[BETA] Fortnightly

California's three largest investor-owned electric utilities have submitted their proposals to the Federal Energy Regulatory Commission for implementing an independent system operator and power exchange for the state's restructured electric industry (Docket Nos. EC96-19-001 and ER96-1663-001).

Last November, the FERC had conditionally approved an "acceptable framework" submitted by Pacific Gas & Electric Co., San Diego Gas & Electric Co., and Southern California Edison (the trustee for the ISO and PX is S. David Freeman), but required more information in what it termed a "Phase II" proceeding.

The new March 31 filing highlights two dominant issues: 1) the independence and strength of the ISO and PX, and 2) the mitigation of market power. Under the proposal, transmission owners now would have an obligation to build transmission facilities the ISO decides are needed for economy or reliability. All existing contractual rights for transmission access would end in five years, except for financial and nonaccess terms.

Major steps to mitigate market power will be taken in symmetry with four-year recovery of stranded costs. The ISO will conduct an independent assessment of must-run plants with the goal of eliminating that category. A proposed rate freeze would limit the generation-related revenues the companies are allowed to retain. In four years the agreement that IOUs only buy and sell through the PX would end.

Limiting "Dump Hydro." The companies have included a proposal limiting the horizontal market power of large, out-of-state sellers of electricity, such as the Bonneville Power Administration, which was described as having the power to "dump" its low-cost hydropower into the California Power Exchange and at the same time collect a relatively high pool-wide price set through a the process of bidding among resources fired primarily by fossil fuels.

The proposal described bilateral trading between BPA and the largest California purchasers. That trading, according to the filing, had won energy sales for BPA at prices well above its hydro marginal cost, but well below the price that would be commanded by the most expensive supplier (the last winning bidder) in the California pool during the relevant hour. The trustee claims that without a mitigating rule, BPA could bid its entire supply into the PX (limited only by transmission capacity over the Northwest interties) and receive the market-clearing price for the entire amount accepted in the PX auction.

A Price Ceiling. Thus, the PX would impose a special rule, applicable to any power-selling entity within the WSCC that: 1) controls transmission facilities used for interstate electric transmission without an open-access tariff on file at FERC; and 2) actually supplies 25 percent or more of the non-must-take or must-run energy sold through the PX at any given hour. So BPA and other large sellers would be paid the highest price for a bilateral trade (at least 5 MW) between WSCC members during that hour, or the pool price, whichever was lower.

But according to BPA spokesman Perry Gruber, that proposal "blatantly discriminates" against BPA. "The proposed rule for the PX will effectively exclude low-cost power from the pool in some hours of the year to the detriment