San Diego Business Journal

A report from federal regulators on high electricity rates in San Diego has elicited cheers, disappointment and talk of possible legal action from local energy experts.

While the Federal Energy Regulatory Commission concluded the state's "seriously flawed" energy marketplace created power rates that were "unjust and unreasonable," it stopped short of saying electricity producers were manipulating prices.

Commissioners instead called for a major revamping of the state's deregulated energy market, while refusing to demand refunds of those high rates to consumers.

FERC released its report Nov. 1, announcing California's market structure was "seriously flawed" and led to an imbalance of supply and demand throughout the state.

That created the potential to jack up rates, although it is not clear that power providers had actually done so illegally, the report stated.

"While we are not able to reach definite conclusions about the actions of individual sellers, there is clear evi-dence that the California market structure and rules provide the opportunity for sellers to exercise market power when supply is tight and can result in unjust and unreasonable rates," the report stated.

FERC goes on to recommend changes to the market to temporarily rein in prices as a competitive market develops.

The report calls for the Independent System Operator and Power Exchange , both of which oversee California's electricity supply , to be run by boards of "non-stakeholders," or members who are not energy industry executives whose companies stand to profit from their actions.

Another step is abolishing the requirement that the state's three investor-owned utilities , Pacific Gas & Electric Co., Southern California Edison Co. and San Diego Gas & Electric Co. , must sell into and buy from the Power Exchange.

No Wholesale Price Cap

The commission avoided ordering a hard cap on wholesale electricity prices, preferring instead a limit on the "clearing price" for energy sales.

Energy producers will be limited to a clearing price , or highest bid paid to all producers , of $150 per megawatt hour. Bids above that will not be accepted as the clearing price, and producers will have to file several reports explaining why their bids were so high.

Additional elements include possible changes to the auction mechanisms, improved monitoring and market mitigation strategies, and the establishment of generation interconnection procedures.

Sempra Energy spokesman Art Larson was pleased by some aspects of the FERC report, disappointed by others. He lauded FERC for taking steps to rein in the high cost for electricity , prices that Sempra's subsidiary SDG & E; itself has to pay.

"We're encouraged that they've acknowledged the California market's broken and in need of substantial reform," he said.

Larson noted FERC took an important step in calling for an overhaul of the governing board of the Independent System Operator, one of California's energy oversight boards.

Pressuring Prices Downward

SDG & E; had called for just such an overhaul in an Oct. 20 filing with FERC, he said.

Other changes FERC recommended would put a downward pressure on wholesale electricity prices. That will help get ratepayers off the hook for the "balancing account," or the difference in cost between the price SDG & E; customers pay for electricity and the actual cost, once the bill comes due in 2003, Larson said.

FERC, however, left several issues unresolved, but Larson said he expects the new makeup of the ISO board will work on those issues.

Michael Shames had a slightly different reaction to the FERC report. The executive director of the Utility Consumer's Action Network said the report was designed to tread lightly, stopping short of accusing power providers of illegal activity.

"The FERC proposed decision comes pretty close to saying that San Diego's rates were unjust and unreasonable. And yet, it contains some equivocal language that mutes the strength of that finding," he said. "On the other hand, they came as close as I think they could come to saying what happened was not just, not reasonable and not lawful."

Shames noted FERC strongly criticized the structural problems at the ISO, and other issues over which there was little controversy.

However, on the more contested questions, such as the definition of "unjust and unreasonable," or whether FERC should refund excess profits, the federal regulators equivocated the most, he said.

That's also why FERC ordered some beneficial changes in the state's energy market, but in other cases backed away from sweeping reforms.

ISO Board Changes

"Their proposal on the banishment of the ISO was good, but then it appears to suggest that the stakeholders should choose who should serve on the appointed ISO board , which recreates the whole problem that we had in the first place," he said.

Similarly, FERC called for "soft price caps," rather than the firm price caps UCAN had sought, he said.

"We got some good things, but there seems to be enough offsetting language that it isn't clear the end result that we hoped for would be achieved," he said. "Most of them, they giveth and they taketh."

Shames suspects FERC made the document malleable because by the time the public comment period ends Nov. 22, a national election will have taken place. A change in political climate could change the document, he said.

Also, the decision could be appealed. These factors could make it impossible to determine how San Diego will be affected, and whether local customers will still be on the hook for the "balancing account," Shames said.

Mike Florio went even further. The senior attorney for The Utility Reform Network called FERC's ruling "worse than disappointing."

"What they have done is actually raise prices for consumers," Florio said.

Florio accused FERC of blocking a price cap plan for wholesale electricity that the ISO had planned to implement by Nov. 1. Also, he noted that San Diegans won't see any refunds of the large profits generators made this summer because of FERC's position that it could not order refunds under the law.

"What is remarkable is they do find rates were not just and reasonable but do nothing about it," Florio said. "It is just a cover for their unwillingness to do anything that the generators don't like."

That left the possibility that TURN would eventually challenge the proposed order in court, Florio said.

State Sen. Steve Peace, D-La Mesa, also questioned FERC's decision that the agency did not have the power to order refunds retroactively. As the architect of California's deregulation, he wrote a letter to FERC Chairman James Hoecker disputing that conclusion.

"We disagree with your counsel's opinion that you are constrained from acting retroactively. If the tariffs produced 'unjust and unreasonable rates' and were, therefore, illegal in October, they were similarly illegal in prior months in which the effect of market power was even more evident," he stated.

Peace also noted the commission gave San Diegans enough ammunition to continue the fight , one that could eventually find its way back to the doors of FERC, he stated.

"While the proposed order is not as clear and unambiguous as I would like it to be (it) means that there is now a legal justification in litigating for relief against those parties who profited from 'unjust and unreasonable' wholesale rates which, of course, will likely require action against FERC itself," Peace stated.