SCE Condemns FERC Proposal to Void Price Caps

November 09, 2000

November 9, 2000

WASHINGTON, D.C., Nov. 9, 2000-Southern California Edison today strongly condemned the Federal Energy Regulatory Commission's (FERC) proposed decision voiding caps adopted by the California Independent System Operator (Cal-ISO) in the California wholesale electricity market.  SCE also called on FERC to begin work immediately on refunds to customers harmed by the market's unjust and unreasonable prices.

"Having found that the California markets are seriously flawed and that prices are unjust and unreasonable, the Commission now has two obligations," said SCE Senior Vice President for Regulatory Policy and Affairs John Fielder in testimony before FERC today.  "First, FERC has the obligation to ensure that only just and reasonable prices are charged.  Second, it must correct the harm imposed on customers to the full extent permitted by law.  The Commission's proposed order falls short on both counts."

On Nov. 1, FERC issued an order finding that California's market structure and rules, in conjunction with an imbalance of supply and demand, "have caused, and continue to have the potential to cause, unjust and unreasonable rates for short-term energy . . . and that there is clear evidence that the California market structure and rules provide the opportunity for sellers to exercise market power when [electricity supplies are] tight and can result in unjust and unreasonable rates." 

As a price and market power control mechanism, the Commission proposed a number of remedies, including a "soft" price cap of $150/MWh in the markets run by Cal-ISO and the California Power Exchange (PX).  Under the proposal, the highest bid under $150/MWh would set the market-clearing price.  Bids over that level, however, would be paid only to the particular generator or marketer if dispatched; furthermore, the generator or marketer would have to file confidential cost data with FERC. 

Fielder argued that the soft cap proposed by FERC would be ineffective and failed to provide immediate energy cost relief for California.  "In California's dysfunctional market, any capping mechanism that does not require each seller to bid or sell at cost simply permits the exercise of market power up to an arbitrary price level," he said.  "Fifteen cents a kilowatt-hour is not a reasonable price for energy."

Instead of soft price caps, Fielder said, FERC should adopt cost-based caps.

"We simply fail to see how the Commission can find California's markets to be seriously flawed, while preserving the right of sellers to sell electricity at unrestricted market based rates," he noted.  "We believe that the only way FERC can ensure just and reasonable rates during the implementation of market design changes is through the imposition of cost-based rates."

In advocating cost-based caps, Fielder noted that SCE was not calling for a return to traditional cost-of-service ratemaking at this time.  Fielder cited the load-differentiated price cap recently approved by the California Independent System Operator-based on 1999 market prices adjusted for increased natural gas prices in 2000 -as one example of an effective cost-based cap. FERC should also consider adopting a hard cap that bases prices on each seller's costs, the SCE executive said.

Fielder also urged FERC to complete its staff investigation of the California market.  While the Commission found that sellers had the ability to exercise market power, FERC said its staff did not have the time to determine whether individual sellers abused that power.

"FERC must determine the causes of the excessive prices that have already been charged so that responsibility can be properly assessed and equitable remedies for past abuses can be imposed," Fielder said.

Finally, Fielder called on FERC to immediately begin establishing criteria for the calculation of refunds and order that buyers receive those refunds promptly.

SCE will provide written comments to FERC on its proposed remedies on Nov. 22.

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An Edison International company, Southern California Edison is one of the nation's largest electric utilities, serving a population of more than 11 million via 4.3 million customer accounts in a 50,000-square-mile service area within central, coastal and Southern California.