SCE Criticizes FERC Proposal for Failure to Provide Refunds and Protect Consumers from Market Power Abuses

November 22, 2000

November 22, 2000

WASHINGTON, D.C., Nov. 22, 2000-In written comments filed today, Southern California Edison charged that the "remedies" to the problems in the California electricity market proposed by the Federal Energy Regulatory Commission (FERC) fail to protect California's consumers and economy from excessive electricity prices resulting from the exercise of market power by sellers.

"Failure to deal aggressively with market power abuses and to curb excessive electricity prices will threaten the interests of California consumers, the economy, and the future of electric restructuring nationwide," said SCE Chairman, President & CEO Stephen E. Frank.  "Unfortunately, we don't see this current FERC proposal as providing any relief at all."

SCE said the FERC proposal suffered from two major flaws:  failure to provide buyers any relief from excessive prices in the past by ordering refunds and failure to protect buyers from unjust and unreasonable rates in the future by continued reliance on market-based rates.

While FERC has claimed that it lacks the authority to order refunds prior to Oct. 2, 2000, SCE cited numerous cases where FERC-supported by case law in the federal courts -- has ordered retroactive refunds when sellers have collected charges in excess of just and reasonable levels, either by error or through the exercise of market power.

Furthermore, SCE said, there is substantial evidence that sellers have collected charges above competitive levels and that sellers exercised or benefited from the exercise of market power.  To help determine the level of refunds that are appropriate, SCE attached to its filing a study by renowned economists Drs. Paul Joskow and Edward Kahn.

In that study, Joskow and Kahn estimated the level of prices that would have prevailed had the market behaved competitively, quantified the extent to which market prices exceeded competitive levels, and presented empirical evidence that sellers strategically withheld capacity from the market in order to exercise market power and artificially inflate prices.

SCE rejected FERC's arguments that refunds might undermine the financial stability of sellers.

"No seller has come forward with evidence that, unless it is able to retain unjust and unreasonable rates, its financial stability will be undermined," SCE wrote.  "There is, however, a large body of unrefuted evidence that the financial stability of California purchasers has been severely undermined by having to pay the unjust and unreasonable rates charged this summer."

SCE also questioned the legality and effectiveness of FERC's proposal to impose a soft cap of $150/MWh in the wholesale market.  Under FERC's soft cap 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.

"It is simply untenable for the Commission to first find that the…markets cannot be relied upon to produce just and reasonable prices but to then preserve the right of sellers to sell electricity into those markets at market-based rates," SCE said.  "A reporting requirement that applies only at very high price levels combined with an undefined standard for reasonableness once these reports are filed cannot adequately remedy the environment for market abuse perpetuated by the Commission's order."

Instead of a soft cap, FERC should impose cost-based pricing rules, SCE said.  The utility noted that FERC accepted such a cost-based bid cap for initial operation of the restructured PJM pool, covering the states of Pennsylvania, New Jersey and Maryland.  FERC had required each seller in PJM to bid into the market at its variable operating cost.

If, however, FERC is still unwilling to impose cost-based bid caps, the Commission should at least adopt a more effective market-based mechanism such as load-differentiated price caps, SCE said.  "Because the excessive, unjust, and unreasonable prices being experienced in California are not limited to high demand periods, the cap should reflect the fact that, in a properly functioning market, prices should be different at different levels of demand," SCE said.  "Allowing the level of the cap to vary with load protects buyers from excessive prices during high, moderate, and low demand periods."

With respect to forward contracting, SCE said that FERC's proposal to provide buyers with greater flexibility was a positive first step.  For forward contracts to be truly effective, the utility said, problems in the day-ahead and real-time markets must be fixed, and the issue of state prudency reviews resolved.  Finally, SCE also urged FERC to drop proposed penalties for under-scheduling in the day-ahead market.

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