?
Mr. Wood. You've got it. As you mentioned, your bill does
that for us. We do not have that ability on the natural gas
side. In our prior discussions, we focused on electricity. But
the Commission, in my testimony to our oversight committee, did
indicate a request to have such authority on the natural gas
side as well, similar to what we just talked about in bill 964.
But I think what we've found, and I think it's certainly
the case, is when market participants know that not only are we
looking, but we have capable, qualified, bright people who are
doing that looking, not politically motivated looking, but
people who are interested in the long-term health of the
markets looking, then those behaviors get remedied pretty fast,
if they get tried at all. It's hard to know what caused the
California markets to kind of settle down, but I think a
substantial number of people have credited the fact that now
they knew that the cop was looking, not parked at Dunkin'
Donuts but actually out there looking.
And, we will continue to do that.
Mr. Ose. Dunkin' Donuts is based in his district. No, just
kidding. [Laughter.]
Mr. Wood. I just think that the ability to be nimble and
quick and smart is 90 percent of what is needed to oversee the
market. The other 10 is to have a tool chest that gets
attention.
Mr. Ose. I do want to thank you for the work you do. I may
continually nag at you to come on, come on, faster, more,
sooner, frankly, because I've got 35 million people of which
600 odd thousand live in my district, and they're concerned
about this. I know Mr. Sullivan and his constituents are
concerned about this. I do want you to know that, we do not
believe this issue is over. Excuse me, I don't believe this
issue is completed. I do think we are going to have a
continuing issue in California relative to supply and price.
The ability to bring to the rulemaking process some
definition on methodologies for pricing and marketplace
behavior is critical to what we are going to do successfully in
California. We are going to talk a little bit about that in the
next panel. I do appreciate FERC's willingness and interest to
stay on this, because I will continue to watch and if
necessary, have additional hearings. Because I know you love
coming up here.
Mr. Wood. Let's go to Sacramento again.
Mr. Ose. Yes, maybe someday. I will tell you, I am
troubled, I fail to see the logic between being able to find
evidence of manipulation and moving to order refunds and then
finding similar evidence of manipulation and being reluctant to
order refunds. You haven't made that case to me yet, that there
is a break between those two. Manipulation is manipulation.
And, frankly, my people suffered accordingly. To the extent
that they did suffer, they are entitled to refunds over and
above a just and reasonable price. We'll come back to that
issue in future hearings if necessary, and you'll probably get
endless letters from me accordingly.
But I do want to thank you for coming down here. I am
appreciative of the fact that you've accommodated our next
panel and will participate in that too. We are going to take a
3-minute break here. Commissioner Wood, thank you for joining
us.
Mr. Wood. Thank you, Mr. Chairman.
[Recess.]
Mr. Ose. All right, we are going to go ahead and reconvene
with our second panel. Joining us on our second panel are the
following individuals. We have Terry Winter, who's the
president and chief executive officer of the California
Independent System Operator; Karen Tomcala, who's the vice
president of regulatory relations of Pacific Gas and Electric
Co.; Gary Ackerman, who's the executive director of the Western
Power Trading Forum; Jan Smutny-Jones, who's the executive
director of the Independent Energy Producers; and we have
George Fraser, who's the general manager of the Northern
California Power Agency.
As you know, we swear in all our witnesses. Commissioner
Wood is joining us also. We are going to ask him to rise and be
sworn in again. If you'd rise, please.
Commissioner Wood does not need to be sworn in a second
time? All right. Well, he's volunteering. [Laughter.]
[Witnesses sworn.]
Mr. Ose. Let the record show that all the witnesses
answered in the affirmative.
Now, we have an order here, we are going to move from my
left to my right. Commissioner Wood having given his testimony,
if he wishes to add anything, will be welcome to do that. Each
witness is going to be provided 5 minutes. We've received your
testimony in advance. I have in fact read it. And I have
numerous questions. We'll get to those as we move through.
So Mr. Winter, you're first for 5 minutes.
STATEMENTS OF TERRY WINTER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CALIFORNIA INDEPENDENT SYSTEM OPERATOR; KAREN TOMCALA,
VICE PRESIDENT, REGULATORY RELATIONS, PACIFIC GAS AND ELECTRIC
CO.; GARY ACKERMAN, EXECUTIVE DIRECTOR, WESTERN POWER TRADING
FORUM; JAN SMUTNY-JONES, EXECUTIVE DIRECTOR, CALIFORNIA
INDEPENDENT ENERGY PRODUCERS; AND GEORGE FRASER, GENERAL
MANAGER, NORTHERN CALIFORNIA POWER AGENCY
Mr. Winter. Thank you. I appreciate the opportunity to come
and talk to the group. As normal, I have to say that as the CEO
and president of the ISO, I am representing myself here today
and would not want to represent that my comments deal with the
board, any State agency or the Governor's office. So with that
disclaimer, you're going to get whatever you see.
With your concurrence, I would like to submit for the
record an opinion from our market surveillance committee, which
consists of Dr. Wolak, Dr. Bushnell, Dr. Hobbs and Dr. Barber.
I had asked them to do a review on LMP. They got that to me
yesterday. So if I could put that into the record.
Mr. Ose. Without objection.
[The information referred to follows:]
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Mr. Winter. Thank you.
I think the first question, why MD02, you've defined what
it is, and for the record, that's Market Design 2002. And, one
of the things that we've heard loud and clear is that the
California market is broken, and I certainly agree with that.
We no longer have a PX, we no longer have the ability to get
supply. We certainly have seen high prices, and even though
they have moderated considerably over the last year, they were
still astronomical and we are concerned about those continuing.
Actually, the redesign by different names started in 2000
when we started having market things that we were concerned
about. And, it's been over the last 2 years, we actually were
ready in about January 2001, we received a new board. They
wanted to get familiar with it. So the final MD2002 was filed
with FERC in May 2002. And, this was a result of untold hours
of stakeholder meetings, searches for best practices among the
other ISOs, and recognizing the constraints of the California
market and the situation the transmission system was in.
The end result is MD02. And, it is our proposal to solve
the six major concerns that we have. One, it addresses and
prevents gaming and market power abuse. Two, it's to help us
reliably operate the system. Three, it allocates scarce
transmission resources fairly and provides open and non-
discriminatory service. Four, it provides a day ahead market
and removes from real, as much from real time as possible, the
decisions that we have to make. Five, it provides transparency
to market participants so that they can better manage their
costs and exposures. And, six, we are hoping that it will
return confidence to the marketplace, so that the efficiencies
gained can benefit the consumers.
Until this is in place, I feel that we are still vulnerable
to all the things that have happened to the market in the past.
So we feel we need to move rapidly to get this done.
You've asked me to address four areas: resource adequacy,
mitigation, LMP, and seams issues. Each of those subjects you
could literally write books on. But I will try to capture in
one or two sentences where we stand on each of those.
Resource adequacy. The ISO feels as a very bare minimum
that load serving entities should provide an amount equal to
112 percent of their peak load. This will meet operational
reliability concerns and ensure a competitive market. The ISO
did not file this with FERC at the request of the State, which
is working to provide a procurement policy for the utilities
and the needs of the State. They have moved somewhat rapidly
and in terms of getting hearings started, the PUC, the CEC are
all working on these. They have told us that they will have
results by November 1st.
I think it is the State's prerogative to be able to say, we
are going to meet this capacity with demand programs, with
efficiencies, with additional generation, renewables. I feel
that is a State prerogative. So we are waiting. But again, I
think the ISO, from our standpoint, we have to be guaranteed
that you have at least 112. The State is looking to give us
more than that at the 115 to 120 percent level, which I am
encouraged by.
Mitigation. FERC has in place three things that they gave
us at the end of, or the fall of last year. One of those was a
must offer requirement, which ensures that generators will bid
into the market. Second, a bid cap of $250. And third, an
automated mitigation procedure that checks for prices versus
the cost of gas.
And, while those are absolutely necessary and helpful in
the market, I would ask for two additional things. One of those
is a method to mitigate local market power, because we see that
when we have transmission lines out, we see it in pockets where
the transmission service is not adequate.
The second is, as much as I would dislike having to enforce
penalties, I feel that the market, to gain confidence and also
control some of the activities that we have seen, that we need
penalties for things such as uninstructed deviations, when
people do game the market. We've got to have a clear set of
rules and say this is unacceptable and a way to stop that
behavior.
LMP. LMP has been much discussed, but merely, I think if
you look at what it is, LMP is just a way of allocating
transmission resources. The drawback, of course, to some is
that it gives you a different price at different locations. If
you happen to be in one of those high priced locations, then
you're very anxious to make sure that you don't get stuck with
a high price. We think it's absolutely essential for the
generators and the wholesale purchasers to understand what
price they are paying at a particular location, and so we are
recommending that we go with the LMP, and I'll stop in just a
second. But we are going to average the price over PG&E, Edison
and SDG&E's territories, so that the retail customer will see
one common price.
Seams issues, we are working on those and I am sure you'll
have a question for me on that. Thank you.
[The prepared statement of Mr. Winter follows:]
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Mr. Ose. I thank the gentleman for his time and his
testimony.
Our next witness is Karen Tomcala from Pacific Gas and
Electric. Welcome. You have 5 minutes.
Ms. Tomcala. Thank you, Mr. Chairman. I am Karen Tomcala,
vice president of regulatory relations, of Pacific Gas and
Electric Co.
I appreciate the opportunity to testify before you here
today, and I would ask that my full written testimony be
submitted into the record.
Mr. Ose. Nobody is going to object to that.
Ms. Tomcala. PG&E supports the ISO's MD02 efforts, because
a well functioning wholesale power market is necessary for
utilities like PG&E to provide the reliable service our
customers require. We should all recognize that the MD02
related tasks before the ISO are both technically complex and
politically sensitive, and the ISO must move forward respecting
both of those facts.
With this in mind, I'd like to emphasize the processes
necessary for the ISO to achieve a successful MD02 program.
First, the ISO must coordinate its market redesign activities
with State efforts. Fixing California's energy market requires
both Federal and State regulatory attention. The California
PUC, under new leadership and in coordination with the other
California energy agencies, is beginning to construct a
coherent model for the State's energy future. The ISO's
activities must proceed in synchronization with these efforts,
so that its ultimate MD02 product supports the emerging model.
Second, the ISO must provide an effective process for
stakeholder participation and input in developing MD02. The
energy crisis has shaken the confidence of everyone involved.
Redoubled efforts to ensure that stakeholders' concerns are
heard and addressed in the MD02 process are necessary to
establish confidence that California will have a fair and
stable market design on which participants and consumers can
rely. Creating such stakeholder buy-in can provide the
additional benefit of minimizing litigation, both during the
design process and down the road. Our collective resources are
better dedicated to fixing California's market and bolstering
the State economy.
Third, the ISO must develop, as necessary, and engage in
regional coordination processes that recognize the regional
nature of the western market. As has often been discussed, the
seasonal exchange of power in the West has benefited customers
across the entire area. To retain these synergies, the ISO must
work cooperatively with the region to provide appropriate
mechanisms for addressing seams issues between the Pacific
Northwest, California and the Desert Southwest. Such a regional
approach does not require that the market designs in western
States be identical, only that they be consistent enough to
permit the regional cooperation and coordination that have been
the hallmarks of the western market for years.
Examples of issues that should be coordinated across seams
include operational and commercial rules, market mitigation and
resource adequacy, all of which are more appropriately
addressed in the regional footprint of the market and discussed
further in my written testimony.
Finally, by engaging in the processes I have just
described, the ISO can do much to create a well functioning
wholesale power market in California. The ISO, through its role
as a non-discriminatory grid manager, is positioned to provide
a range of transmission related benefits to the regional
electric power market, including more efficient and reliable
operations, transmission pricing that eliminates so-called
``rate pancaking,'' improved congestion management, improved
reliability through application of its open access transmission
tariff, and more coordinated planning of transmission
investment. All of these activities will result in a robust
transmission system for the benefit of consumers.
In tandem with transmission benefits, getting essential
market rules right will ensure that MD02 provides the most
reliable service and the greatest protections available for
consumers. One example of getting it right would be using MD02
to craft mitigation rules targeted to address specific market
problems. The crisis demonstrated that inappropriate or
uncoordinated mitigation is a potential source of gaming. When
price caps in California were low relative to neighboring
States, some suppliers were motivated to export power from
California, thereby making the supply situation in the State
worse.
Another way in which the ISO can use MD02 to get it right
is to implement stable, transparent market rules, an essential
precursor to investment in new infrastructure. The upheaval
associated with the California crisis, which is not yet fully
resolved, has chilled investment in the State, leading to
projections of supply shortage recurrence in the 2007-2008
timeframe. Implementing stable rules on which investors can
rely can reverse this trend and ensure fully adequate
resources.
The fact of the matter is that doing all these things may
take some time. But doing them right is the most important
objective. Taking the extra effort to coordinate, strive for
consensus, plan and implement MD02 properly is the only way to
provide customers with the stable, reliable service that they
deserve.
Thank you, Mr. Chairman. I'd be pleased to answer any
questions.
[The prepared statement of Ms. Tomcala follows:]
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Mr. Ose. Thank you for your testimony.
We'll go right to Mr. Ackerman for 5 minutes. He joins us
from the Western Power Trading Forum.
Mr. Ackerman. Thank you for getting the name right, Mr.
Chairman. My name is Gary Ackerman, and I am executive director
of the Western Power Trading Forum, a non-profit trade
association dedicated to enhancing competitive energy markets
in the western States.
I appreciate the opportunity to offer my comments in
addition to the written testimony I have submitted to your
subcommittee regarding the efforts of the California ISO and
the Federal Energy Regulatory Commission to redesign
California's restructured market.
First, let me say that the people I represent are the folks
providing the key ingredient to making our homes and businesses
safe and secure; that's electric energy. They provide the
energy to light the dark spaces, and connect folks into the
21st century. They are the people who build alternative energy
projects that emit fewer pollutants, sustain our vital natural
resources and lessen our Nation's dependence on foreign oil.
Notwithstanding the negative press that has surrounded our
industry of late, we have a vision whereby consumers enjoy
lower average energy costs through competitive markets. And, we
remain steadfast in our desire to show you and the Nation what
can be achieved. Without competition, consumers are stuck with
a single energy provider, and costs are passed through to the
ratepayers.
With competition, private companies battle for the right to
serve consumers, thereby lowering average prices, with all the
financial risk borne by the companies, not the ratepayers. For
example, my group updated a comparison of the average monthly
wholesale prices in California since deregulation began in
California in 1998. We compared it to the pre-deregulation just
and reasonable generation component of retail rates.
The outcome is clear. The deregulated average for the full
5 years since competition began is lower than the utility's
cost to provide the same even with the bumps and perturbations
of the well documented wholesale price spikes that occurred
during the crisis.
Had Californians the opportunity to pay competitive
wholesale prices, as opposed to paying the just and reasonable
price, then California consumers would have saved $3.7 billion
that otherwise went to paying their electric bill. If one adds
to that savings the proposed refund amount announced by FERC 2
weeks ago, then the total 5 year consumer benefit would be $7
billion. That's not a bad value in either case for 70 percent
of the consumers in your State.
Market design in the West, particularly in California, is
moving forward in fits and starts. The worst design will
suffice amid abundant energy supply. The best design may falter
in a shortage. I would encourage this subcommittee, the
Commission, and the California ISO, rather than getting all the
elements of the design perfect, to spend more time on the
elements of the design that affect private investment in new
generation plant and transmission. There is a common belief
that getting the rules just right will eliminate market
manipulation and the abuse of market power.
But the other side of the coin is that suppressing market
forces to the point where markets don't exist any more will
further exacerbate the looming shortage that will occur when
the economy rebounds and if there is a drought in the Pacific
Northwest. In short, no one is going to care how hard we tried
to get the market rules right in 2003 when the lights flicker
in 2005.
My written testimony covers the specific items the
subcommittee has posed to the panel and I won't repeat those
answers here. However, I look forward to answering your
questions, and again, thank you for the opportunity to appear
before you and provide our point of view.
[The prepared statement of Mr. Ackerman follows:]
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Mr. Ose. Thank you for joining us, Mr. Ackerman.
Our next witness is Jan Smutny-Jones. Mr. Smutny-Jones, you
are recognized for 5 minutes.
Mr. Smutny-Jones. Thank you, Chairman Ose. My name is Jan
Smutny-Jones. I am the executive director of the California
Independent Energy Producers. I also previously served as the
Chair of the ISO from until June of probably January 2001. I
would like to submit some written comments for the record and I
am just going to summarize them here today, in the interest of
time.
Mr. Ose. We'll accept them without objection.
Mr. Smutny-Jones. Mr. Chairman, in the beginning of today's
hearing, you characterized California as continuing to live in
an intolerable state of energy purgatory. I share that view,
although I believe that California is on the road to recovery.
Hopefully the road to recovery is not like the road to hell and
just paved with good intentions. I think our purpose today is
to make sure that the primary work before us with regard to
market restructuring actually takes place.
Key to the infrastructure development that you indicated is
necessary in California is stability. Stability requires
clearly articulated market rules, which I think you and
Chairman Wood talked about previously. Second, a coherent
procurement process, which I think several of the previous
witnesses have suggested is underway in California. There have
been some positive developments on the part of the State with
developing procurement roles. And, last, but certainly not
least, a redesigned market structure, which is currently
underway in California ISO.
What I'd like to focus on here is the need for resource
adequacy. IEP is in the resource adequacy business. Our members
build and operate power plants, both gas-fired and renewable.
There's over 10,000 megawatts added to California since
restructuring, and have been added to California's resource
mix. Importantly, these facilities are not only reliable, but
have shifted the development and operational risks from
basically ratepayers to private sector developers and operators
of these plants. That's a huge benefit to the people of
California.
An ancillary benefit of this modernization also has very
real, significant environmental benefits. The Calpine plant,
for example, in Sutter County, produces electricity with 98
percent fewer emissions than the average plant would in terms
of the fleet in 2000. So that's significant.
The resource adequacy component of the CAISO is currently
being held in abeyance until the State completes their work in
November of this year. I want to underscore this point. It is
absolutely critical that the work that the State is doing is
fully integrated into the ISO's tariffs. Otherwise, this is not
going to work and we are going to revisit the problems that
we've previously experienced.
Some other specific market rules that I think we need to be
going forward with here is, the market redesign in California
needs to be based on sound economics and markets that work
elsewhere. There is a significant debate going on about why
California is different and why the West is different and
whatever. Fine. Let's identify where we are different and move
on. I for one used to hold that view very religiously, but I
think we need to just recognize the fact that there are other
markets that do seem to work elsewhere and now is not the time
to reinvent the wheel.
We need a day ahead market so people can actually trade
electricity. As I indicated earlier, a resource adequacy
component is absolutely critical to overall market stability.
And, we need a stakeholder advisory committee that basically is
able to address issues that are coming up in a way that
provides people a meaningful opportunity to basically impact
the outcome of rules that are under development.
Last, but not least, the seams issue. This is a regional
market. California is not an island, has not been for a very,
very long time. We need regional rules that are monitored and
basically enforced on a regional basis. We think that's of
critical import.
And, so in closing, I would just like to conclude that the
energy crisis was a convergence of a serious supply and demand
imbalance, poor market design and inadequate regulatory
response. It need not and should not be repeated. We need to
encourage infrastructure investment providing new supply,
implement meaningful market redesign and ensure that our
regulatory institutions are reformed in a manner that is
responsive to modern market realities. It is time for action,
because quite candidly, Mr. Chair, we cannot afford another
failure.
Thank you very much.
[The prepared statement of Mr. Smutny-Jones follows:]
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Mr. Ose. Thank you for joining us today.
Our final witness is Mr. George Fraser, who's the general
manager of the Northern California Power Agency. Mr. Fraser,
you're recognized for 5 minutes. And, by the way, his
grandchildren are in the audience today.
Mr. Fraser. Thank you, Mr. Chairman. We are a different
segment of the market, as opposed to folks who are in the
business to make a profit. I represent numerous community-owned
utilities in Northern California. We are not merchants, we are
integrated utilities in that we provide the generation, we
purchase and sell power, to the extent that it's surplus, and
we serve our retail customers.
Our point of view regarding the Market Design 2002 is that
it will not, as it's currently been described to us and
designed, facilitate bilateral contracts. And, we live on
bilateral contracts. We are encouraged by what Mr. Winter said,
because we believe that meaningful resource adequacy is
absolutely essential. And, before you start changing a new
design and getting involved in a new experiment in California,
we need to make sure that we have sufficient generation and
especially transmission, so that we don't have to deal with
congestion throughout California.
There is no reason from what we can see right now to
believe that Market Design 2002 will provide incentive for
investment either. Standard market design is supposed to
encourage voluntary bilateral contracts. We are very encouraged
by the words we hear, but what we see in the detail of the
design doesn't appear to support bilateral contracts.
When a detailed proposal is put forth that truly supports
voluntary bilateral contracts, I think you'll find us
supporting such a plan. We think it's more important to do this
design right rather than doing it fast, so we are urging that
this thing be carefully put together and not rushed. The
current process seems to be geared toward managing
stakeholders, and moving toward a pre-ordained outcome rather
than actually including the input from stakeholders as we go.
Just to reemphasize my point of view about transmission, I
believe Spencer Abraham has been quoted as characterizing the
existing transmission in California as Third World. We don't
see any fundamental elements of Market Design 2002 that
addresses transmission construction and transmission adequacy.
Let me move ahead and talk about market incentives and
resource adequacy. Let me summarize my verbal comments here and
they're consistent with the written comments we've turned in.
Market Design 2002 is inconsistent with the stated goal of SMD
to encourage and facilitate voluntary bilateral contract
arrangements.
We believe that resource adequacy must precede market
design, that the plan with Market Design 2002 is a serious case
of putting the cart before the horse. We are not starting out
with resource adequacy, we are starting out with a new design.
In its current state, we see, and we've studied Market Design
2002, we believe it lacks sufficient detail concerning such
critical elements as the ones I've described, as well as
congestion management and market power mitigation. We would
like to, as I said, support the design when we see more detail
and see it tested in the relatively near future.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Fraser follows:]
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Mr. Ose. I thank the gentleman for his testimony.
As we said, everybody's statement, we've received it, we
are entering that into the record. There's a couple things I
want to go through in particular. The January 2003 report
produced by the Public Policy Institute of California, which is
entitled, ``The California Electricity Crisis: Causes and
Policy Options,'' lays out a series of goals that any market
structure should achieve. And, these include lower prices,
system reliability, efficient use of resources, administrative
feasibility and environmental protection.
These are significant issues and many times very difficult
to resolve, let alone grasp in total. I want to make sure that
as we go forward through this hearing that those particular
five contexts be the basis for the feedback you give us.
Because that's essentially where we've got to go, is we've got
to figure out how to stitch this all together. So with that
particular thing in mind, I do want to proceed.
Now, you've all talked at one point or another in your
testimony, either because we've asked you to or otherwise,
about resource adequacy. The proposal for California, for its
Market Design 2002, has pushed off the adoption of resource
adequacy standards until the last phase. I happen to think that
most if not all of the dysfunction we suffered in California
was due to an inability of the utilities to enter into safe
harbor, long-term, bilateral contracts. And, it seems to me
that whatever we do in market design, we ought to make sure
that we incorporate the ability to enter into short, medium and
long-term contracts into that market design for our utilities.
Now, as I understand, Mr. Winter, CAISO has not been able
to move forward on that because the California Public Utilities
Commission basically hasn't taken up the challenge of resolving
that issue. Am I correct in that?
Mr. Winters. That is correct. They came before our board
and our chairman gave them until November 1st to come up with a
plan and then he made it very clear that if they did not have a
plan put together by that time, that he would continue with the
request that we had made to FERC for the 112 percent.
Mr. Ose. That raises an interesting question, because when
we had the first of these hearings, and this I am going to
direct to Ms. Tomcala, when we had the first of these hearings,
I asked a specific question whether or not the PUC had adopted,
from a regulatory standpoint, safe harbor provisions for the
investor-owned utilities to enter into long-term contracts. In
other words, go ahead and do it, we are not going to second
guess you.
I was told under direct questioning by Loretta Lynch that
the PUC had adopted safe harbor provisions for the investor-
owned utilities to go ahead and enter into long-term contracts.
And yet, if that's the case, why are they now considering
whether or not to do that? It seems to me there's a
disconnection. The question is, has the PUC provided the
investor-owned utilities the ability to enter into safe harbor,
long-term contracts for the provision of power to their
customers?
Ms. Tomcala. The PUC has divided that question into two
time related segments, the short-term, the intermediate, to get
us over the hump, and the long-term procurement proceeding,
which they're engaged in right now. So the PUC has provided us
the ability to enter into contracts for the time being, but is
still pursuing an integrated, long-term procurement proceeding
that will look at the combination of some of the elements that
you identified earlier, contracts, demand response, efficiency,
those sorts of things and how they fit together for the long-
term.
Mr. Ose. So you have the ability to enter into a long-term
contract?
Ms. Tomcala. We have the ability to enter into contracts.
We would probably quibble over whether we have a safe harbor
provision.
Mr. Ose. How important is a safe harbor provision to your
ability to enter into those contracts?
Ms. Tomcala. Tremendously important, not only for the
ability to enter into those contracts, but also to return us to
investment creditworthiness, which we feel is essential to
provide the service that we must provide to our customers.
Mr. Ose. When you say you don't have the safe harbor
provisions, what do you mean?
Ms. Tomcala. What we mean is we are not in a position yet
where our contracts won't be second guessed after the fact.
Mr. Ose. By whom? Why would anybody second guess your
contracts? I mean, you're the utilities.
Ms. Tomcala. Because we are still working out the standards
for the long-term and the long-term procurement proceeding.
Mr. Ose. So this issue arose, I mean, I broached this issue
in April 2001. And, you still don't have any definitive rules
from the CPUC about what is or isn't acceptable for long-term
contracting for power delivery.
Ms. Tomcala. That's right. That procurement proceeding is
continuing as we speak.
Mr. Ose. And, Mr. Winter, you're saying that the board of
the ISO has given the PUC until November 1st to get their act
in order?
Mr. Winter. Correct.
Mr. Ose. Chairman Wood, under MD02 or any market structure,
if people operating in the market can't get regulatory or
political certainty until the last of the process, what does
that mean for resolving all the--it seems to me that the
delivery of power is what this is all about. What does that
portend?
Mr. Wood. It means you won't invest. And, that's what I
think, honestly there's, I think all five of these folks have
said the exact same thing on this issue from a different
perspective. There's got to be, if California is going to
regulate the retail customer, I think that's a choice that the
legislature now has made. Kind of return to a more, to a
traditionally regulated retail environment.
The approach has got to be one very similar to that taken
in other States, that if you do a very organized process, which
I understand from our staff's visit with the CPUC staff 3 weeks
ago they're looking at, you do have to basically say, if you go
through an open solicitation for power contracts and you take
the best bid or lowest bid or whatever you define it to be,
that will be de facto granted, that is the best choice, before
you actually sign the contract.
These folks have to have that kind of certainty. Then these
folks can go ahead and build and trade on that and it all
works. But if you don't have that build-ahead component of this
market, which we still don't have there today, then you do
have, I think, what Mr. Winter pointed out, I guess I am going
to put words in your mouth, but kind of a problem down the road
and it may not be a very long road.
Mr. Ose. Mr. Fraser is a public agency, but Mr. Ackerman
and Mr. Smutny-Jones have private side producers. Some of your
members actually generate power, or at least would like to, and
would like to sell it for a profit. And yet, you don't have a
customer that you could enter into a long-term contract with.
Do you have any input on this? Mr. Smutny-Jones.
Mr. Smutny-Jones. I would say the No. 1 problem in
California right now is that there is not a long-term contract
that you can take to a bank and get financed that basically
comes out of a procurement process where PG&E or the other
investor-owned utilities will know that they'll get cost
recovery later on. It's a very significant problem.
The second point I want to make here, because even if the
PUC comes up with, and I don't by the way think that this is
rocket science, it shouldn't be that hard, but even if they
come up with a perfect rule that applies to the investor-owned
utilities, resource adequacy will also have an impact on Mr.
Fraser's community, which is about 30 percent of the market in
California. And, there is an additional group of load serving
entities that are neither municipal utilities nor publicly
regulated utilities. These are load serving entities servicing
the retail market.
So how to pull this all together I personally believe that
the connective tissue is the ISO tariff. So basically we
determine how much can be determined by the State of California
and the municipal utilities that they have to respond to, who
provides it is obviously an open question. But more
importantly, how it's ultimately enforced is going to be
through an ISO tariff and ultimately I think through
Commissioner Wood's Commission.
Mr. Ackerman. Mr. Chairman, I think you're looking at part
of the problem. The whole problem also includes aged power
plants in the State of California which could be shut down and
a lot quicker if they don't see the kinds of markets that would
facilitate being used at all. So we have to look not only at
the new construction which might not take place, because the
certainty isn't there, but the additional megawatts that might
be taken off the table because people are looking at the costs
of continuing to run those power plants and saying, the
economics aren't there, putting more pressure on the supply
demand imbalance, if you wish to call it that.
Mr. Ose. You've identified two questions. There's the
capital necessary to keep existing plants running on a
maintenance and repair basis.
Mr. Ackerman. That's right.
Mr. Ose. Then there's a second question having to do with
creating, generating power for the growth in the market.
Mr. Ackerman. That's right. And, we can add to make it
complicated a third element, which is new transmission
facility. I'll give you a specific example. Let's take the
generation that's being built in Arizona and along the Mexican
border. It doesn't have enough transmission to get in to help
serve the needs of California and the Pacific Northwest.
So we have inadequate transmission to bring some of this
currently stranded new-asset power into the State of California
and the Pacific Northwest. There's the chance that we might
lose some existing power plants, because they can't sustain
themselves and add new environmental requirements in order to
keep producing power.
And, then of course, we have the fear of new generation not
being built because they don't have the market certainty. Other
than that, things are going pretty well.
Mr. Ose. You're an optimist.
Mr. Winter, it seems to me that we've got enough power for
this summer. But I am not very optimistic about the out years,
if you will, 2 or 3 or 4 years downstream, as it relates to any
potential shortages or significantly higher prices. Now, I know
ISO is working on a report to forecast power supplies for this
summer and the near future, which seems to be prudent, and I
want to compliment you on that. Do you have anything you can
share with us to summarize what appears to be the case, both in
the immediate term and in the near term beyond that as it
relates to power supplies for California?
Mr. Winter. I have the advantage of having the draft report
that you're referring to. It's 3,246 megawatts that we have
``in excess'' of the identified needs. That would portray that
for the summer of 2004, we would have adequate power.
Now, I always qualify that with, if I lose a couple of
nuclear units, suddenly some transmission lines are down, or if
we have a situation where there's a local hot spot that we just
don't have sufficient transmission to serve it, that we of
course would have to take whatever action was necessary for
those. But for that period of this summer, it looks like we
will be able to make it.
That also takes into account a reduced import from the
Northwest. During the summer, we usually see somewhere between
5,000 and 6,000. In our studies we have projected only 3,500,
because we expect the Northwest to be somewhat drier. My
understanding in talking to them last week was that they have a
very good March as far as snow and rain is concerned, but we
don't know what the impact of that will be.
Looking beyond that, I have considerable concerns, many of
the things people have mentioned here. We have old plants, many
of them are under a requirement to add significant capital, to
add SCRs or catalytic converter type things to clean up the
air. People are just not going to make that investment unless
they know they've got a market that they can play in.
The other is that we have many old units. The other thing
that I am seeing that, one of the advantages of being rather
old is, you see things tend to repeat themselves quite a bit.
And, I am seeing the utilities now getting caught up in the
economy is down, the load is not growing as it has in the past.
And, my experience in the utility was, we were very, very good
at predicting nice, steady growth or nice, steady leveling off.
But we could never quite hit it right when things either
started growing fast or they started going down.
I see this trend to try and lower things because of the
economy. If our economy turns around, especially with the
activities we have in Silicon Valley, where so many of them
have reduced their consumption, they can add that back in
literally months. And then, I think we are going to very
quickly get into a concern.
My guess is that if things go normally, the economy doesn't
rapidly recover, we are probably good until 2006, 2007. If
things don't go well or if they go well and the economy picks
up but we have less additions and there's no more added
generation, I think as early as 2005 we could be getting back
into a problem. And, if bad weather in 2004, we could get into
trouble.
So I know that's not a clear answer, but forecasting load
is not a real science. My feeling is, we need more generation.
But even more than that, we need some transmission. And, one of
the things that George said that troubles me a little bit,
mainly because maybe I don't understand it, was the
identification that the MD02 design was not friendly to
bilateral. I think what he's referring to is that, the design
does not guarantee, if you will, transmission for bilateral
contracts. And, I would certainly agree with that. But as far
as bilaterals, with the design, bilaterals are done completely
outside the market and are just a way of getting resources in.
So now we get to the point of do we have sufficient
transmission. And, the answer to that is clearly no. But that's
not a market design that can provide that. That's something
that we've got to sit down, and while MD02 tries to indicate,
through the nodal identification of constraints and power costs
that you need a transmission line, I don't think it will ever
be sufficient to be the total driver for the addition of
transmission.
So while MD02 is a portion of it, there's all kinds of
other parts of the procurement of power, the addition of
transmission, the building and adequacy of the generation,
demand side, distributive generation, that all has to be pulled
together. I feel MD02 gives us a basis to work on those. But it
by itself cannot solve all the problems.
Mr. Ose. So you have a draft report that indicates using
what I would describe as conservative assumptions from power
transfers from the Pacific Northwest, that in the summer of
2003 we have 3,200 more megawatts available under ``normal
circumstances'' than we have demand for?
Mr. Winter. Correct.
Mr. Ose. Which is about 6 or 7 percent of the total market?
Mr. Winter. Right. But now realizing that I've already
added my reserves, which are 6 to 7 percent, so if you put
those together, you're about the 12 percent that I've talked
about. But next year, if load growth occurs and we don't have
any new generation, which I am not seeing being built in
California, then I think we start cutting into that 6 percent
very rapidly.
Mr. Ose. So if the total, I just want to make sure I
understand this from a generic standpoint, if the total market
is around, let's say, 50,000, total market load is 50,000
including the reserves 6 or 7 percent, you've actually got
around 53,000 megawatts available against a market demand of
around 47,000. Those aren't the exact numbers, I know that, but
I am trying to get it clear it my head.
Mr. Winter. Right.
Mr. Ose. And then, you've accounted in your out years using
some assumptions that we will be short in 2005 or 2006, again
depending on how fast the economy grows and whether something
goes down and what have you. But in any case, it's not a
particularly optimistic scenario.
Mr. Winter. And again, that's not our study. We look at the
short term. But that was just my feelings based on the
experience I've had in utilities.
Mr. Ose. Well, I came to Congress from business, so the
economy is at the heart of what I pay attention to. I want the
economy to come back. Trust me, I want it to be just
percolating like crazy. If my objective and that of so many of
my colleagues here is achieved, that is, if we get economic
growth of 2.8 or 2.9 or 3 percent per year, what I hear you
saying is that we are going to be in a box, so to speak.
Mr. Winter. I would certainly concur.
Mr. Ose. OK. That's kind of where I am at. That's one of
the reasons I want to get the design done. I want to get these
things aligned and in place and moving.
Mr. Winter, you and I have had this discussion about
whether or not the CAISO is independent. We are not going to
rehash that today. I do want to talk a little bit about the
stakeholder process, whether or not the people, for instance,
sitting between Mr. Wood and Mr. Fraser have been part and
parcel of the deliberations that CAISO is undertaking. For the
stakeholders, let me just make sure I've got it correct. Are
you guys being consulted with relative to the design of MD02?
Is that consultation taking place on a satisfactory level?
Mr. Ackerman. I don't think that my members would agree
that consultation is taking place. There's an education process
that's going on, whereby the ISO staff educates the market
participants, who I represent, and Jan represents as well, as
to what the ISO is thinking. We have some limited amount of
input. It has not been the feeling expressed to me by my
members that they are part and parcel, they are somehow
partners in terms of designing this marketplace as it was once
upon a time, let's say, back in 1997 or 1998.
Mr. Fraser. I would agree with that. I would support what
he said. To illustrate that, I believe there's an RFP out for
software to basically run the MD02 system put out before our
input has been entirely included in the design process.
Mr. Ose. Mr. Smutny-Jones.
Mr. Smutny-Jones. I think that there is a great deal of
concern of how well the stakeholder process has been working. I
would concur with what Mr. Ackerman suggested with respect to,
it's more educational than anything else. We have put together,
with some other parties, a formal stakeholder advisory
committee proposal to the ISO and ISO board for their
consideration. That is crafted along the lines of other
stakeholder advisory committees that currently exists in other
successful markets, like PJM, for example, where there's a much
more, a process we believe takes input from the marketplace.
We think this is important for a couple different reasons.
One is obviously getting input from people who are affected by
the market, I think, is a positive thing. Two is, it does
reduce the amount of things we ultimately then need to litigate
before Chairman Wood's commission. If we can resolve these
things in California before they get to Washington, we can save
an awful lot of time and a lot of money. So we basically
believe there needs to be stakeholder reform in California.
Mr. Ose. Mr. Winter and Mr. Wood, I direct this question at
you. The stakeholders are saying they'd like to have some
direct line of input into this process that's formal in nature,
with voting and all this other stuff. What's your reaction? Mr.
Winter first, apparently it doesn't exist now to their
satisfaction? Is there another view to this?
Mr. Winter. Well, certainly I have another view. Not to
debate what they have said, because what your customers, all of
them say is reality, whether you feel it's the truth or not. I
guess after probably 5 years of sitting through more meetings
than you can ever imagine with input from everybody I can also
imagine, having agreements then filing your filing and having
people contest it at FERC anyway because your decision was not
to agree with them, has kind of left me a little bit less than
willing to accept that we didn't have a process. I forget how
many hundreds of meetings, how many manhours we've spent trying
to bring people along.
I think it is a fair criticism that after input for a
couple of years we move forward. But trying, and this is what I
am going to pass to Pat a little bit, because during the summer
of 2002, we were concerned about this very fact. Because we had
put together the design, we had modified it constantly with
people's input, we had tried to go to chat rooms, we had tried
to do everything we could to get information from folks.
Finally, somewhat in frustration, we asked FERC to come out and
hold some technical working conferences on MD02, so that if for
no other reason, they could see that we at least had tried to
get the input in some rational way.
They held those meetings, I guess, Pat, I don't think they
were all that successful, but nonetheless, we had them and got
input. And, so we have moved forward.
Now, let me also address the problem, if the example is
that you've gone out for an RFP, let me tell you that four
Senators from California sent me a letter and said, you will
not move forward on----
Mr. Ose. California has four Senators?
Mr. Winter. Well, four of them that sent me a letter. The
State, they have--it feels like 100. But nonetheless, they had
requested us not to go forward until we had done an LMP study.
We sat down with representatives of those folks and clearly
laid out that the reason we needed to go forward was to keep
things on schedule, and that we needed input from the designers
of the system to No. 1, give us schedules, No. 2, give us
alternatives that we could put into the design so that we could
determine whether or not we could accommodate many of the
things that people were asking us to do.
So we proceeded with that. Nothing is cast in concrete. The
board has committed to the State Senators that they in fact
will not go forward until we have reviewed all the issues.
So I guess I feel we've made quite an effort to do it.
You're never perfect on getting everything to everybody's
satisfaction. But the idea to slow down, slow down, kind of
disturbs me, because most of the things we are doing are either
in place in other ISOs and where markets are well running, and
certainly I think there are some issues around FTRs or CRRs as
to how we are going to allocate transmission. But one of our
major problems is, we don't have adequate transmission and
we've got to come up with a way to allocate that to people and
some of them have existing contract rights, which we have to
carve out and protect.
So we are where we are, and we are trying to do the best we
can to get that input. We are modifying the design every day as
people come in. We just spent 4 days or 3 days last week
walking everybody through every step of the process of the
design and how it's going to work, so that they could give us
input.
Mr. Ose. Commissioner Wood, how valuable is the stakeholder
process that you utilize over at FERC? I don't know if it's
institutionalized or otherwise.
Mr. Wood. We certainly, in setting up all the other
markets, and just to take an example, one that's going on right
now in the Southeastern United States, have a formal
stakeholder committee, which is not just everybody showing up
in a room with their designated representatives from each kind
of constituent group who comprise the committee. So it is a
manageable, diverse group that does not, is not mandated to
agree on everything, but is mandated to get to, as close to
consensus solutions on major issues as you can get.
It is very valuable. It ultimately goes through the ISO
board up to the Commission. It's very valuable to know that a
proposal has been vetted through the stakeholder process. Those
stakeholders do have the right, which you can't deprive them
of, to directly address FERC on their concerns about the ISO
solution. I don't think that anything would ever really change
that. But certainly folks in my position, including me, do look
at whether a process has been, or a new procedure has been
vetted through a stakeholder process. I think these are too
important not to do that.
But on the other hand, an independent view has to be looked
at as well. That's why we do value an independent board's
review of what stakeholders come up with, to make sure that it
not only advantages stakeholders, but ultimately is good for
the public, it is good for the broad industry. And, there will
be at times proposals that can make it through a stakeholder
process that are not in the best interest of the public. And,
we've got to always be able to say no to the stakeholder
process. But that's what I think Terry and his folks are going
through. It's probably the most difficult place in the country
to do a multilateral negotiation on issues related to
electricity that I could ever imagine. So I don't know that
it's a necessarily textbook example.
Mr. Ose. All right. I want to move on to the seams issues
here. We have 11 different States, we have Canada, we have
Mexico, we have plans to generate in each of these 11 States.
We have transmission lines, we get a lot of power from Power X.
We have facilities south of our border with Mexico that are
under construction, if not already producing. And, the sum of
that is that on any given day, we may import a significant
amount of power from outside the State and then on any given
day, when we have surplus, we may export power outside the
State.
The issue here is how do the market places interact with
each other? In other words, if the rules in one area are
different than the rules in another, how do you stitch them
together? That's that seam between the issues. Now, Mr. Winter,
in your testimony, you talk about a working group, the SSIWG. I
can't remember what the acronym is. Seam Steering something or
another Dash Working Group. And, you talk about how they
interact.
My concern is that we don't create a market design in
California that makes it impossible to import from other areas
or export when we have surplus. So what are the leading
concerns on that particular aspect that you're dealing with?
Mr. Winter. Well, I think first off that group has been
tremendously successful in at least identifying the problems.
It's one of the reasons that we tend to support FERC's SMD as
it makes these different issues, somewhat gives you a framework
to work off of.
I would say probably the No. 1 contention is going to be
how are you going to handle congestion, management of the
transmission system. We've chosen locational marginal pricing
because it has worked in the Northeast and PJM and New York
models. I don't think that the others are quite there yet. But
at least we are talking to them about it.
I think a bigger concern oftentimes that I have is, I think
there will be ways to work out the market issues. But some of
the timing issues around the real time operation get to be
major. In other words, if one market is accepting changes and
bids up to 20 minutes before they dispatch the power----
Mr. Ose. As opposed to 10 minutes.
Mr. Winter. Right, as opposed to 10 minutes or 5 minutes or
wherever we get, those are the kinds of issues that have to be
resolved in the design phase, so that the operators don't have
to try and deal with that in real time.
So you know, I can't list all the things they've gone
through, because they've been going through an evolutionary
process of whether they're going to use flow gates or they're
going to use LMP or they're going to use zonal or how they're
going to divide their markets up. I think the main thing
California has to do is stay flexible so that we can
accommodate most of those. I think if we get the operational
time lines, then we can work out the others as long as there's
transmission capacity to bring the power in. That's a real
time, every 10 minute issue of whether or not you have
sufficient transmission to get the power in.
Mr. Ose. Do you think you can handle this through agency
action, or do you need direct legislation?
Mr. Winter. My 'druthers is, I don't like to push anybody
into joining the ISO or having to live with the market. So one
of the things we have done a tremendous amount of is trying to
make it flexible enough to accommodate everyone. On the
municipal side, we've developed what we call metered subsystems
that allow them to operate their systems pretty much away from
what the ISO does and what the markets do. I think we would
offer the same type of opportunities to the regions outside.
Mr. Ose. This brings me to one of the things as a consumer
that I am most interested in seeing effectively implemented.
And, that is when you get to this interaction or this interface
between, if you will, the RTOs from different geographic areas,
how do you ensure that the behavior at that point of interface
is properly occurring? In other words, do you need a market
wide monitor, so to speak?
Mr. Winter. Yes. Clearly one of the things at the ISO, we
identified many of the gaming activities that were going on
inside our borders and we could suspect them on the outside.
But once you went outside the State, we really couldn't
determine whether someone was behaving according to the rules
or not. So I clearly support the FERC's West-wide market
monitoring activities.
I would say that I think there is a need for the local
monitors also because they're sitting there, right there
watching the market every day, move up and down. Therefore,
they can identify problems more quickly than somebody at a
regional area who has to then monitor the interfaces and may
not see the data for several days or even weeks.
Mr. Ose. Mr. Wood, if I understand this particular concept,
FERC would be the agency to whom this independent market
monitor would report?
Mr. Wood. Correct.
Mr. Ose. And, the tool that they would use perhaps would be
the, either the reports from the field, from these people
deployed into the different markets, or the data gathering
machinery or equipment you have over at the headquarters?
Mr. Wood. Or their own independent analysis. They could
depend on the folks that work at Terry's shop or in the
Northwest or in the desert Southwest. Again, we are pretty
flexible in how the different regions want to set up the market
monitoring function. But we do require that there be a
component of it that answers directly to us that's not
responsible to Terry to tell him he's doing good, but could
actually talk directly to us and also to the appropriate State
regulatory authority at the same time. They could use a variety
of tools, ours, theirs, and a third set, their own.
Mr. Ose. Ms. Tomcala, in the context of an IOU, whether it
be you or San Diego Gas and Electric or Southern California
Edison, is a West-wide market monitor a necessary component of
making these different RTOs operate efficiently?
Ms. Tomcala. Absolutely.
Mr. Ose. So just from an industry perspective, obviously
you're not speaking for anybody other than perhaps PG&E, you
would support having an independent market monitor to govern,
if you will, the interactions?
Ms. Tomcala. Yes. And, we have supported that in written
comments to the FERC, both associated with Order 2000 a couple
of years ago and associated with the SMD proceeding.
Mr. Ose. Mr. Ackerman, do you share that opinion?
Mr. Ackerman. Yes, we do. The three most important points
that have to be done on a regional analysis, and I just want to
emphasize that the members of my group are of course trading
across all the Western States, not just in California, is
resource adequacy, which we've talked about a little bit.
That's the bean counting function--do we have enough supply in
order to meet demand under various conditions?
Second is market monitoring, which you're asking about
right now, we do need a West-wide monitor. We want to have it
under an apolitical, to the extent that's possible, an
apolitical umbrella so we don't feel as we do today that what
occurs in California is under the guise and under the direction
of an ISO governing board that's quite biased, quite biased
against us.
And, finally, congestion management of the transmission
system. Those are the three most important things.
And, I'll reserve specific recommendations after that.
Mr. Ose. Mr. Smutny-Jones.
Mr. Smutny-Jones. Yes, we obviously believe that there
needs to be regional market roles. I'll even go one step
further. I am not necessarily advocating an ISO amongst the
entire Western United States, but there needs to be basic rules
that are understood on a regional basis. It's important that it
not only be monitored regionally but also enforced regionally.
And, I think here's an area that probably requires some further
exploration, given the fact that this is interstate commerce
and you do have different States that have obviously very
different views on how this might work.
But we are very supportive of the concept that if, you
know, we have a regional market, an interstate market, and
those rules need to be both monitored and enforced by a
regional market monitor.
Mr. Ose. Mr. Fraser, what's your input on this?
Mr. Fraser. I totally agree. We both purchase in the
Northwest and Southwest and sell into both markets, and have
the same concern that we not get way out in front of the
designs in those other areas, so that we move ahead in concert
with them, rather than way ahead of them.
Mr. Ose. Anybody else want to offer? Mr. Winter. Ms.
Tomcala.
Mr. Ackerman. Could I just add one thing? Chairman Wood
reminded me of one element that's also important on a regional
basis, which is transmission planning. I was thinking it, but I
didn't say it. So add that to the list. That would make four
essential elements.
Mr. Ose. Just a moment here. Mr. Winter, you brought up the
issue of local market power. What I believe you were attempting
to convey is concern about the ability of a sole source to
control pricing and availability and the like under a certain
set of circumstances where transmission into an area may go
down and the like, so that there is no alternative means of
providing power.
You said something that I don't quite understand. You
stated that there was a need for additional mitigation measures
for plants that have local market power. The question I have is
that under a normally functioning market, the competitors for
that particular producer would move into that market and
attempt to sell or create power generation. And, it would seem
to me that at least under a pure theory of markets, putting
artificial constraints on local market power would serve as an
adverse incentive to bringing that power in.
Can you reconcile that?
Mr. Winter. Clearly it is going to put the impact of not
wanting people to generate or build new generation in that
area. On the other hand, no one is going to build a new
generator if in fact the line outage is for 2 weeks during the
year and that's the only time you need to mitigate it.
So if you have a generator who is located in a very
isolated spot, you have two transmission lines going into the
area, one of them goes out, therefore you can't get any power
from outside the area, the only guy you can call on is the guy
located right in the area. He has no restraint on his prices
now.
Mr. Ose. So how would you deal with that?
Mr. Winter. Well, the way I would deal with it is as much
the method that PJM has of dealing with it. What they do is
they have established a price that the generator is entitled
to. If something happens to the system so that they clearly
have market power and the prices start going up, they just
mandate that the person operates at that cost.
Mr. Ose. Mr. Wood, under a scenario like that, how do you
ever bring new generation to that marketplace? Who would ever
put their capital at risk?
Mr. Wood. It would be difficult if that were the only tool.
One that the New England market redesign has proposed is to
let, local pockets happen. They just do, because you've got
industry that for 100 years was encouraged to be concentrated.
So now we are trying to disaggregate it to get competition to
work. So it may be transitional, you know, a couple of years to
get transmission built or until you sell generation plants to
various companies, so there are competitive forces at work.
But I think of southwestern Connecticut as kind of that
constrained example. Probably the north peninsula in San
Francisco down to probably Palo Alto area, is similarly
constrained. What they have proposed in New England, and just
adopted in March, was to set the price cap, basically, at the
cost of what a new entrant would charge to recover his costs
fully. So that could in fact be higher than the formula Terry
was just talking about.
But it is one that I think we've heard from both generators
and regulators and customer groups alike, that seems to
probably hit the right balance. Because I think everybody
recognizes that local market power exists and really can't run
unabated. But the really bigger debate at our level so far has
been, so what's the right way to address that local market
power. Do you do it through a cost plus formula or through a
proxy for the new power plant, what he would cost to enter into
the market.
Mr. Ose. Ms. Tomcala, how does PG&E deal with situations of
this nature?
Ms. Tomcala. Well, in the past we've had RMR contracts to
deal with this. Going forward----
Mr. Ose. Share with us----
Ms. Tomcala. I am sorry. Reliability Must Run contracts, we
use the acronym so often it's hard to get out of them. There
are mixed reviews about how well that has worked in the past
and whether that approach fits in with a fully competitive
market going forward. So we have some proposals at the ISO
through the MD02 process that we are addressing as possible
alternatives for RMR.
Mr. Ose. And, those would be coming out of the deliberative
process some time after November?
Mr. Winter. Good question. I am not familiar with exactly
what proposal she's talking about. But clearly it would have to
be coordinated with the November procurement and whatever the
State came up as the requirements.
She mentions RMR, and I think that's a perfect example,
where you just can't look at the cost of generation, because in
the example I gave, you could build a third transmission line,
and that may be the least expensive alternative. So all these
have to be coordinated. I am sorry, I don't know exactly what
her proposal was in the program.
Mr. Ose. Mr. Ackerman, how would your members react to this
kind of thing?
Mr. Ackerman. Well, they agree that it's a thorny problem
in terms of identifying where market power exists and how to
mitigate it. But here's what's really far more scary. When I
was at the 4-day MD02 workshops ISO conducted last week, the
scary part was, they said, we are going to apply this
mitigation measure for local market power everywhere except for
points where power comes into the State and interconnects with
the ISO and in the middle of the State, where we have Path 15,
that's south of your district, and south of that, Path 26.
But everywhere else, the ISO will assume that local market
power exists and we are going to apply these market mitigation
rules. So your supposition is absolutely correct. Why would
anybody invest in an area where we have this difficult load
pocket to deal with, but now apply it to a much broader area,
that includes the whole Bay area, Humboldt County, Round
Mountain, Los Angeles, San Diego, the eastern part of
California and on and on. And, they are going to start there
because the ISO doesn't believe that there's sufficiently
competitive markets in order to take off these ``mitigation''
shackles, as it were. So people are not going to invest.
And, when we get into the definition of partnering with the
ISO to say, well, where do we start solving this problem, I
think the first question is where do these problems truly
exist? We will have to come to some compromise solution.
Mr. Ose. Well, let me flip it around on you. There's a
price cap of $250, if I understand it. Are you saying that $250
is not a sufficiently high price for a power generator to come
in and build a plant?
Mr. Ackerman. I would say for a power plant that only
intends to operate 1,000 hours or less a year, $250 is nowhere
near enough.
Mr. Ose. To cover that gap?
Mr. Ackerman. To cover that gap. Now, we are not talking
about a cap of $250 when we talk about local market power
mitigation. We really don't know what number it might be.
There's no dollar number floating out there. But I'm darned
sure it's less than $250/mwh. We wouldn't be spending time
talking about this topic if it weren't.
Mr. Ose. Mr. Smutny-Jones, any input on this?
Mr. Smutny-Jones. Well, it's certainly not a new problem.
Obviously it's being handled elsewhere. I think the
Northeastern approach actually is a variation on something that
was looked at in California a while back to deal with San
Francisco, because San Francisco is a load constrained area. At
the time we were looking at a, I guess it was a bid cap at a
level of the new entrant or the closest adjacent competitive,
what's called a node, or substation. In other words, there may
be other reasons why the prices in the market are high that
have nothing to do with the location of the unit. And, the
person who owns that unit shouldn't be harmed by that.
We also had a large number of RMR contracts when we first
set the market up in California. And, it was a great deal of
effort. We took a great deal of pride in the fact that we
removed a significant amount of these RMR contracts, both in
northern and southern California. So that is yet another way of
dealing with this issue.
I share the concern that market power and concerns about
market manipulation have sort of tainted everything. So what we
are doing is, we are spending an inordinate amount of time
focused just on market power and not on designing a market that
I think Commissioner Wood talked about, or Chairman Wood talked
about earlier, that if you have adequate resources, and there's
real competition, the market power problem really doesn't
arise.
Mr. Ose. Mr. Fraser.
Mr. Fraser. Well, I'd like to add another level of
complexity to all this. I suppose one of the paradoxes in our
business going back to the earlier comments about the need to
have sufficient resources to meet all the load plus a 10 or 12
percent reserve, the paradox is that you have a power plant and
you hope never to run it.
So you've got to, within your market design, figure out
some way to accommodate that. In many cases, it might be an old
plant that used to run efficiently but nowadays is held in
reserve. And, ideally, if nothing goes wrong, it is not run. So
you've got to have a market design that would accommodate the
owner of that plant, so that he or she would keep it in
operation and ready to start when needed.
Just to support what Mr. Ackerman said, we have a number of
combustion turbines that when things are running well, they are
not operated, other than maybe 40 or 50 hours a year. In the
bad old days in 2000 and 2001, they were run right up to the
limit of their resource availability. But in normal years, if
you look at the cost on a per kilowatt hour basis, if you judge
it on per kilowatt hour, it's very high. So the capacity
adequacy issue is indeed pretty complex when it's essential
that we have a very reliable electric system.
Mr. Ose. I am sitting here listening, and I have to say I
am somewhat confused. The argument that was just made regarding
local market power would serve to protect if you will the
oldest, most inefficient producers that are doing the most harm
to our environment, producing the highest cost power in our
marketplace. That is the net result of this particular
potential policy, is that the dinosaurs of our industry end up
getting protected in lieu of replacing them with far more
efficient, far lower cost producers.
And, I have to sit up here balancing the different
objectives we have of power for our people and capital
allocation that produces plants and protecting our environment.
I am sitting here scratching my head, how do you reasonably
come forward with a policy, the net result of which is that we
have dirtier air than we might otherwise if we replaced that
old plant with a more efficient plant in the first place? Would
any of you care to comment on that? Commissioner Wood.
Mr. Wood. I think it clearly points out the need for
sufficient transmission. The best solution to a clogged up
local market power plug is to have more highways into that
congested area. Now, there are parts of California, as there
are in any other State, that are very, very difficult to build
in. So there will be places like New York City, probably like
San Francisco, we've got an upper Wisconsin, southwestern
Connecticut, where you've got significant environmental
pushback.
And, I think what we are seeing certainly with the rate
design changes that were introduced in Connecticut is, OK, then
the people that live there see the price impact of those
choices. So the choices to run an expensive unit and not to
have transmission result in the bill not being paid by everyone
in New England, but now by people in that part of Connecticut
getting paid. So that's one of the harsh realities, but good
realities of some of the changes in MD02, which I think Terry
indicated they're able to mute. But with locational marginal
pricing, we start to see the costs of these environmental
choices or non-choices that then get paid by the folks who make
those choices as opposed to spreading the costs to everyone
else.
Mr. Ose. Well, if I understand the investor owned utility
structure in California, which delivers a significant
percentage of the power, those costs are aggregated and then
spread to the entire ratepayer base.
Mr. Wood. They are.
Mr. Ose. So in effect, it's----
Mr. Wood. It's muted.
Mr. Ose. Yes.
Mr. Wood. But nonetheless, those signals are identified so
that these transmission planners and the utilities who will go
fix the problem will know exactly where it is and can make the
case to the PUC, who's got to prove it on need and on cost
benefit, that in fact this is costing PG&E in the aggregate $80
million a year. This is a $200 million line. It pays for itself
in whatever, 2\1/2\ years. That's something that a regulator
can say, yes, hard as it is to site, it's worth doing.
Mr. Ose. I have to tell you, this is an amazing argument,
but I find myself beginning to subscribe to this issue of
environmental justice. Because what you're laying out is
someone who makes a conscious decision to not build
transmission and not build generation for whatever reason,
basically shifting the responsibility to somebody else
accordingly. And, I can't see that's very good policy.
Mr. Wood. Plus the environmental point.
Mr. Ose. Plus the impact. I mean, my air quality is bad so
somebody else doesn't have that issue.
Mr. Ackerman.
Mr. Ackerman. There are two other creative elements that
would allow people in a load pocket to reduce demand. One is
demand bidding, of course, which allows large users of energy
to every day, maybe even every hour, to enter bids as to how
much they would be willing to be paid in order to shut down
operations. And, the other one is real-time pricing.
But here's the problem. Jurisdictionally, those items are
on the State side of the line, not on the Federal side of the
line. It becomes somewhat messy in terms of how to coordinate
those two sides so that you have a coherent policy. It's not
possible for FERC, for example, to go to a State and say, you
know, you really ought to be doing demand-side bidding.
Although they can give it lip service, and they have in many of
their polices and many of their orders. But they can't go all
the way. The States must pick up the slack.
Mr. Ose. And, Mr. Winter, in your testimony, you talked
about some of these permutations, if you will, on the demand-
side. Are these part and parcel of the design that you're
talking about?
Mr. Winter. That is certainly one of the ways of meeting
your capacity requirements. So if the State decides that they
want to identify demand-side reduction, let's just take San
Francisco, for example, because that is, as Pat Wood said, a
constrained area. So if you look at that particular area, in
regard to being constrained, and I am sorry, what was the
question? I lost you.
Mr. Ose. Whether or not these demand-side reduction
provisions are part of the market design discussion.
Mr. Winter. Right. They are not part of the design, but
they would meet the requirement. And, at such time as those
particular areas became constrained, then they would use the
demand reduction to allow the sufficient generation to get into
the area.
Mr. Ose. I believe you just told me it's one of the tools
that would be available.
Mr. Winter. Correct. But not through the design itself. It
just has to be, everybody keeps saying, put that in the design.
I think they're talking more broadly of the design of how
energy is going to be provided in the State as opposed to MD02,
which is really the design of how the market would work.
Mr. Ose. All right. Mr. Smutny-Jones, do you want to add
anything on this, on local market power?
Mr. Smutny-Jones. Only to emphasize that we do share your
observation and concern with respect that the cure is worse
than the disease here. In using San Francisco, not just to pick
on them because I am from Sacramento, but there is a
significant constraint there, we've debated this now for 6, 7
years. It seems to me that we can resolve this. If you set your
price gap but also allow people to bid into the closest
competitive node, you need an LMP to do this. Then you remove
the problem that I think you're observing, which is you're not
giving people any incentive to basically build there.
I also think it does in fact send signals to policymakers,
even if you peanut butter as they say, the rate impact of this.
It does give the utility and the policymakers real information
in terms of what it's really costing to serve a particular
area. That is absent right now.
Mr. Ose. Mr. Fraser, any input?
Mr. Fraser. No, thank you, Mr. Chairman.
Mr. Ose. My last question here, I am concerned about the
market design being such as to prevent the gaming that occurred
such as Death Star and Fat Boy and all the others that have
gotten such play in the modern lexicon. Mr. Ackerman, how do we
embed in market design the structures that prevent that kind of
gamesmanship?
Mr. Ackerman. I think that moving to a system that's been
given the initials of ``LMP,'' which means the locational
marginal pricing, goes a big step toward preventing the type of
gaming you saw previously. And, I don't want to go into so many
details that I lose the point here.
I think that the Market Design 2002 is heading toward
several positive charges; one of them being locational marginal
pricing, another trying to specify how they're going to
mitigate prices globally, and third, how they're going to
mitigate prices on a local basis. Those three things alone will
do a lot to remove the worry that I think consumers should have
that they're being subject to the kinds of games that were
identified in previous hearings in the State of California and
many, many other reports.
But to answer your question more broadly, I believe the
whole industry has matured, because we've been exposed in the
public light. There's a lot of public anger about what has
occurred. With MD02 or without MD02, trading is not going to
look like it was before.
So I wouldn't rest upon MD02 to solve all the problems and
assure people that everything is going to work cleanly. If
there is a charge, it comes right down to the individuals who
are making decisions on the trade floors. How are they going to
make those decisions? I think now they understand that what
they do, what they say and who they report to has the light of
public review. I don't think anybody ever considered that or
dreamed it, way back when.
Mr. Ose. Commissioner Wood, same question. How do you use
MD02 to prevent market manipulation in the future? What
specific tools need to be in it?
Mr. Wood. I think it was the most clear consensus item I
heard from my fellow panelists here today, is get that resource
adequacy requirement in place as soon as possible. I heard that
from the folks who would build and trade, from the man who
operates the grid, from the utility that both public and
private view, have customers and who also have generation. I
think it is the cleanest way to hop over all the noise about
the California being a bad place to build, etc.
If you have customers who have authority and ability to
pay, which is an important issue with the large IOUs,
certainly, to be dealt with hopefully soon, then all the rest
of this work, the ability to manipulate again is exacerbated
when you have insufficient supply and I think the market rules,
certainly I can't pass that up. We clearly have to get
congestion allocated in a better way. The price signal is being
sent to not only builders of power plants, but to customers and
to transmission builders about where investment is needed.
But clearly steps to keep the supply bubble ahead of that
kind of tight level that Terry laid out for 2004. That's not
just jump up and down kind of news for me. Any steps that can
be taken in the very near future to send that buy-ahead signal
to developers of all sorts, to come into California and start
building again, would be very welcome.
Mr. Ose. Mr. Winter, how do you use Market Design 2002 to
prevent the manipulation?
Mr. Winter. First off, I agree both with Pat and Gary.
Clearly if you have plenty of resources there, people don't do
things that they normally do. On the other hand, I don't think
any generator is going to build based on his ability to try to
game the market, if you will. And, clearly, the LMP allows me
as the operator to quickly identify the problem and get right
on it.
Because the dilemma we had with the old design was that
people could actually in the day ahead congest lines. Then,
when we got to real time, I had to solve it because the models
didn't tell me that it was congested until I got to real time
and saw the line overloaded. Then I had to take action. And, it
was just a beautiful opportunity to game things by scheduling
loads such as to cause congestion.
So I think that will help. Clearly, getting more generation
and transmission, it isn't just generation, because right now I
sit with power in Northern Mexico and power in southern
Arizona, and because of transmission constraints, I can't get
it in. I've got to have a way to increase that capacity and
make it available.
And, I look at the transmission system as an enabler for
the markets, and it's really a rather small percentage of the
cost of energy. Therefore, let's try and get some lines built
that will relieve it, then you allow the generator to build in
more places he would like to where he's got water, transmission
service, etc. And, then, we can move forward. But if we keep
constraining it, even if you build all the generation in the
world, if I can't get it to the load, it doesn't do me much
good.
Mr. Ose. Ms. Tomcala.
Ms. Tomcala. Yes, we can all agree, I think, on this area,
and that's a nice thing. Adequate resources, clear rules,
independent region-wide monitoring, and the ISO has done some
things already in the MD02 process in conjunction with FERC
that help. There are some screens in place now, an impact
screen, a conduct screen, and a reference price, all of which
give the monitor something to look at, to give a quick check to
see if everything's in place or if there's a problem. And then,
FERC's ability to act when they do see a problem coming out of
those screens.
Mr. Ose. Mr. Fraser.
Mr. Fraser. I couldn't agree more. Resource adequacy has
got to come first, I think I made those comments earlier.
Particularly transmission, and I think you've got to look at
transmission a little bit different from the traditional least
cost planning, and view it from a strategic point of view that
transmission brings more than just the cost in the cost benefit
analysis. It brings reliability as we've discussed, it's a very
effective tool in mitigating gaming, and certainly not the
least of which it facilitates inter-regional transfers,
particularly in the West, where we have major temperature
differences between California and the Northwest that we at the
NCPA have taken advantage of for some 15 years.
Mr. Ose. Mr. Smutny-Jones.
Mr. Smutny-Jones. I think what the other speakers are
saying is very similar to my observations here. I think it's
important that we learn lessons from what happened in
California but we don't learn the wrong lessons. Unfortunately,
there's a lot of people who I will call neo-monopolists that
sort of want to go back to some other model that frankly didn't
work all that well either. I think as we move forward, the
market redesign that's being proposed here needs to parallel
other markets that we have real world experience in. And, I
think we are almost there.
But that real world experience is based on using the LMP,
which does have a very high level of transparency associated
with it. I think all the people on the panel have indicated a
set of regional rules that are monitored and enforced
regionally that basically, whether you call it megawatt
laundering or arbitrage or ricochet or whatever, the rules are
the same in Sacramento as they are in Portland as they are in
Phoenix, people will behave according to those rules.
So we need to basically, I think, move in that direction so
we actually do have, that we do in fact learn from what
happened in California and we do not have a repeat of that in
2005 and 2006.
Mr. Ose. I want to thank you all for coming today. This has
been educational, to say the least. I am not particularly
comforted by what we talked about relative to the current
market design that exists in California. I still happen to
think we can do better. I think the current design leaves us
vulnerable to manipulation. And, I am not convinced that we as
a State, that is California, have yet to address the
fundamental flaws in its market.
I don't believe we are done with this situation. I don't
think we are going to have rosy markets forever. I think we've
got maybe a year to get this thing under control before we have
another crisis. Frankly, I don't think we can afford to let
that happen. To the extent that, Mr. Winter, you can expedite
the market design and the rest can provide input to get us to
closure on that, I think that's a critical piece of the pie
here, to getting the California market fixed.
Absent a fix, we are not going to have any investment,
whether it be generation or transmission, whether it be public
or private, whether it be munis or utilities or third party
merchant generators. We'll be stuck with old plants at high
cost and high pollution and that's not a future that I really
want to have come to pass.
This Member of Congress is going to stay focused on this.
You have a basic piece of the economic puzzle that you're
working with. My objective is to get lower prices for
ratepayers and have it delivered in a fashion that allows
people to have power when they turn on the switch and clean air
when they want to breathe. I hope CAISO's Market Design 2002
works out. I am here to tell you I am going to be watching, and
if necessary, we will have you all back here again, because I
know you enjoy it.
Thank you all for coming. I appreciate it. This hearing is
adjourned.
[Whereupon, at 4:54 p.m., the subcommittee was adjourned,
to reconvene at the call of the Chair.]
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