Energy Legal Blog

California Merchant Generators, IOUs Put Forth Market Reform Plan

Two of California's investor-owned utilities ("IOUs") along with six merchant generators quietly unveiled on August 17 a plan to reform California's struggling power markets at a closed-door meeting in Sacramento.  Pacific Gas & Electric Co., Southern California Edison Co. ("Edison"), AES Corp., Duke, NRG, Mirant, Dynegy, and Reliant secretly developed the plan.  Governor Arnold Schwarzeneggar also encouraged the proposal, in the hopes that the development of a strong energy policy will amount to the decisive action on energy policy that will placate California voters still smarting from the 2000-2001 energy crisis, and the governor's top energy advisor, Joe Desmond, was present at the Sacramento meeting.  Following the announcement, the plan drew cautious praise from some market participants and the California Independent System Operator ("CAISO"), which noted that the plan includes many elements that CAISO President and CEO Yakout Mansour "has been preaching about" for some time, according to a CAISO spokeswoman.

The plan would require all load-servers to procure sufficient power to meet mandated resource adequacy requirements, including peak load and reserve margins, and would penalize load servers who fail to meet these requirements.  The plan also rejects the current resource adequacy requirement of a one-year forward purchase obligation as too short to encourage investment in new resources and infrastructure.  Even though the California Public Utilities Commission ("CPUC") is currently in the process of developing its own resource adequacy requirements, the IOUs' and generators' plan would mandate that the CPUC allow utilities to procure power through long-term purchase agreements that support investment in and construction of new power plants.  The costs of the long-term contracts and any new utility-owned power plants would be recovered "from all customers who benefit from the resulting reliability," including direct-access customers.  The CPUC would also limit contracts to the minimum amount of capacity needed to ensure system-wide reliability, using projections from the California Energy Commission and the CAISO.  Also included in the reform plan are a proposal to develop a capacity market in California, a call to move away from reliance on the must-offer obligation imposed by FERC during the 2000-2001 energy crisis, and a call for the CAISO to raise price caps to the levels of other markets.

Notably missing from the plan's development process was Sempra Energy, parent company of San Diego Gas & Electric, California's other large investor-owned utility.  Sempra was not invited to help develop the plan and was not present at the plan's unveiling in Sacramento.  More than likely, this stems from Sempra's past criticism of an Edison proposal included in the reform plan to spread the costs of proposed power deals for a total of 1500 MW among all customers south of Path 15, a key transmission path in California.  Edison has argued that the contracts are needed to improve reliability in Southern California next summer, while Sempra calls this an "inequitable cost-sharing proposal" and argues it has enough power to meet Southern California's needs for summer 2006.  Many observers also noted similarities in the reform plan to a proposal pushed by Edison last year, which would have guaranteed that utilities recover in their rates all costs of building new generation.  Gov. Schwarzeneggar vetoed that bill.  [NEW MATTER]