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H.R. 1647, "The Electricity Emergency Act of 2001
Subcommittee on Energy and Air Quality
Mr. Lindy Funkhouser
I am Lindy Funkhouser, Director of the Arizona Residential Utility Consumer Office, otherwise known as "RUCO." The Arizona Legislature established RUCO in 1983 to study, research and represent the interests of Arizona residential utility consumers. The Director is appointed by the Governor and confirmed by the State Senate. I have been RUCO's Director since December 1999. Arizona has an interest in helping California help itself so long as Arizona residents are not harmed in the process. RUCO is a long-standing member of the National Association of State Utility Consumer Advocates ("NASUCA"). NASUCA has invited me, as a consumer advocate within the Western Region, to speak to this Subcommittee concerning The Electricity Emergency Act of 2001 ("Act"). I. INTRODUCTION RUCO has closely followed developments surrounding the California Energy Crisis. The ongoing events in the California wholesale markets are especially troubling because the extraordinarily high prices from those markets are spilling over into neighboring states, including our own. For example, Citizens Communications Company purchases virtually all of its power in the wholesale markets to serve the areas of Lake Havasu City, Mohave County and Nogales. Citizens collects revenues from customers to pay these costs through rates set by the Corporation Commission. From May to September 2000, Citizens reported that it incurred a deficit in excess of $59 million from power supplies purchased on the spot market. Under normal conditions Citizens would have expected a deficit no greater than $2.6 million. Citizens has submitted to the Corporation Commission a plan to recover the deficit through increased rates over time. The plan might become difficult to implement since Citizens may be incurring additional losses from this winter's price spikes in the Western power markets. Consequently, Citizens wholesale power contract potentially exposes Arizona ratepayers in the Colorado River and Nogales areas to the very high power prices that have persisted from last June through to this day. Upon an invitation of the Federal Energy Regulatory Commission, directed to interested parties in the Western region, RUCO submitted comments on FERC's proposed Order Proposing Remedies for California Wholesale Electric Markets and the Staff Recommendation on Prospective Market Monitoring and Mitigation for the California Wholesale Electric Power Market in its docket entitled San Diego Gas & Electric Company, et al., 93 FERC ¶ 61,121 (2000). I have attached those comments to supplement my testimony today. II. The Act In Perspective Much of the reaction to "fix" the California Crisis has been caused by a failure to properly design the wholesale and retail markets in the Western Region in the first place. Unfortunately, the proposed solutions fail to directly address this problem and suffer the defect of assuming that a workably competitive market exists. This Act is no exception. III. Sections 101 and 102 - Demand Reduction Incentives Demand reductions and demand responsiveness should be a part of the solution. However, these approaches should not be used as an excuse to sidestep the significant p roblems with the wholesale and retail market structures in the Western Region. For example, if this legislation allows people to receive the market-clearing price for demand reductions, say from $400 to $350 per MWH, it should not have the effect of pre-approving reasonableness of the implicit market power rents that caused the rates to be as high as $350 per MWH to begin with. Yet this is what the Act seems to do. Another danger is that generators might gain market power over demand reduction incentives. For example, generators might enter into a sufficient number of demand reduction contracts with large industrial customers to control the demand reduction market. As a result, a relatively small number of participants might gain control over both the demand and supply portions of the market. Again, the Act could lead policy makers into another damage control death spiral unless and until we deal with the fundamental problems of market structure, which have led to the existence of substantial market power. IV. Section 104 - Path 15 Transmission Consider a requirement that the transmission investment be found through appropriate study to be "least cost," consistent with reliability and engineering requirements, prior to the commitment of investment funds, and prior to guaranteed cost recovery. V. Section 107 - Payment Guarantees This section also suffers from the faulty assumption that the contract price is the result of a workably competitive market. As a result the Act would create a safe haven for contracts that are influenced by unjust and unreasonable prices. Consider whether this section might give a wholesale supplier the ability to shut off power to an all-requirements purchaser like Citizens due to insufficient payment guarantees (e.g., a rate increase order imposed by the State Public Utilities' Commission). This section might be construed as applying to retail contracts. It also fails to include voluntary efforts to provide supplies, thereby perhaps giving an incentive to withhold supplies for a guaranteed payment. VI. CONCLUSION The foregoing testimony is an illustrative, not exhaustive, list of the issues that this body must consider to avoid creating a set of "solutions" that simply exacerbates the problem. The Energy Crisis has become a policy wildfire within the Western Region. Up to now, the tendency to come up with quick fixes has fanned the flames - mainly because these fixes avoid the hard problems of market design and structure. With all due respect, significant thought must be given to prevent this Act from becoming gasoline on the existing fire.
BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: James J. Hoecker, Chairman; William L. Massey, Linda Breathitt, and Curt Hébert, Jr. San Diego Gas & Electric Company, Complainant, v. Docket No. EL00-95-000 Sellers of Energy and Ancillary Services Independent System Operator and the California Power Exchange, Respondents. Investigation of Practices of the California Independent System Operator and the Docket No. EL00-98-000 California Power Exchange Public Meeting in San Diego, California Docket No. EL00-107-000 California Power Exchange Corporation Docket No. ER00-3461-000 California Independent System Operator Docket No. ER00-3673-000 Corporation COMMENTS OF THE ARIZONA RESIDENTIAL UTILITY CONSUMER OFFICE THE NEW MEXICO ATTORNEY GENERAL, AND THE COLORADO OFFICE OF CONSUMER COUNSEL REGARDING DRAFT "ORDER PROPOSING REMEDIES FOR CALIFORNIA WHOLESALE ELECTRIC MARKETS" INTRODUCTION The Arizona Residential Utility Consumer Office, the New Mexico Attorney General, and the Colorado Office of Consumer Counsel respectfully intervene in Docket No. EL00-95-000 ("Docket") as the Joint Consumer Advocates (JCA), and submit the following comments on FERC's proposed Order Proposing Remedies for California Wholesale Electric Markets ("Order") in this Docket. This intervention responds to the Order's invitation at page 20, for comments from "other Western State policymakers to help shape and further develop this new market design." The recent events in the California wholesale markets are especially troubling because the extraordinarily high prices from those markets are spilling over into neighboring states, especially our own. Smaller utilities like Citizens Communications Company in Arizona have experienced excessive price spikes from their wholesale power contracts with existing vertically integrated utilities. Consequently, some of these wholesale power contracts have already exposed retail ratepayers outside of San Diego to the very high regional power prices that have persisted from last June through to this day. The very high market prices over the past several months raises serious questions about the viability of the future wholesale power markets throughout the Western States Coordinating Council (WSCC). The move towards retail competition may be in jeopardy in New Mexico and Arizona. FERC must do whatever is necessary to determine whether or not wholesale power markets throughout the WSCC can be made workably competitive. Major investor-owned utilities in the states that we represent have now committed to joining the Desert Star RTO. Region-wide power markets will remain problematic unless future California RTO markets are brought into harmony with one another and with the public interests affected by them. TAKE TIME TO RE-EVALUATE WHAT HAS HAPPENED JCA urges FERC to avoid simply patching up and repairing the existing California market structures and governance structures. Ask a simple question based upon the information we now have available: "How would a California RTO be designed if we were starting with a clean slate?" A patch here and there will not solve the problems that the California markets have caused ratepayers in California and throughout the West. FERC must finally address the difficult and fundamental problem of creating a workably competitive wholesale market in California in the near term, and throughout the WSCC in the long run. JCA suggests that all past precedents should be rejected since California's original market designs failed to consider in sufficient depth the potential problems that would be affecting the new markets. ADDRESS THE KEY ISSUES FERC should amend the Order to address the following key issues: 1. Deal with and impose immediately some of the "longer-term measures" described in the Order, particularly those measures relating to reserve requirements. This will be necessary to quickly get an adequate supply of new capacity on line. California must have a required reserve margin to prevent California buyers from leaning on excess capacity in the West that they have not set aside through contracts. An adequate amount of capacity serves two main functions: bringing system reliability to an adequate level and mitigating market power. A required reserve margin has the additional virtue of being the simplest way of ensuring that participants will construct adequate amounts of new generating capacity within California. FERC has approved similar requirements for PJM and NEPOOL.
California energy markets have experienced price spikes in part because generators must collect their costs plus profits in the market, as well as in the ancillary service markets. If most fixed costs could be recovered in a capacity market, competition in the energy market would tend to imply that the market clearing prices in the energy market could be, and, hopefully, would be much closer to short-run marginal costs. Keep in mind that some fixed costs would be recovered in the energy market via the difference between the market clearing price and the variable cost of running a generating unit. A capacity market would become an important means for differentiating the longer-term (annual) price signals needed to get new capacity built, from the shorter-term (hourly) price signals needed to get demand to respond to higher prices during peak periods. Prices in the energy market would not have to exceed the $150 per MWH figure that FERC computed in its Order, yet the capacity market would give FERC leeway to set a hard price cap for energy while allowing generators to recover fixed costs. 3. Energy market price caps must be allowed to change over the course of the day. A price cap that is appropriate for peak hours will be far too high to prevent market power in off-peak hours. Do not utilize a "soft" price cap, which is subject to abuse. Require energy market clearing prices to closely approach the variable costs of production, perhaps by setting the cap at a constant percentage (e.g., 20%) above the assumed marginal cost of serving the load in each hour. Exclude opportunity costs from the concept of variable cost. A single cap will not effectively mitigate market power in the off-peak or mid-peak hours. Since cost-based bid prices in the energy market tend to increase with load, a single price cap, such as the proposed $150 per MWH cap, will not really restrain prices, except near times of peak demand. JCA proposes that the price cap should vary during the course of a day as a constant percentage (or some other measure) above an estimated future competitive cost-based clearing price. Market monitors could increase or decrease the percentage, as market power becomes a problem, or not. This measure avoids the need for the proposed soft cap, since the percentage cap could be varied to fit the circumstances. Perhaps the ISO could set projected price caps ahead of time once per month based on a percentage of differentials given by FERC. 4. Consider charging ancillary services at cost until the energy market is workably competitive. Establishing too many workably competitive markets simultaneously may be too difficult. We recommend that to make a capacity and energy market competitive, FERC should initially require the ISO and PX to charge ancillary services at cost based upon some way of prioritizing the generating units providing each service. This approach would also make easier the ISO's market power monitoring function by eliminating a key source of potential market power, namely the ancillary service markets. The ISO will have fewer markets interacting with each other in complex ways. 5. Establish a fully integrated market monitoring and mitigation function. Once FERC has established a capacity market, detecting market power in both the energy market as well as the capacity market will be much easier. Market monitoring must focus on behavioral and structural issues. Within the category of behaviors that exercise market power, monitoring must search for inappropriate capacity withholding as well as strategic bidding. Having a variable set of price caps will make market power mitigation easier, since the price cap will be better tailored to the underlying market cost structure for each hour. A similar price cap may be needed in the capacity market to mitigate for potential market power, perhaps at the level of the annualized fixed costs of a new peaking unit. The monitoring function can then be fully interactive with these new features of the market structure, and the constraints on bid ranges can either be tightened up or loosened, as appropriate. 6. For the capacity and energy spot markets, change the current market structure, which allows all dispatched generators to be paid at the same market-clearing price. Try a payment rule that allows each generator to receive only as much as it bids and analyze the data to determine whether the rule helps to mitigate market power. While more analytical studies of different pricing rules are needed, some initial research suggests that exercising market power may be somewhat more difficult if bidders into both the energy and capacity markets (and ancillary service markets if they are not cost-based) are only paid their bid price, and not the highest bid price that clears the market. This approach is similar in some respects to the bilateral contract market, where sellers only get paid their asking price once a buyer has accepted that price. FERC should use this approach experimentally since electricity markets have not yet tried it. Although this measure may cause low cost suppliers to submit higher initial bids, the suppliers will have to exercise some caution by bidding below the estimated market clearing price, or risk not being dispatched. Hopefully, this rule will cause electric generation markets to behave more like other commodity markets. 7. Prevent participants from exercising market power through capacity withholding by requiring all capacity in California to bid into every appropriate capacity, energy, and ancillary service market. We support the Order's general intent to minimize capacity withholding. FERC should strictly require generators who initiate an outage to clearly justify the need, and carefully monitor the frequency of such outages for all units in California. These rules should apply to all generating units, not just thermal units, to the extent that they can operate. Capacity withholding should be banned from all markets. 8. Modify FERC Order No. 2000 to require the market structures of all RTOs, at least in the WSCC, to be the same as the above proposals imply for California. The future market structures of Desert Star are our immediate concern in filing comments in this docket, since most of our investor-owned utilities have joined Desert Star. Of particular importance is the need to make WSCC market structures consistent with one another and with the public interests that are affected by them. All regions of the US, and especially of the WSCC, are fairly similar with respect to generation and transmission constraints. The FERC staff report documents that California market prices have an especially strong spillover effect on the prices in the other WSCC sub-regional markets. Differing market structures and rules between Desert Star and California may open up numerous possibilities for generation owners to game or arbitrage these systems in unknown ways. Market power monitoring and mitigation could become much more difficult in both regions. SUMMARY These issues are critical in large part because they will establish important precedents for neighboring RTOs throughout the WSCC region. Given the close proximity between the Desert Star region and California, the decisions that FERC makes in California will likely determine whether or not both workably competitive wholesale and retail markets can exist in states like Arizona, New Mexico, and Colorado. JCA strongly urges FERC to completely re-think and re-consider whether the best market structures and market rules have been created for the California markets. Half-measures and patchwork changes will not solve the serious market power problems that have emerged from the California markets. These fundamental problems did not begin in the year 2000. Even if prices decline somewhat over the next few months, market power may still exist within the California wholesale electricity markets. Our recommendations are not a cure-all for dysfunctional markets. Establishing workably competitive markets in California will continue to be extremely difficult. Consequently, for many years to come our states may continue to suffer the spillover problems from the California markets. Although time is of the essence, FERC must move thoughtfully and comprehensively. An appropriate amount of time must be allotted if detailed analysis is necessary to determine whether any particular policy should be implemented. Respectfully submitted, RUCO ________________________ Lindy Funkhouser Arizona Residential Utility Consumer Office 2828 N. Central Ave. Suite 1200 Phoenix, AZ 85004 (602) 200-3352 New Mexico Attorney General ________________________ Jeff Taylor Assistant Attorney General Office of the Attorney General Regulatory Law Division Ratepayer Advocate Unit P.O. Drawer 1508 Santa Fe, NM 87504-1508
OCC ________________________ Ken Reif, Director Colorado Office of Consumer Counsel 1580 Logan St. Suite 740 Denver, D.C. 80203 Phone: (303) 894-2224
CERTIFICATE OF SERVICE
___________________ Lindy Funkhouser
BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: Curt Hébert, Jr.,
Chairman; San Diego Gas & Electric Company, v. Docket No. EL00-95-000 Sellers of Energy and Ancillary Services Independent System Operator and the California Power Exchange, Respondents. Investigation of Practices of the California Independent System Operator and the Docket No. EL00-98-000 California Power Exchange Public Meeting in San Diego, California Docket No. EL00-107-000 California Power Exchange Corporation Docket No. ER00-3461-000 California Independent System Operator Docket No. ER00-3673-000 Corporation COMMENTS OF THE ARIZONA RESIDENTIAL UTILITY CONSUMER OFFICE REGARDING "STAFF RECOMMENDATION ON PROSPECTIVE MARKET MONITORING AND MITIGATION FOR THE CALIFORNIA WHOLESALE ELECTRIC POWER MARKET" The Arizona Residential Utility Consumer Office ("RUCO") responds to the Commission's invitation to comment on the Staff Recommendation on Prospective Market Monitoring and Mitigation for the California Wholesale Electric Power Market ("Recommendation") in this Docket. 1 On November 22, 2000, RUCO, the New Mexico Attorney General, and the Colorado Office of Consumer Counsel, as Joint Consumer Advocates filed comments on the Commission's November 1, 2000 Order Proposing Remedies for California Wholesale Electric Markets. 2 In those comments RUCO, as one of the Joint Consumer Advocates, informed the Commission that Arizona residents have been affected by the recent events in the California wholesale markets and that very high market prices had begun to raise serious questions about the viability of the future wholesale power markets throughout the Western States Coordinating Council (WSCC). The comments urged FERC to do whatever is necessary to determine whether or not wholesale power markets throughout the WSCC can be made workably competitive. In the comments, RUCO, with the Joint Consumer Advocates, recommended that FERC do the following: Take time to re-evaluate what has happened and start with a clean slate. We warned that a patch here and there would not solve the problems that the California markets have caused ratepayers in California and throughout the West. Establish a required reserve margin to prevent California buyers from leaning on excess capacity in the West that they have not set aside through contracts. An adequate amount of capacity serves two main functions: bringing system reliability to an adequate level and mitigating market power. Establish a capacity market immediately. A capacity market allows participants to recover fixed capacity-related costs and prevents participants from using fixed-cost recovery to justify price spikes in the energy market. This measure will assist in the ISO's market monitoring functions and, as the market begins working properly, may eventually eliminate the need for price caps in the energy market.Allow energy market price caps to change over the course of the day because market power can be exercised at all times of the day. A price cap that is appropriate for peak hours will be far too high to prevent market power in off-peak hours. Require energy market clearing prices to closely approach the variable costs of production. Consider charging ancillary services at cost until the energy market is workably competitive. Establishing too many workably competitive markets simultaneously may be too difficult Establish a fully integrated market monitoring and mitigation function. Market monitoring must focus on behavioral and structural issues. Within the category of behaviors that exercise market power, monitoring must search for inappropriate capacity withholding as well as strategic bidding. For the capacity and energy spot markets, change the current market structure, which allows all dispatched generators to be paid at the same market-clearing price. Try a payment rule that allows each generator to receive only as much as it bids and analyze the data to determine whether the rule helps to mitigate market power. Prevent participants from exercising market power through capacity withholding by requiring all capacity in California to bid into every appropriate capacity, energy, and ancillary service market. Modify FERC Order No. 2000 to require the market structures of all RTOs, at least in the WSCC, to be the same as the above proposals imply for California. Since November 2000, markets in the western states continued to deteriorate. The public has begun to lose confidence in the integrity of the financial, political and corporate institutions that participate in the western power markets. Participants at the January 23, 2001 technical conference on market monitoring and mitigation submitted proposals that were similar to those outlined in the JCA's recommendation, including the following: (1) requiring generators and marketers to offer forward contracts for most of their generation capacity at cost-based prices, (2) requiring load-serving entities to contract for resources equal to 115 percent of their annual peak load, (3) imposing a capacity availability standard on all market participants in California, (4) imposing cost-based bid caps on generators bidding into the ISO's real-time market. The Recommendation appears to respond to these proposals, with the notable exception of the market conditions for invoking market mitigation. The Recommendation's clear preference is to expose consumers fully to the price spikes that run throughout the western wholesale markets. 3 It accepts that market power will always be with us and market mitigation "entails a cost," therefore "some" market power must be tolerated "because the cost to mitigate it entirely would inevitably exceed the benefits gained." 4 The Recommendation appears to disassociate prices resulting from the exercise of market power and prices resulting from scarcity, where "retail market rules prevent wholesale price signals from being passed along to end-use consumers." 5 Presumably market mitigation might be achieved if policymakers allowed these "price signals" to flow through to consumers who then might respond to bring demand "into balance with the available supply." 6 The Recommendation seems to accept some level of scarcity pricing without mitigation. 7 This view contains problems that the Recommendation does not address. If scarcity makes money, as the California experience proves, the Commission should consider whether the "market" itself is willing to accept relative scarcity before allowing additional supplies to come into the market. In such an event, the Recommendation should explain how much scarcity pricing the Commission should accept, if any at all. As for the ability of consumers to curtail demand in response to "price signals," suppose marginal prices decreased 15% under a well-crafted demand response program. If prices overall were unreasonably high by 40%, demand response may not have any appreciable effect on market power behavior. The Recommendation does not explain how the Commission should address such conditions. The Recommendation restricts market mitigation to "critical" operating periods, such as Stage 3 emergencies and thus invites the Commission to abdicate its responsibility to prevent unjust and unreasonable rates at all times. This categorical approach will ineluctably disregard an overwhelming number of suspect transactions. 8 Commissioner Massey succinctly exposed the fallacy of this approach in his dissent to this Commission's Order Directing Sellers to Provide Refunds of Excess Amounts Charged for Certain Electric Energy Sales During January 2001 or, Alternately, to Provide Further Cost or Other Justification for Such Charges (the "Refund Order of March 9, 2001). 9 We support his dissent in this proceeding in all respects and with gratitude. The fact of the matter is that market power can and will manifest itself in all aspects of the market. This concept should be so well accepted as to require no citation of authority. We refer to Commissioner Massey's dissent to the Refund Order of March 9, 2001, wherein he cited the following: Staff's report that sellers may have exercised market power in the summer months of May to August 2000; and The Commission's December 15 order finding that prices were unjust and unreasonable when no Stage 3 emergencies had been declared. 10 While making much of the "cost and difficulty" of monitoring and investigating manifestations of market power, such as capacity withholding, 11 the Recommendation fails to consider the human costs of allowing such behavior to affect our citizens. This Commission has received in this docket many well-reasoned comments explaining those costs, with no apparent result. If this Commission is unable or unwilling to implement fully a market monitoring and mitigation program then it should seriously consider whether the public interest requires reconsideration of what has been done so far to the western power markets. Let it be clear. On the day it is obvious that this Commission has successfully exposed citizens to the prevailing dysfunctional wholesale markets in the western states, all will learn firsthand how reliable, reasonably priced power is essential to the health, safety and welfare of each citizen. Expect to hear from citizens who depended on power for home health care, who depended on funds for childcare to maintain their employment and who depended on their small businesses to send their children to college. These problems will intensify for citizens in the desert Southwest, which can reach summer temperatures in excess of 115º F for days at a time. For all the talk about "price signals" policymakers will learn firsthand how the people we represent are quickly able to send political signals to public servants that have so cavalierly abdicated their public responsibility. SUMMARY As the Joint Consumer Advocates said in November 2000, a patch here and there will not solve the problems cascading from California into the neighboring states. The Recommendation is simply another patch that lacks factual and empirical support. Respectfully submitted, RUCO Lindy Funkhouser Lindy Funkhouser Arizona Residential Utility Consumer Office 2828 N. Central Ave. Suite 1200 Phoenix, AZ 85004 (602) 200-3352
CERTIFICATE OF SERVICE
Lindy Funkhouser
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