Frontlines

Fortnightly Magazine - November 1 2000

Frontlines

Federalism At Work

 

 

Excerpts from the field hearing conducted by the Federal Energy Regulatory Commission on wholesale power markets in California.

San Diego, California, Tuesday, Sept. 12, 2000, 9 a.m.

James Hoecker:* Good morning, ladies and gentleman. We are here in San Diego to do some very serious work … I fully recognize that experts in this area can debate these issues, why this happened, and what should we do about it from hell to breakfast. … [Most of first panel omitted here.]

We are going to conclude this panel with a statement of the California Public Utilities Commission. Commissioner?

Carl Wood: Thank you very much, Chairman Hoecker. …

I would like to join with the residents and businesses of San Diego in urging you to provide speedy and effective relief for the economic disaster that has been visited on this community. …

I urge you to decisively and quickly provide San Diego with cost-based rates that reflect the traditional understanding of "just and reasonable." …

Hoecker: Thank you, commissioner. I'm wondering if you can illuminate a little bit. …

Wood: I'm not sure that what I've asked you for is very radical … there is a long history in this country, going back to the Federal Power Act … that establishes that cost-based rate making is the basis for determining just and reasonable rates. That's really the radical action that I'm asking that this commission assert.

Linda Breathitt: The notion of returning to cost-based rates without a FERC due process [hearing] involved would be very troubling to me because of the judicial nature of our orders. And we speak through our orders … That doesn't mean that we can't take definitive actions. It just must be supported.

Commissioner Wood, those were your comments, but I'm wondering if President Lynch also shares your view in calling for a return to cost-based rates?

Loretta Lynch: If it takes cost-based or cost-based-plus rates to give what California consumers are entitled to, I would support that.

Curt Hébert: If you're considering a move back to cost-based rates, then I'm assuming you have a rate of return in mind, something that you think would allow this market to correct itself?

Wood: I think that there is a very well-established methodology for determining appropriate rates of return, depending on comparable financial markets, depending on the risk that is incurred. There is a great deal of history with your agency, as well as state agencies in that respect.

[But] let me make something clear perhaps in response to your question and Commissioner Breathitt's. What we are proposing here is not a permanent return to cost-based rate making.

Hébert: Okay. And I'm assuming if you return to cost-based rates, that you would dissolve your existing Power Exchange? I'm not sure what the function of the PX would be at that point. You would dramatically change the ISO--downsize probably--move at that point to some kind of independent for-profit transmission company. Am I wrong, or do you see it a different way?

Wood: This is extremely speculative. It just assumes a lot of things that we are not proposing here today. What we are asking for is some immediate relief from this dysfunctional market. …

And we are, therefore, asking for a declaration based on an evidentiary record. We are not asking that you do this preemptively, but [that] a determination be made that there does not exist a condition for [the] market to produce just and reasonable rates. …

The fallback in that situation is a cost-based rate. …

Hébert: You can't just say you're going to look at cost-based rates. You do have to assess the PX. You do have to assess how utilities are going to function. …

It's not that simple. It's very complex. It addresses a lot of different functions. And I would like to see how that plays out. …

It's interesting. I was in a hearing in 1992 when testimony came up from one of the California commissioners … I was a state commissioner at that point … and they said, "Don't worry about 'just and reasonable' rates. They're going out the window. Market rates will be less."

And that's why I throw it back to you … I'm just asking you, right, wrong or indifferent, give me a plan. Tell me what your idea is of success here. Lynch: In changing to a market-based structure, we did not have a clearly thought-out plan to get us through the transition to true competition … So I think it's time to reset the starting point back to protecting consumers.

Hébert: I know this is dragging on. I don't mean to be ugly about this. You've asked me to come here … to help you solve a problem. I can only do that if you give me adequate information … I would suggest that you not just look at cost-based rates.

William Massey: I think this is time well spent … because we may be getting down to the [nub] of this partnership _ with the state of California … and the question is what is the ultimate goal of the partnership? Is the ultimate goal … a return long term to cost-based rates for wholesale generation? If that is the nature of the partnership, that is a very difficult partnership for this commission to enter into.

Lynch: We have not collectively on the state and federal level demonstrated a path that works. Until we do that, we need to go to our starting point of protecting consumers.

Hoecker: I have one last question … In a world where generators no longer have an obligation to serve, will cost-of-service rates be sufficient inducement for companies to build generation in California -- do you have any thoughts about that?

Wood: I have some thoughts about that. …

One is that, first of all, the determination that we are asking be made is to declare that in the present circumstances, these costs are not just and reasonable in lieu of the market. We are asking that cost-based rates be set …

Today, if you step outside the doors of this building and walk down the street and talk to the people who aren't wearing suits … you would find … there's a majority opinion in San Diego right now to return to traditional command-and-control cost-of-service rate making …

[But] I don't feel I'm in a position to push one approach or another right now. I think that's the job of the legislature and the governor.

Hoecker: I take your answer to mean that you're not sure whether cost-based rates will solve this supply problem here in California?

Wood: I would just like to quote from the statement from the governor …

"While I remain hopeful that California wholesale markets may ultimately become competitive … I cannot and will not accept the liabilities to California that result from the current situation, even for a short period. I intend to take any and all steps necessary to restore economic stability to the electric service infrastructure of California."

And you know, of course [that] I will defer to the governor who appointed me. Anyway, from a personal level that is my position precisely.

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