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At the annual meeting of the North American Energy Standards Board (NAESB) on September 14-15 in Austin, a panel of state Commissioners tackled the question: Is the relationship between federal and state regulators better or worse than a year ago?
Carl Wood, a member of the California Public Utilities Commission (CPUC), called it "generally true" that the CPUC has a good working relationship with FERC members and staff, but he launched a frontal assault on FERC's interpretation of the Federal Power Act (FPA), particularly the extent of its authority to remedy abuses that took place during the energy crisis in the West.
Wood argued that FERC's standard market design (SMD) and other electric initiatives are based on economic theory and are not verified by experience, and that the regulatory system that brought about universal electric service "should not be lightly thrown aside." He sees "a distance between federal regulators and what is actually happening on the ground, . . . but state regulators really don't have that luxury." Wood acknowledged only in passing that California went seriously astray in its initial wholesale market design, which was approved by FERC.
Recent court decisions "shine a light on the substance of the relationship" between FERC and the CPUC, Wood said. "What has become very evident is that FERC has a very different view of its role and its jurisdiction under federal law than state regulators do."
Wood mentioned State of California, ex rel. Bill Lockyer, Attorney General v. FERC (No. 02-73093), in which the U.S. Court of Appeals for the Ninth Circuit affirmed market-based tariffs but found that FERC abused its administrative discretion by not ordering refunds for violation of reporting requirements under the FPA. The court remanded the cases for further proceedings. At stake are retroactive refunds up to $2.8 billion for market manipulation by Williams, Dynegy, Mirant and Reliant during the fourth quarter of 2000 and all of 2001. (See FER No. 373, p. 1)
The Ninth Circuit overturned the interpretation that refunds were legally unavailable until 60 days after a complaint was filed. "Had there been a real interest on the part of the sitting FERC Commissioners to extend a hand to California," Wood said, the court's decision would have been quickly followed by a statement that, "yes, we got the message" and will expedite refunds "that have been delayed now for just about four years." Instead, "we have spokespersons from the industry saying, 'we're not worried about this, it's going to take at least two years, maybe longer to litigate this, and probably it's all going to go away after a while.' And, unfortunately, my perception is that is, in fact, the case . . . because FERC is trying to protect its market project and, hence, marketers."
In response to a question on whether standardization should focus on "how to get markets right" or some alternative goal. Wood replied, "the purpose is not to create markets; the purpose is to assure the reliable, affordable provision of a reasonable level of electrical service for both residential and business customers." Electricity "is a unique good in modern society, not a simple commodity." Because it is "absolutely indispensable," public access to electricity "needs to be considered a right." For that reason, and because the complexities of operating the power industry create opportunities for discrimination and market manipulation, electricity must be comprehensively regulated by state and federal agencies.
In Wood's view, the record is, at best, "spotty" where states have broken away from cost-of-service regulation. In general, where electric restructuring has taken place, rates are higher, and ratepayers have not seen the kinds of rate reductions promised. Likewise, reliability is not better but likely worse in many respects.
What is most striking, however, is that "the finances of this industry are in a real mess." According to Wood, the "financeability" of energy providers today is directly related to the extent to which they are regulated by states. "We have now put at risk a great and critical portion of the economy as one of the unintended consequences of restructuring." And there is little or no evidence, in his opinion, that FERC "has any ability or desire to address the manifold economic and operational problems that its derelictions -- and I use that term advisedly -- over the past many years have brought about."
The direction the Commission is following is not mandated by legislation but by ideology, as embraced by successive FERC Chairmen Curtis Hebert Jr., James Hoecker, and now Pat Wood III. All have acted to overcome the basic thrust of the FPA -- that FERC's primary responsibility is to protect customers, Wood said.
From the audience, former FERC Commissioner Branko Terzic (managing director, energy research, Deloitte & Touche) pointed out that the PJM Interconnection was working fine at the same time California was deteriorating. "Do you think wholesale markets are redeemable if designed right?" he asked Wood.
It depends on the extent to which states expose their utilities, replied Wood. For example, divesting generation in California led to problems, which was not the case in PJM. "The answers have to do with particular local circumstances."
California has no intention of cutting itself off completely from wholesale markets, Wood added. For example, the state intends to retain access to out- of-state hydropower supplies and planned merchant power plants ("farms") in Arizona. He did not specify who would pay for the incremental transmission capacity that might be needed.
Was Wood advocating, in effect, a state distribution utility in California? asked another member of the audience. No, he replied. What he was advocating was the benefit of a bundled utility, such as San Diego Gas & Electric, which avoided the consequences suffered by other investor-owned utilities during the crisis. He added, "public ownership is an interesting option," but "it is not at the center of the debate."
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