Petition For Just and Reasonable Rates
In Western Wholesale Electricity Markets

Summary of Request

Pursuant to Sections 205 and 206 of the Federal Power Act, Consumers Union of United States, Inc. (Petitioner) requests that Federal Energy Regulatory Commission (Commission) take immediate action to protect consumers against unjust and unreasonable charges for electricity in the western United States. Last November, this Commission recognized that remedial measures were necessary to protect the public from unjust and unreasonable electric prices in California's wholesale electric markets. Over the past six months, the Commission has adopted orders that have failed to result in just or reasonable prices by any historical or legal standard. Wholesale electricity prices remain far above the cost of generating electricity during all hours of the day and far above what is reasonably necessary to encourage investment in additional generation. All of the Commission's efforts short of cost-based regulation have failed to alleviate (much less stop) the continuing damage to consumers, businesses, public institutions and economies in the western states. Accordingly, Petitioner requests that the Commission:

1. Immediately suspend the authority of sellers subject to its jurisdiction to charge market-based rates;

2. Require sellers to make cost of service filings with the Commission;

3. Determine just and reasonable rates for sellers based on the seller's cost of service. Rates based on inflated, excessive, unreasonable or inappropriate costs for the particular seller should be rejected as unjust and unreasonable;

4. Order refunds for any unjust or unreasonable rates and charges.

Petitioner requests that the Commission adopt these remedial measures for all states in the Western States Coordinating Council for a period of three years. These actions will allow a reasonable period of time for supply and demand to be brought into balance and the Commission to implement the market reforms necessary to produce fair and reasonable electricity prices to consumers. During this time, sellers should be allowed to earn a non-confiscatory return that meets constitutional standards under FPC v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S. Ct. 281, 88 L. Ed. 333 (1944).(1)

Statement of Facts

Over the past year, wholesale electricity prices have skyrocketed from ten to twenty times the prices of a year ago.(2) These staggering increases are not the result of natural market forces but rather of a seriously dysfunctional market that is producing unjust and unreasonable electricity prices for consumers.

Because of the high wholesale prices, electric rates have begun to rise substantially. In California, the California Public Utilities Commission recently authorized a 40 percent increase in rates for that state's two largest investor-owned utilities.(3) The Directors of the Sacramento Municipal Utility District have voted to increase rates by 19 to 27 percent.(4) Similarly, Seattle City Light increased its rates to consumers by 28 percent earlier this year and more increases are expected.(5) Tacoma Public Utilities has implemented a 50 percent surcharge in response to high wholesale prices.(6) Also, customers of many small rural electric cooperatives are seeing large increases because of high wholesale prices.(7)

These substantially higher electric prices are inflicting serious harm on consumers, businesses and public institutions in western states. Residential electric customers (particularly those living on low or fixed incomes) are finding it increasingly difficult to afford basic utility service.(8) Large and small businesses have been forced to cut back on production and lay off workers.(9) Farmers are seeing higher costs for pumping water, lighting, and operating electrical equipment.(10) Schools and universities are choosing between paying drastically higher electric bills, cutting programs or going dark.(11) Testifying before the Senate Energy and Natural Resources Committee, Washington Governor Gary Locke described the situation as follows:

Let me give you some idea of what is happening in Washington State, where wholesale energy prices have gone up from ten to twenty times the prices of a year ago: High energy costs have forced several businesses to curtail operations and lay off hundreds of workers. Georgia Pacific laid off 850 workers in Bellingham just before the Christmas holiday. Pioneer, a chemical manufacturer in Tacoma, has curtailed operations by 50 percent and taken steps to lay off 80 employees. Nine of the ten aluminum plants in the Northwest - and thousands of aluminum workers - are now idle. There are many other examples. High energy costs are hurting our agricultural sector. Many farmers worry that they won't be able to afford to pay the pumping costs for irrigation. And last summer, high energy prices forced the state's largest cold storage facility, Bellingham Cold Storage, to curtail operations just as peak harvest season was under way for both berries and ocean fish. Only by invoking emergency powers was my office able to secure an affordable power supply to the facility - not only keeping 1200 employees at the facility on the job but keeping hundreds of ocean fishers and family farms from bankruptcy due to lack of cold storage for their products. Public agencies, schools and universities are faced with the possibility of curtailing programs to meet unexpected energy costs that are double or triple the levels of a year ago. And utility ratepayers are now facing surcharges as high as 75 percent of their monthly retail power bills. This is not just a problem for residential customers on a tight budget. For many small and medium-size businesses - restaurants, coin-operated laundries, and retail shops - this can be the difference between profitability and bankruptcy. And the continued high costs of wholesale power threatens the very solvency of some of our utilities. This situation is untenable.(12)

Higher electricity rates are having a serious negative impact on state economies. The Federal Reserve Bank of San Francisco recently estimated that higher natural gas prices and the increases in electricity rates authorized to date will cost the average California household more than 1.5% of its income.(13) (Additional increases, of course, would cut even deeper into disposable income.) Higher prices and rolling blackouts are costing California businesses billions of dollars, forcing business owners to cut back on production, lay off workers and cancel planned capital investments. High wholesale prices have also led to the bankruptcy of Pacific Gas and Electric Co., and forced Southern California Edison Co. to the verge of bankruptcy. While the State of California has stepped in to mitigate the impact of high wholesale prices on consumers and investor-owned utilities, the state's once large budget surplus is being rapidly depleted and its credit rating is deteriorating rapidly.

Unless the Commission acts to protect the public, the situation in California, Oregon, Washington State and other western states will get even worse. With the snow pack in the Pacific Northwest and California substantially below normal, the California Independent System Operator (CAISO) recently stated that this summer, "California faces an electricity shortage of unprecedented proportions."(14) In particular, CAISO forecasts that California will be short at peak between 600 MW and 3,700 MW in June through September 2000, and as a result California is expected to experience rotating blackouts throughout these months.(15)

On May 15, 2001, the North American Electric Reliability Council (NERC) issued its own summer assessment concluding that the electricity shortage will be worse than CAISO's estimates. The NERC's assessment states:

NERC estimates that the CAISO will likely experience supply deficiencies of about 4,500 to 5,500 MW at the time of peak demand during each summer month (2,000 to 4,000 MW greater deficiency than the CAISO projections) and expects rolling blackouts to occur throughout the summer. Due primarily to the CAISO's dependence upon energy-limited hydroelectric resources, it may experience operating emergencies during non-peak periods, as well. A probabilistic analysis conducted using NERC's estimates of available resources indicates that there will be about 260 hours of exposure to rotating blackouts in the CAISO over the course of this summer; the average size of each outage will be about 2,150 MW.(16)

Similarly, the Northwest Power Planning Council has reported that runoff levels in its region are comparable to the lowest levels on the sixty-year historical record.(17) Regarding the availability of purchasing power on the wholesale market, the Council states:

The availability and price of imports is problematic this year. Physically, there ought to be imports available in off-peak periods. However, this year the price may be prohibitive. The costs of purchased power work their way into retail rates with adverse impacts on the regional economy. In addition, Bonneville's financial position is particularly vulnerable this year. High purchase power costs could imperil Bonneville's ability to make its Treasury payment and maintain necessary operating reserves through the fall.(18)

Under these conditions, the price of electricity on the wholesale market (already at unusually high levels) can be expected to rise to levels that will be devastating to consumers, businesses, public institutions and economies of the western states. If this damage is not averted, the western electricity crisis will affect the national economy and could tip the country as a whole into recession.

Under Sections 205 and 206 of the Federal Power Act, this Commission is obligated to ensure that the rates and charges of sellers of electricity subject to its jurisdiction are just and reasonable to consumers. To this end, Petitioner herein requests that the Commission take action to:

1. Immediately suspend the authority of sellers subject to its jurisdiction to charge market-based rates;

2. Require sellers to make cost of service filings with the Commission;

3. Determine just and reasonable rates for sellers based on the seller's cost of service. Rates based on inflated, excessive, unreasonable or inappropriate costs for the particular seller should be rejected as unjust and unreasonable;

4. Order refunds for any unjust or unreasonable rates and charges.

Petitioner requests that the Commission adopt these remedial measures for all states in the Western States Coordinating Council for three years. During this time, sellers should be allowed to earn a non-confiscatory return that meets constitutional standards under FPC v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S. Ct. 281, 88 L. Ed. 333 (1944).

Petitioner

Petitioner Consumers Union of United States, Inc. (Consumers Union) is a nonprofit consumer organization chartered in 1936 under the laws of the State of New York to provide consumers with information, education, and counsel about goods, services, health and personal finance; and to initiate and cooperate with individual and group efforts to maintain and enhance the quality of life for consumers. Consumers Union's income is solely derived from the sale of Consumer Reports, its other publications and services, and from noncommercial contributions, grants, and fees. In addition to reports on Consumers Union's own product testing, Consumer Reports, with approximately 4 million paid circulation, regularly carries articles on health, product safety, marketplace economics, and legislative, judicial, and regulatory actions that affect consumer welfare. Consumers Union's publications and services carry no outside advertising and receive no commercial support.

Communications

Communications regarding this filing should be directed to:

Gene Kimmelman
Consumers Union of United States
Suite 310
1666 Connecticut Avenue, N.W.
Washington, DC 20009
[202] 462-6262
[202] 265-9548 Fax

Authority

Section 205 of the Federal Power Act provides:

All rates and charges made, demanded, or received by any public utility for or in connection with the ... sale of electric energy subject to the jurisdiction of the Commission and all rules and regulations affecting or pertaining to such rates or charges shall be just and reasonable and any such rate or charge that is not just and reasonable is hereby declared to be unlawful.

16 U.S.C. Section 824d(a) (emphasis added). The overriding purpose of prohibiting unjust and unreasonable rates and charges is "to protect consumers from exorbitant prices and unfair business practices." Public Systems v. FERC, 606 F.2d 973, 979, n. 27 (D.C. Cir. 1979).(19) Section 206 provides that when a rate or charge is unjust or unreasonable, the Commission "shall determine the just and reasonable [rate or charge] to be thereafter observed and in force, and shall fix the same by order." 16 U.S.C. Section 824e. In addition, the Commission may order refunds of portions of rates found unjustified. Id.

While the Commission has some discretion in applying the just and reasonable standard, the Commission may not abdicate its statutory duty to protect consumers against excessive rates.(20) In particular, "[T]he prevailing price in the marketplace cannot be the final measure of 'just and reasonable' rates mandated by the Act." FPC v. Texaco, Inc., 417 U.S. 380, 397 (1974). Courts have stated that to be "just and reasonable" rates must fall within a "zone of reasonableness" where they are neither "less than compensatory" to producers nor "excessive" to consumers.

When the inquiry is on whether the rate is reasonable to a producer, the underlying focus of concern is on the question of whether it is high enough to both maintain the producer's credit and attract capital. To do this, it must, inter alia, yield to equity owners a return "commensurate with returns on investments in other enterprises having corresponding risks," as well as cover the cost of debt and other expenses. . . . [W]hen the inquiry is whether a given rate is just and reasonable to the consumer, the underlying concern is whether it is low enough so that exploitation by the [regulated business] is prevented.

Farmers Union Central Exchange v. FERC, 734 F.2d 1486, 1502 (D.C. Cir. 1984). In short, "The 'zone of reasonableness' is delineated by striking a fair balance between the financial interests of the regulated company and 'the relevant public interests, both existing and foreseeable.'" Id. In determining whether rates are fair and reasonable, courts have stated that "[T]he most useful and reliable starting point for rate regulation is an inquiry into costs." Id.(21)

Courts have also stated that "[W]hen there is a competitive market the FERC may rely upon market-based prices ... to assure a 'just and reasonable' result." Elizabethtown Gas Co. v. FERC, 10 F.3d 866, 870-71 (D.C. Cir. 1993) (citation omitted). "In a competitive market, where neither buyer nor seller has significant market power, it is rational to assume that the terms of their voluntary exchange are reasonable, and specifically to infer that the price is close to marginal cost, such that the seller makes only a normal return on its investment." Tejas Power Corp. v. FERC, 908 F.2d 998, 1004 (D.C. Cir. 1990).

However, when the Commission authorizes market-based rates, it is under a continuing duty to ensure that the relevant market remains sufficiently competitive to prevent unjust and unreasonable prices. Process Gas Consumers v. FERC, 177 F.3d 995 (D.C. Cir. 1999) ("FERC must remain attuned to the status of the affected market vis-a-vis monopoly and competition."). Where markets are not sufficiently competitive to keep prices at reasonable levels, the Commission must exercise its ratemaking and refund powers to protect consumers. (22)

When it comes to electricity, the Commission has a special duty to ensure that markets are competitive before attempting to rely on market forces. Unlike other products, electricity cannot be easily stored. Also, it is an essential product for which there is virtually no substitute. Under these circumstances, consumers can easily be forced to pay prices that are unjust and unreasonable.

As described above, wholesale electricity prices have increased by ten to twenty times over the past year in western electricity markets. These increases are not the result of competitive market forces but of a dysfunctional market that is producing unjust and unreasonable prices.

Recently, CAISO submitted three reports to the Commission analyzing the exercise of market power in California's electricity markets. These studies show that wholesale rates charged by jurisdictional utilities exceed the fair and reasonable standard by billions of dollars.

The first of these reports is a top-down analysis of the impact of market power on overall system prices based on the system price-to-cost markup for the combined Power Exchange and CAISO markets and other bilateral transactions scheduled through the CAISO.(23) The CAISO report finds:

· During calendar year 2000, results show that approximately 29% percent of overall wholesale energy costs are attributable to market power. Even if it is assumed that high prices during hours of potential resource scarcity do not reflect market power in any degree, the results indicate that approximately 29% of wholesale energy costs are attributable to market power.(24)

· Over the most recent 12-month period (which includes the first two months of 2001), results show the gap between wholesale prices and competitive levels continues to grow. (25)

· [T]he degree of market power observed in California wholesale market represents additional costs of about $6.8 billion since May 2000. Only about $600 million of these additional costs were incurred during hours of potential scarcity, so that even excluding these hours, wholesale energy costs have been driven up by over $6.2 billion since May 2000 by the exercise of market power.(26)

The CAISO report also examines actual wholesale prices and the estimated competitive market baseline prices in relation to the cost of investment in new supply. The report states:

Results of this analysis show that the extremely high prices observed since the summer of 2000 in California provide contributions to fixed costs that significantly exceeded the level needed to support investment in new supply. On an annualized basis, wholesale energy prices since January 2000 have exceeded the cost necessary for new investment by about 400%, and would allow recovery of an investment in new supply in a period of less than two years. A new combined cycle plant earning the hourly competitive baseline price developed based on the analysis presented in Section 2 of this report would have earned from about 200% to almost 300% of the annualized cost of new supply investment.(27)

On March 22, 2001, CAISO also submitted a second study analyzing the bidding behavior of 21 individual market participants, identifying individual suppliers responsible for setting high market clearing prices through their individual bids.(28) This study finds that a wide range of suppliers systematically bid capacity at prices several times higher than the actual cost of production. The CAISO study states:

Withholding patterns and bid-cost mark-up indices indicate that most of the five in-state suppliers and many of the large importers displayed bidding patterns which were consistent with the exercise of market power. Many suppliers bid in excess of their marginal cost of generation either through economic or physical withholding. These bidding strategies contributed significantly to the system price spikes in summer and fall 2000. The observed bidding patterns show that suppliers bid in expectation of increasing the market clearing price because they are setting the high market clearing price directly or indirectly in most hours. As a result of their exercise of market power, many of the suppliers earned extraordinary amounts of excess profits (or monopoly rents) at huge cost to the consumers. (29)

On April 9, 2001, CAISO submitted a third study that used a "bottom-up" accounting and analysis of hourly market energy schedules and sales by individual market participants.(30) This further study estimates that the potential costs in excess of competitive levels for the total wholesale market in California is in excess of $6.7 billion for the period May 2000 through February 2001 (including $430 million in the Ancillary Service markets not included in the earlier analysis).(31) These are but the most recent studies documenting the lack of workable competition and degree to which consumers have been subjected to unjust and unreasonable rates in California's electricity markets. (32)

Indeed, on November 1, 2000, this Commission issued an order stating

The Commission finds in this order that the electric market structure and market rules for wholesale sales of electric energy in California are seriously flawed and that these structures and rules, in conjunction with an imbalance of supply and demand in California, have caused, and continue to have the potential to cause, unjust and unreasonable rates for short-tem energy … under certain conditions.

San Diego Gas & Electric Co. v. Sellers of Energy and Ancillary Services Into Markets Operated by the California Independent System Operator and the California Power Exchange, et al., 93 FERC 61,121 (2000) reh'g pending at 61,349, 2000 FERC LEXIS 2168, *3 ("November 1 Order"). The Commission further stated "[T]here is clear evidence that the California market structure and rules provide the opportunity for sellers to exercise market power when supply is tight and can result in unjust and unreasonable rates under the FPA. Under such conditions, the Commission is obligated under FPA section 206 to take action to establish market rules, regulations and practices that will ensure just and reasonable rates in the future." Id.

In the November 1 Order, the Commission proposed to establish a "soft cap" of $150/MWh. Sellers would be allowed to submit bids over the cap but such bids would not establish a market-clearing price and would be subject to strict monitoring and cost justification. 2000 FERC LEXIS at *82-*89. In his concurring opinion, Commissioner Hebert stated

In today's order, the Commission creates two distinct categories of bids into the PX and ISO. Sellers bidding below $150/MWh will be subject to little scrutiny. Sellers bidding in excess of the $150 threshold, however, will be subject to tremendous scrutiny.

Id. at *121 (emphasis added). Accordingly, the Commission expected that there would be few, if any, bids over $150/MWh.(33) Following the issuance of the November 1 Order, the $150/MWh soft cap was adopted on December 15, 2000. Order Directing Remedies for the California Wholesale Market. 93 FERC 61,294, 2000 FERC LEXIS 2491 (2000), reh'g pending (December 15 Order).(34)

Contrary to the Commission's expectation that there would be few, if any, bids over the soft cap, sellers reported 70,300 transactions above the $150 breakpoint in January 2001 alone. Order Directing Sellers to Provide Refunds of Excess Amounts Charged for Certain Electricity Energy Sales During January or, Alternatively to Provide Further Cost or Other Justification for Such Charges, 94 FERC 61,245, 2001 FERC LEXIS 463, *14 (Comm. Massey dissenting) (March 9 Order). In response to this large number of bids over the $150/MWh breakpoint, the March 9 Order adopted "a just and reasonable 'rate screen' above which refunds will either be required or further investigation will be undertaken…" The March 9 Order also watered down the Commission's previous orders in two important respects. First, instead of a $150/MWh breakpoint, the Commission adopted a $273/MWh breakpoint for the month of January 2001 based on the weighted average of the least efficient gas turbine for each of the three California investor-owned utilities. Id. at 61,862-63. Second, the Commission applied the rate screen only to periods when CAISO was experiencing Stage 3 emergencies, eliminating 81% of the transactions over the $150/MWh breakpoint from scrutiny. Id. at 61,862-63. Subsequently, pursuant to the Commission's March 9 Order, the Commission Staff issued a notice stating that the breakpoint for February 2001 would be $430/MWh. 94 FERC 62,245, 2001 FERC LEXIS 614 (2001).

On April 26, 2001, the Commission issued a further order adopting a "mitigation plan" for the California market to replace the $150 MWh soft cap. Order Establishing Prospective Mitigation and Monitoring Plan for the California Wholesale Electric Markets and Establishing an Investigation of Public Utility Rates in Wholesale Western Energy Markets, 95 FERC 61,115, 2001 FERC LEXIS 907 (April 26, 2001 Order). In the April 26 Order, the Commission stated that all generators in California, including non-public utility generators, with available capacity will be subject to price mitigation during periods when reserves drop below 7.5%. During these periods, generators in California will be limited to the marginal cost of the highest cost generator called on to run. The Commission's April 26 Order will not result in just and reasonable prices for the following reasons.

First, the mitigation plan covers only the real-time market. There is no mitigation for unjust and unreasonable prices charged in the bilateral, day-ahead or hour-ahead markets even though there is ample evidence that market power is being exercised in those markets as well. Indeed, the Commission's April 26 Order refused to consider protecting consumers against unjust and unreasonable prices in the bilateral, day-ahead or hour-ahead market on the grounds that such measures would "go beyond the scope of this proceeding."(35)

Second, even in the real-time market, prices will be subject to mitigation only during periods of extreme scarcity (i.e., when there is a Stage 1, 2 or 3 emergency). As discussed above, the studies submitted by CAISO and others demonstrate that wholesale prices are unjust and unreasonable at all times of the day, not just during emergency conditions.

Third, even when real-time prices are subject to mitigation, the Order adopts a pricing methodology based on the least efficient, highest cost unit. This results in inflated prices rather than prices that are just and reasonable to consumers.

Fourth, the April 26 Order does not cover marketers. This creates the opportunity for in-state generators to avoid price mitigation by selling power at inflated prices to marketers and marketers justifying their bids based on these excessive prices.

Fifth, the Order does not cover power imported into California. This creates the opportunity for suppliers to schedule supplies out-of-state and re-import those supplies into California to avoid mitigated prices.

Sixth, the April 26 Order provides that prices will be mitigated for only one year at which time the Commission expects that the market will be sufficiently competitive to ensure just and reasonable prices to consumers. At this time, there is little reason to believe that flaws in the current market structure and lack of adequate supplies will be completely and satisfactorily addressed in the next twelve months.

Finally, the April 26 Order does not address high natural gas prices, which are a major factor in high wholesale electricity prices in California. Prices for natural gas delivered in Southern California have risen almost ten-fold and have remained at extremely high levels even as natural gas prices have declined in other parts of the country. (36)

More than a year ago, the California Public Utilities Commission (CPUC) filed a complaint under Section 5 of the Natural Gas Act alleging, inter alia, that El Paso Pipeline and El Paso Merchant exercised market power to artificially drive up the price of natural gas transported into California. On March 28, 2001, the Commission found that internal El Paso documents cited by the CPUC "raise doubt about whether El Paso Merchant had market power and, if so, exercised it so as to increase natural gas prices at the California border." Order Denying Motion for Summary Disposition, Dismissing Complaint in Part, and Setting It For Hearing in Part, Docket No. RP00-241-000, March 28, 2001, 94 FERC 61,338, 2001 FERC LEXIS 644, *41. Accordingly, the Commission ordered the commencement of trial-type hearings on this issue.

In the course of these proceedings, Southern California Edison Company has filed a study indicating that natural gas prices in Southern California were artificially high because El Paso withheld significant amounts of capacity from the market.(37) In addition, a FERC staff economist has testified that it was likely that El Paso possessed and exercised market power in the Southern California gas market. (38)

Despite these proceedings challenging the lawfulness of natural gas prices in California, the April 26 Order relies heavily on high spot market gas prices to determine whether high wholesale electricity prices are just and reasonable to consumers. As Commissioner Massey points out in his dissent to the April 26 Order, the use of high natural gas prices to establish the market clearing price for electricity compounds the damage to California consumers. (39)

Since November when the Commission found that wholesale rates in California are unjust and unreasonable, wholesale prices for electricity have remained astronomically high. To date, the Commission's orders have failed to provide consumers with relief from these prices. As described above, the orders have been limited to begin with, watered down by subsequent orders and contain numerous loopholes by which generators and marketers can avoid the statutory requirement that prices be just and reasonable. Indeed, the loopholes built into the Commission's orders are so numerous that tens of thousands of wholesale transactions at sky-high prices routinely escape Commission review. As a result, sellers have undergone something far less than the "tremendous scrutiny" promised by the Commission in November and consumers continue to pay far more than they should for electricity.

Moreover, drought conditions in the Pacific Northwest, below average snow pack in California, and overall an extremely tight supply situation in the western states are likely to drive rates to even more egregious levels.(40) Whether the excessive wholesale prices are due to physical withholding of supply, sophisticated bidding strategies, or taking advantage of a flawed system, the Commission must act to protect consumers against these excessive rates and charges.

This Petition is filed pursuant to Rule 207 of the Commission's Rules of Practice and Procedure which provides in relevant part that "A person must file a petition when seeking … [a] rule of general applicability." Petitioner believes that a Petition is appropriate in this instance in light of the Commission's April 26 Order stating that San Diego Gas & Electric Co. v. Sellers of Energy and Ancillary Service into Markets Operated by the California Independent System Operator and the California Power Exchange (Docket EL00-95-012), Investigation of Practices of the California Independent System Operator and the California Power Exchange (Docket No. EL00-98-000), California Independent System Operator Corporation (Docket No. RT01-85-000), and Investigation of Wholesale Rates of Public Utility Sellers of Energy and Ancillary Services in the Western Systems Coordinating Council (Docket No. EL01-68-000) are limited solely to the real-time market and periods of extreme shortage and consequently other proceedings must be commenced to consider allegations of unjust and/or unreasonable prices in other markets and at other times.(41) In this Petition, Petitioner seeks generalized relief beyond the real-time market, for periods beyond emergency conditions and for all western states. In the alternative, Petitioner requests that the pleading be treated as a Motion and Motion to Intervene pursuant to Rules 212 and 214 in the above dockets.

Relief Requested

Last November, this Commission recognized that remedial measures were necessary to protect the public from unjust and unreasonable electric prices in California's wholesale electric markets. Over the past six months, the Commission has adopted orders that have failed to result in just or reasonable prices by any historical or legal standard. Wholesale electricity prices remain far above the cost of generating electricity during all hours of the day and far above what is reasonably necessary to encourage investment in additional generation. All of the Commission's efforts short of cost-based regulation have failed to alleviate (much less stop) the continuing damage to consumers, businesses, public institutions and economies in the western states.
For the reasons set forth above, Petitioner requests that the Commission return to cost-based rates. Specifically, Petitioner requests that the Commission:

1. Immediately suspend the authority of sellers subject to its jurisdiction to charge market-based rates;

2. Require sellers to make cost of service filings with the Commission;

3. Determine just and reasonable rates for sellers based on the seller's cost of service. Rates based on inflated, excessive, unreasonable or inappropriate costs for the particular seller should be rejected as unjust and unreasonable;

4. Order refunds for any unjust or unreasonable rates and charges.

Petitioner requests that the Commission adopt these remedial measures for all states in the Western States Coordinating Council for three years.(42) During this time, the Commission should develop and implement the reforms necessary to establish a genuinely competitive market-one that will produce just and reasonable prices to the consuming public.

Petitioner further requests that the Commission adopt measures to ensure that natural gas prices in California are just and reasonable. To this end, the Commission should prevent pipeline companies from gaining and/or exercising market power. Where pipeline companies have gained or exercised such market power, the Commission should order effective remedies (including freeing unused capacity, adopting cost-of-service regulation and ordering refunds) to rectify unjust and unreasonable prices charged to consumers.

_________

Footnotes:

(1) This Petition is filed pursuant to Rule 207 of the Commission's Rules of Practice and Procedure which provides in relevant part that "A person must file a petition when seeking … [a] rule of general applicability." Petitioner believes that a Petition is appropriate in light of the Commission's April 26 Order, which finds that San Diego Gas & Electric Co. v. Sellers of Energy and Ancillary Service into Markets Operated by the California Independent System Operator and the California Power Exchange (Docket EL00-95-012), Investigation of Practices of the California Independent System Operator and the California Power Exchange (Docket No. EL00-98-000), California Independent System Operator Corporation (Docket No. RT01-85-000), and Investigation of Wholesale Rates of Public Utility Sellers of Energy and Ancillary Services in the Western Systems Coordinating Council (Docket No. EL01-68-000) are limited solely to the real-time market. Petitioners seek generalized relief beyond the real-time market, for periods beyond emergency conditions and throughout the states in the Western States Coordinating Council. In the alternative, Petitioner requests that the pleading be treated as a Motion and Motion to Intervene in these dockets.

(2) For example, the California Independent System Operator (CAISO) recently filed a study with the Commission showing that the average wholesale cost increased from $30/MW to $361/MW from February 2000 to February 2001 (an increase of 1,200 percent). Eric Hildebrandt, Further Analyses of the Exercise and Cost Impacts of Market Power in California's Wholesale Energy Markets, March 2001, Table 2.1, filed in Docket Nos. EL00-95-017, et al.

Nor is the problem of high wholesale prices limited to California. Testifying before the Senate Energy and Natural Resources Committee, Dr. Tom Karier, a member of the Northwest Power Planning Council, stated, "Average prices for power were well over $200 per megawatt hour, occasionally reached $700 per megawatt hour or more, and peaked at $5,000 per megawatt hour on the Mid-Columbia trading hub. At the low end, that is more than 10 times the previous high and at the high end more than 100 times." Testimony of Dr. Tom Karier, Council Member, Northwest Power Planning Council, Senate Energy and Natural Resources Committee, January 21, 2001, p. 2. Hal Bremerton, NW Utilities Get Socked the Hardest, The Seattle Times, April 13, 2001, p. A-1. ("Pacific Northwest utilities are paying the highest prices in the nation for the next day-delivery of wholesale power, according to an analysis of market surveys. During the three months of this year, the Northwest wholesale market-known as the "mid-Columbia-averaged $267 per megawatt hour. This was 16 percent higher than the average price in Northern California and 28 percent higher than the average price in Southern California.")

(3) D. 01-03-082 issued in CPUC Dockets A.00-11-038, A.00-11-056 and A.00-10-028.

(4) Carrie Peyton, SMUD Directors Vote to Hike Rates: A Tentative Increase of 19% to 27% Is Blamed on Rising Energy Costs, Sacramento Bee, April 20, 2001 at http://www.capitolalert.com/news/capalert02_20010420.html.

(5) Because of high wholesale prices and even higher wholesale prices expected this Summer, "Seattle City Light spent more to buy power last month than it spent for the entire year two years ago. In March, the Northwest's largest publicly-owned utilities spent a record $92 million buying on the spot market, more than in any month in its 91-year history." Seattle City Light's Power Spending Skyrocketing, The Electricity Daily, April 20, 2001.

(6) Testimony of Mark Crisson, Director, Tacoma Public Utilities, Senate Energy and Natural Resources Committee, January 31, 2001.

(7) Lynda Mapes, Tiny Co-ops Facing Massive Power Bills: Bracing for the Blow of Higher Rates, The Seattle Times, February 12, 2001, p. A-1, and Gail Kinsey Hill, Crisis Entangles Big and Small: Consumers Face Double-Digit Rate Increases As Public Agencies Are Forced to Pay Top Dollar on the Wholesale Market for Power, The Oregonian, February 18, 2001, p. C-1.

(8) Mark Grossi, No Heat or Food or Funds: Many Seek Relief From Valley Social Agencies, The Fresno Bee, February 15, 2001, quoting a 79-year old World War II veteran whose natural gas bill jumped from $24 in December to $139 in January and electricity bill shot up from $64 to $339, "I don't have much left over. I live on bologna sandwiches and canned food."

(9) To avert a 200 to 300 percent increase in its rates as of October 1, the Bonneville Power Administration has proposed that aluminum smelters in the Pacific Northwest close for as long as two years laying off as many as 6,000 workers. Jonathan Brinkman, BPA: Shut Aluminum Smelters The Problem: The Region Faces Huge Increases If Power Use Isn't Cut, The Oregonian, April 10, 2001, p. A-1. See Impact of Current Energy Situation on Washington's Economy, Washington State Office of Financial Management at http://www.ofm.wa.gov/energy/employment.htm, citing to layoffs and job losses in the state's aluminum and paper, pulp and lumber industries.

(10) For example, the Washington State Office of Financial Management notes that agriculture is one of the industries most at risk from higher electricity prices stating:

Because agriculture is one of the most stressed industries in the state already, the impacts of the current energy situation are particularly difficult. Higher electricity prices affect irrigation pumping and food processing and the drought will limit water available for irrigation. High natural gas prices drive up the prices for fertilizer and also affect food processing.

Impact of Current Energy Situation on Washington's Economy, Washington State Office of Financial Management at http://www.ofm.wa.gov/energy/industries.htm. Other industries at risk because of their high power consumption include pulp, paper, lumber, food processing and refrigeration, petroleum, aluminum and aerospace. Id.

(11) Lights Out: The Power Is Back On in the West But There Is Growing Concern That California's Energy Crisis Will Short-Circuit the Nation's Already Slowing Economy, Newsweek, January 20, 2001, p. 44.

(12) Testimony of Washington Governor Gary Locke Before the Senate Committee on Energy and Natural Resources, March 15, 2001.

(13) Also, wholesale prices will have a negative impact on the economy of these western states. FRDSF Economic Letter, 2000-11, Rising Price of Energy, April 20, 2001. Earlier this year, Washington State's Office of Financial Management reported that a sustained increase in average household energy costs of 50% for the next three years would mean a $1.7 billion annual loss in disposable income, or about 1% of total disposable income. Deborah Finestone, Energy Costs May Kick Washington When It's Down, The Bond Buyer, March 20, 2001, p. 41.

(14) CAISO 2001 Summer Assessment, March 22, 2001.

(15) The Secretary of Energy has agreed that "Blackouts this summer appear inevitable," citing to estimates that California could face between 20 and 200 hours without power in the coming months. Energy Secretary Says Blackouts 'Appear Inevitable' in California, The Energy Report, March 26, 2001.

(16) North American Electric Reliability Council, 2001 Summer Assessment: Reliability of the Bulk Electric Supply in North America, May 2001, pp. 3-4 (emphasis added).

(17) Northwest Power Planning Council, Analysis of 2001-2002 Power Supply Outlook, April 4, 2001, pp. 2-4.

(18) Id.

(19) Pennsylvania Water & Power Co. v. FPC, 343 U.S. 414 ("A major purpose of the whole Act is to protect power consumers against excessive prices.") and NAACP v. Federal Power Commission, 425 U.S. 662, 666-67 (1976) ("The Commission's task in protecting the consumer against exploitation can be alternatively described as the task of seeing that no unnecessary or illegitimate costs are passed along to that consumer."). See also Atlantic Refining Co. v. PSC of State of New York, 360 U.S. 378, 388 (1959) (the corresponding provisions of the Natural Gas Act (NGA) "afford consumers a complete, permanent and effective bond of protection from excessive rates and charges"). Courts routinely rely on cases decided under the NGA in interpreting the FPA.

(20) In Farmers Union, the D.C. Circuit stated:

While we agree that the statutory phrase sets down a flexible standard, an agency may not supercede well-established judicial interpretation that structures administrative discretion under the statute. An agency may not "pour any meaning" it desires into the statute.

734 F.2d at 1504.

(21) See also Public Systems v. FERC, 606 F.2d 973, 978, n. 24 stating "Although courts can require only that a 'just and reasonable' rate be set, and cannot dictate ratemaking methods, FPC v. Hope Natural Gas Co., 320 U.S. 591, 602, 64 S. Ct. 281, 88 L. Ed. 333 (1944), there is a clear consensus that a just and reasonable rate covers the firm's costs plus an adequate return on capital. e. g. FPC v. United Gas Pipe Line Co., 386 U.S. 237, 244-45, 87 S.Ct. 1003, 1008, 18 L. Ed. 2d 18 (1967) ('power and the duty of the Commission to limit cost of service to real expenses'); City of Chicago v. FPC, 147 U.S.App.D.C. 312, 330, 458 F.2d 731, 749 (1971), cert. denied, 405 U.S. 1074, 92 S. Ct. 1495, 31 L. Ed. 2d 808 (1972) (a heavy burden on the Commission to justify departures from cost-based ratemaking)."

(22) In Farmers Central, the D.C. Circuit admonished the Commission for assuming "without empirical proof" that market forces would produce just and reasonable prices stating:

In fact, FERC's 'regulation' by such novel 'standards' is worse than an exemption simpliciter. Such an approach retains the false illusion that a government agency is keeping watch over rates pursuant to the statute's mandate, when it is in fact doing no such thing.

734 F.2d at 1510.

(23) Eric Hildebrandt, Further Analyses of the Exercise and Cost Impacts of Market Power in California's Wholesale Energy Market, CAISO, Department of Market Analysis, March 2001.

(24) Id. at p. 7.

(25) Id. at p. 7.

(26) Id. at p. 10.

(27) Id. at p. 15 (emphasis added).

(28) Anjali Sheffrin, Empirical Evidence of Strategic Bidding in California ISO Real-time Market, CAISO, Department of Market Analysis, March 21, 2001.

(29) Id. at p. 8.

(30) Eric Hildebrandt, Impacts of Market Power in California's Energy Market: Results of More Detailed Analysis of Individual Seller Transactions in ISO and PX Markets, CAISO, Department of Market Analysis, April 2001.

(31) Id. at p. 1.

(32) Based on these and other studies documenting the existence and extent of market power, CAISO has urged the Commission to revoke the authority of merchant generators to charge market-based rates. See also Report on the Redesign of the California Real-Time Energy and Ancillary Services Markets, Market Surveillance Committee, Docket Nos. ER-2843-000, et al. (October 18, 1999) at 1 and 7-8 ("We find that significant market power remains in California's wholesale energy markets during periods of high total load, which primarily occur during the summer months.... During these periods, price movements across hours of the day are significantly in excess of the increased costs of supplying power during these hours."); An Analysis of the June 2000 Price Spikes in the California ISO Energy and Ancillary Services Markets, Market Surveillance Committee, September 6, 2000, ("During the months of May and June 2000, wholesale revenues from sales of total ISO load (less must-take energy) for all hours of the month in the California energy market were approximately 37% and 182% respectively above monthly revenues under perfectly competitive pricing."); P. Joskow and E. Kahn, A Quantitative Analysis of Pricing Behavior in California's Wholesale Electricity Market During Summer 2000, November 21, 2000 ("After taking all of these factors into account--higher gas prices, higher loads in California, reduced imports, and higher Nox RTC prices--our analysis leads us to conclude that truly competitive prices in the California electricity market would have been substantially lower than those observed this past summer. This 'price gap' provides a rough measure of the effects of market power and related market imperfections reflected in wholesale market prices in California during the June through September 2000 period."). On November 1, 2000, based on its own abbreviated examination of the California electricity market, the Commission Staff concluded that the data "indicate some attempted exercise of market power … and some actual market power effects." Staff Report to the Federal Energy Regulatory Commission on Western Markets and the Causes of the Summer 2000 Price Abnormalities, Docket Nos. EL-00-95, et al., at pp. 1-4.

(33) See Commissioner Hebert's Concurring Statement ("While the order states that the Commission is not preventing a supplier from bidding in excess of that number and receiving its bid, I doubt that suppliers will be anxious to take advantage of that opportunity and to incur the Commission's wrath.") Id. at *122.

(34) In its December 15 Order, the Commission stated "[W]e reaffirm our findings that unjust and unreasonable rates were charged and could continue to be charged unless remedies are implemented." Id., 2000 FERC LEXIS at *77.

(35) The April 26 Order states "Other elements of [the CAISO] plan, such as the day-ahead and hour ahead market proposal, go beyond the scope of this proceeding and would need to filed under section 205, so that these proposals can be reviewed appropriately by all parties." 2001 FERC LEXIS at *63.

(36) Richard A. Oppel, Jr. and Lowell Bergman, Deal for Use of Gas Pipeline Stirs Dispute on Competition, The New York Times, March 26, 2001, p. A-1, ("The spot market price for natural gas produced in the Permian Basin of West Texas doubled last year. But the price that power generators paid when the gas was delivered to Southern California rose almost 10-fold."), and Natural Gas Prices Drop Nationally, Remain High in Southern California, San Diego Business Journal, March 19, 2001, ("Data released by Platts, the energy market information division of McGraw-Hill Cos. show local prices for natural gas in March remain virtually unchanged at $12.53 per million BTUs, compared to $12.51 in February. 'That's an increase of 384 percent over the same time last year, when the average was $2.59,' said Kelley Doolan, natural gas specialist for Platts.")

(37) Richard A. Oppel, Jr. and Lowell Bergman, California Utility Says Prices of Gas Were Inflated, The New York Times, May 9, 2001.

(38) Rick Schmitt, Economist Testifies El Paso Likely Used 'Market Power' in Southern California, The Wall Street Journal, May 15, 2001.

(39) Commissioner Massey states, "Finally let me underscore my great concern about the high price of natural gas delivered into California markets. The transportation differential into California often exceeds ten dollars, and is often substantially more at various intrastate delivery points. The transportation differential into other large markets such as New York and Chicago is usually less than a dollar, and sometimes no more than a few cents. The high cost of natural gas delivered into California is then used to justify high wholesale electricity bids into the ISO market. An inefficient, high heat rate generator using a considerable amount of high priced natural gas then sets the market clearing that all sellers are paid. Thus, the high transportation differentials into California gas markets have a particularly pernicious effect when coupled with a single price auction for electricity." 2001 FERC LEXIS at *76-77 (Commissioner Massey dissenting).

(40) In its Proposed Market Stabilization Plan filed with the Commission on April 6, 2001, at p. 16, CAISO citing to its 2001 Summer Assessment states "Absent sufficient resources, there is no basis for assuming that competitive forces will be able to restrain prices to just and reasonable levels."

(41) The April 26 Order states, "Other elements of [the CAISO] plan, such as the day-ahead and hour ahead market proposal, go beyond the scope of this proceeding and would need to be filed under section 205, so that these proposals can be reviewed appropriately by all parties." 2001 FERC LEXIS at *63. The West-Wide Investigation ordered by the Commission is also limited to electricity sold in spot markets and which take place during conditions when contingency reserves fall below 7 percent. 2001 FERC LEXIS at *65. See also 2001 FERC LEXIS at *75-76 (Commissioner Massey) ("This order opens an extraordinarily narrow 206 investigation for the western interconnection and I commend my colleagues for at least going this far, but the approach is far to narrow to hold any promise of effective price relief. ").

(42) In the past, because of the interconnectedness of electric transmission networks and wholesale electricity markets among the western states, this Commission has often recognized the need to extend relief to all of the states within the WSCC. See Removing Obstacles to Increased Electric Generators and Natural Gas Supply in the Western United States, 94 FERC +61,272, 2001 FERC LEXIS 499, and the April 26 Order in so far as it commences an investigation into resale transactions during emergency conditions in the WSCC. 2001 FERC LEXIS at *65.

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