November  2000

Lifting The Siege of San Diego

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2000/11)

The inherent paradox in effective deregulation is that for electric power commodity markets to function at the state level, there must be a great deal of Federal oversight of all aspects of wholesale price setting. The extent to which FERC’s action to restore workable markets in California portends such centralization is a question whose answer may prove to be bound up in the election. (Whose results, of course, it is doubtful will ever be revealed unless FERC issues a special order.)

The elements of the California crisis alleviation recently recommended by FERC would seem to have varying degrees of national replicability or projectability. FERC allowed utilities to begin purchasing in the same market as other players. Certainly a structural reform, which will encourage bilateral contracting. Not necessarily one of innovative broad scale application, except for any jurisdictions which unquestioningly followed the California model which compelled utility reliance on the volatile spot market and did away with mechanisms to compensate for provision of capacity.

FERC instituted a "soft" price cap to replace the desperation "cap of the week" approach instituted by the Cal ISO. Again, a reasonable fine tuning of the extent of its delegation of "just and reasonable" price setting to ISOs. But also, perhaps, an acceptance of the notion that consumer protection price caps may have a place. That’s a "soft" boundary for the installation of true competitive markets, as well as a pragmatic accommodation of the daunting economics of mandating refunds in the current situation. However, it may prove so complex as to further impair operation of RTO markets.

FERC fired the ISO Advisory Board too, while blowing away its new proposed low price cap. Commentators foresaw this as a harbinger of new assertiveness on other "quirky" ISO measures, such as the New England ISO’s ex post facto price adjustments and Midwest ISO failure to adequately address central dispatching. In principle, this proactive stance could turn out to be the most important element of the Order. In taking it, however, FERC will have to navigate between three very different positions as to the role of ISOs and the policies they adopt.

First, is the position of the independent power generation industry, which essentially would like to see the relinkage of prices available from wholesale loads to retail price signals. Concretely, this means minimization of the utilization of caps, so that over both the short and the longer term suppliers can count on appropriate rewards for both their scheduling of existing and construction of new generation.

Opposed to this approach, and likely to have some second bites at the apple, both within and outside of California, are the proponents of what may be termed "reregulation" or simply cost based regulation (either temporary or permanent). Fundamentally, this approach reflects a profound skepticism that managed competition to get to supply-demand equilibrium through the use of complicated price caps truly is more efficient than simply keeping rates down through a mixture of traditional cost allocation methods and incentive ratemaking. This view could at least restrain if not actually reverse the deregulation trends.

Cross-cutting these two fundamental trends as to the role of FERC and ISOs in the regulation process are the forum shopping maneuvers by individual utilities among ISOs in pursuit of an environment most suitable to their marketing strategies. Most visible lately in this regard are the attempted shifts of Con Ed and Illinois Power out of the Midwest ISO, which had enjoyed greater FERC support than the Alliance RTO. Con Ed’s expressed reason was that as a result of the PECO merger, its concerns regarding congestion management and the right tariffs were now "eastern facing". Other national utilities, like Xcel (Northern States Power; Northern States Power-Wisconsin and Southwestern Public Service) have been compelled to join not only MISO but also other RTOs for technical reasons. Munis and Federal Power marketing agencies have expressed reluctance to join any RTOs (Middle West) or significant disgruntlement with RTO governance (South-West). Overall, there appears to be a move toward for-profit trancos, which FERC has not fully assimilated in its umbrella approach to permissible types of RTOs.

This trichotomy of RTO approaches serves to emphasize how supply-demand balances, IOU merger shifts, RTO structural uncertainties and potential muni non-competitiveness all conspire against rough-and-ready FERC resolution of national power transmission, dispatch and pricing issues through a series of California-like individual orders (and perhaps even by dramatic enforcement of Order No. 2000). It also highlights the difficulty in beginning to address the special reliability issues related to the New Economy which are beginning to play a more and more important role in future power regulation.

It’s not clear how the promised new "honor in the presidency" or "fighting for the working class" solves this type problem, or even how pro-business or government biases cut, when the issue is really one of assuring that our electric system keeps America competitive. Fuel preferences of the presidential contenders also are not dispositive of the operational issues presented. But it is clear that FERC’s lifting the Siege of San Diego is just a bump in the historical road and a blip in the uncertain load. It is, at least, a beginning.

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.