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FERC Questions Market Power Studies, Will Explore Mitigation in California PX Docket

Fortnightly Magazine - February 1 1997

Having decided that California's three major investor-owned utilities (IOUs) exert greater market power in generation and transmission than the IOUs had let on in detailed studies filed last summer, but finding no purpose in asking for a second round of hefty documents, the Federal Energy Regulatory Commission (FERC) has decided to explore options for mitigating such market power before approving the proposal by the IOUs (Southern California Edison Co., Pacific Gas & Electric Co., and San Diego Gas and Electric Co.) to form a Power Exchange (PX) and Independent system Operator (ISO).

Commissioner William Massey noted that with the release of the PX order, that FERC had touched upon the entire California restructuring proposal. He added that the FERC had made a preliminary assessment of market power, but that instead of ordering more studies, it was "more fruitful" for FERC to ask questions on the submitted information.

More Data Wanted. Specifically, the FERC has asked the companies to provide more information on:

• plans to divest generating assets,

• plans for monitoring the ISO, and

• more details on the idea of requiring the IOUs to enter "call contracts" with the ISO to mitigate market power associated with "must-run" plants.

Under a call contract, a must-run unit would receive a reservation fee or demand charge. It would be paid its variable operating costs whenever the ISO required it to run to ensure reliability. But when not required to run, it would be treated like any other generator (em dispatched on the basis of its bid and paid at the market price.

The FERC further explored mitigation options at a technical conference held January 17.

This latest FERC decision on the California PX and ISO was handed down on December 18, 1996 (Dkt. No. ER-96-1663-000, 77 FERC ¶ 61,265), and follows up on a prior order that granted preliminary approval for the PX and for an ISO, subject to further investigation on market power issues. (Dkt. Nos. EC96-19-000, ER96-1663-000, 77 FERC ¶ 61,204, Nov. 26, 1996.)

Studies Inadequate. The FERC said the market power studies were inadequate in presenting data for transmission costs and losses and for ancillary services. The studies had relied on historical data, failing, according to the FERC, to take into account recent market changes due to restructuring. Also, the FERC ruled that the studies included far more capacity in the market than present transmission would make available, and lacked any market analysis for the proposal by the IOUs to charge market-based rates for ancillary services.

Phase II Filings. In their Phase II filings, due March 31, 1997, the utilities must give additional information on their call contracts and divestiture plans. They must explain how auctions for energy and ancillary services will be conducted. Also, they must provide mechanics for selecting energy and certain ancillary services providers, as well as methods of compensating them.

The PX would establish a competitive spot market for electricity through day-ahead and hour-ahead auctions of generation and demand bids using transport rules and protocols. Participation in the PX would be voluntary, except for a five-year transition period when

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