Orange County Business Journal

With federal price caps due to expire on Sept. 30 and the state’s authority to buy power set to end three months later, a battle is brewing over the future shape of the California’s dysfunctional power market.

But the steps taken so far only are confusing half-measures, those involved in the process agree. And legislators are lobbying federal officials to extend the caps to give the state extra time to come up with a workable plan for its power system.

The battle is being waged on many fronts: in Washington, D.C., as state officials urge federal regulators to extend the price caps; in Sacramento as energy players tussle over a new power trading system; and in San Francisco as state power regulators look at how to get the state’s beleaguered utilities back into the business of buying power.

At stake is how California businesses and residents will get their power for years to come – and the price they will have to pay for that power.

“It seems that California has a new solution every two weeks,” said Dominic DiMare, a lobbyist with the California Chamber of Commerce. “It’s all so unpredictable. And that’s not good for our members or for encouraging investors to come in and build much-needed power plants over the long haul.”

Deregulation and open markets have been discredited after the disastrous experience of the power crisis. But the state no longer can return fully to the system of regulated utilities that was in place before deregulation.

So what’s left is a confusing array of measures that don’t fully provide solutions: “open” markets with price caps, “deregulated” utilities facing likely regulatory restrictions, and businesses forced to pay extra government fees to enter into contracts of their own choosing.

“The whole point of deregulation was to establish a robust market for the buying and selling of power,” said Arthur O’Donnell, assistant publisher of California Energy Markets, a Bay area newsletter. “But now we have a bare minimum of a market and what’s emerging is a real hodge-podge of solutions, with no clear direction.”

To give the state more breathing room, Gov. Gray Davis, the state Public Utilities Commission and U.S. Sens. Barbara Boxer and Dianne Feinstein have urged the Federal Energy Regulatory Commission to extend federal price caps for at least six months after the Sept. 30 expiration date.

Those caps, established last June, and orders for power generators to sell all available power, largely are credited with bringing stability back to the wholesale power market and helped avert power shortages last summer.

Extending the price caps would provide considerable relief for Gov. Davis as he runs for re-election in November. That’s precisely why some have speculated that President Bush might be willing to see them expire.

But after recent revelations of Enron Corp.’s role in manipulating the state’s power market to drive up power costs and suspicions that other companies may have engaged in similar practices, there’s growing pressure on FERC to keep the price caps on.

And last week, FERC chairman Patrick Wood said he would do whatever is necessary to prevent any repeat of the market manipulation. Whether that includes retaining the price caps he would not say.

Meanwhile, the California Independent System Operator, or Cal-ISO, has submitted a plan to FERC to restructure the state’s largely defunct electricity trading market.

The plan calls for a “day-ahead” market for the buying and selling of power (buying power one day to meet power demands for the following day), with a price cap of $108 per megawatt hour.

That’s slightly higher than the current FERC price cap of about $101 per megawatt hour.

But the plan has come under fire, both from independent power generators who say it’s too restrictive and from consumer groups who say it doesn’t do enough to protect against market manipulation.

The Independent Energy Producers, a lobbying group, said in a FERC filing that the market controls in the Cal-ISO plan “go far beyond what is needed” and will hamper the effectiveness of the state’s energy market.

The original goal was to have the new Cal-ISO plan in place when FERC price controls expire on Sept. 30. But given these concerns and the time it would take to set up software for the new system, a start date still is several months away.

An even higher level of controversy surrounds the debate over letting the state’s three utilities – Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric – return to the business of procuring power.

In early 2001, after the utilities rang up billions of dollars in debts as they were not allowed to pass on skyrocketing wholesale power costs to their customers, Davis ordered the state Department of Water Resources to step in and buy power on behalf of the insolvent utilities.

The state Public Utilities Commission now is holding hearings on the standards that will be set to allow the utilities to buy power again. A key flashpoint: what will constitute a “reasonable” price as the utilities negotiate power buy contracts with suppliers, and how will the PUC will enforce that price.

Consumer groups are pressuring the PUC to drop any market-based approaches to determining “reasonable” price levels, instead using a set percentage above production cost – a standard very similar to the old regulatory setup.

“We need to return to the era of regulated prices that was in place before deregulation,” said Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights. “And if the state doesn’t do this, we will take the issue to the voters in 2004 with a ballot proposition.”

The utilities want the PUC to make its reasonableness rulings up front, not years after the fact, to avoid any second-guessing by the utilities or suppliers.

The PUC also is debating how to let businesses leave the utility grid and once again and enter into bilateral contracts directly with suppliers. This so-called “direct access” was suspended last fall; 15% of the state’s businesses rushed into contracts last summer before the window closed.

PUC officials hope to reinstate direct access by the end of the year. But first it must set the “exit fee” – the amount a business must pay to the state to repay the long-term contracts the Davis administration signed last year.

The state, concerned that an exodus of big businesses would leave small businesses and residents holding the bag, is pushing for a cost closer to the $70 per megawatt hour average cost of the long-term contracts.

But business groups are lobbying fiercely for a fee close to the $30 per megawatt hour cost to produce electricity.