1San Diego Gas & Electric Co., 92 FERC ¶ 61,172 (2000) rehearing pending.

2A list of groups interviewed is attached in Appendix A.

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1. Overview

This investigation of the western bulk power market began at the direction of the 

Commission in an undocketed order issued July 26, 2000. The Commission directed staff

to undertake a fact finding mission of the conditions in the electric bulk power markets in

all regions of the country, including volatile price fluctuations in some regions. 

Specifically, staff was to (a) determine any technical or operational factors, regulatory

prohibitions or rules (federal or state), market rules, or other factors affecting competitive

pricing of the electric energy or the reliability of service and (b) report its findings to the

Commission by November 1, 2000. 

Wholesale prices increased significantly over the summer in the West and

residential and other retail consumers in the San Diego area saw these prices passed

directly to them. In response to a complaint filed by San Diego Gas & Electric, on August

23, 2000, the Commission initiated a parallel investigation under Section 206 of the

Federal Power Act.1 The Commission directed staff to accelerate its fact-finding

investigation of the markets in California and the Western region and report to the

Commission as soon as possible. This is staff's report of its findings. 

The focus here is primarily directed toward answering the questions, why prices

behaved the way they did and what should be done about it. In terms of general

methodology, we reviewed public data maintained at the Commission and used other public

sources to establish the general framework of the markets in California and the rest of the

Western Systems Coordinating Council (WSCC). We conducted interviews with market

participants, state regulators, outside economists, entities representing retail customers,

the Independent System Operator (ISO) and the Power Exchange (PX) to obtain further

input.2 The staff then attempted to substantiate issues raised during the interviews regarding

the market from the sources available to it and obtained data from market participants, the

ISO, the PX and the WSCC.

This was an informal investigation. As such, staff did not depose market participants

or others as it might as part of a formal investigation. Given the purpose, to find the

general cause of the unusual prices and market activity, this was not necessary. 

Finally, from a methodological standpoint, staff studied the issues from the

perspective of both California and the entire WSCC, as events in one relate to the other. 

California, as a consistent net importer of electricity during peak periods, relies on sources
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and markets outside of its boundaries. Consequently, the surrounding markets in the rest of

the WSCC are greatly influenced by events and market rules in California.

Brief Overview of Conclusions

The report is organized to provide a factual framework for the Commission's use,

sections discussing major issues evaluated during the investigation and, finally, a section

with options for consideration by the Commission to remedy immediate and longer term

problems. 

Section 2 of the report finds tight supply and demand conditions existed throughout

the West during most of this summer, with emergency conditions concentrated in

California. Broadly speaking, 

• Overall demand across the WSCC increased significantly driven by hot weather

and load increases that were heat sensitive and that were also driven by

increased economic activity. Average summer loads were 11 percent higher in May

and 13 percent higher in June from the previous year. Energy consumption also

increased across the WSCC by 5 percent in May and approximately 10 percent in

June from the previous year. Offpeak demands in the Cal-ISO increased

significantly during the summer, in large part to meet increased pumping demands

for hydro power facilities, needed for peaking purposes both inside and outside of

California. However, peak demand in the ISO area fell slightly, partially reflecting

response to emergency declarations and actions.

• Exports increased significantly, with little overall change in the level of imports. 

As a result, net imports decreased by approximately 3,000 megawatts (MW) from

May through August. The ability to increase imports was limited by hydro

conditions in the Northwest, which actually declined in July and August, and tight

load conditions in other western subregions. Weather conditions led to increased

exports in July and August, corresponding to the decreases in the ISO price cap from

$750 to $500 in July and then to $250 in August.

• Outages increased significantly compared with 1999. This was especially true

with regard to unplanned outages. 

• Increased quantities of demand and supply were left unscheduled in day-ahead

and hour-ahead markets. When loads increased above 35,000 MW in June and at

lower levels in July and August, the ISO was forced to buy substantial amounts of

power in the form of replacement reserves or out of market purchases.
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• Non-hydro generation resources throughout the West were more heavily utilized

in 2000 over 1999. Generation from non-hydro resources in 2000 increased by

15.1 percent in May and 24.9 percent in July over 1999 levels. Based on a snapshot

of WSCC capacity during a selected high load period, little additional capacity

appears to have been available at peak times. 

Section 3 of the report finds that wholesale power prices were high throughout the

West in the summer of 2000, but their implications were most acutely felt in California. 

The principal findings of the report on western prices and costs in the summer of 2000 are:

• Prices in the ISO spiked in May and June and average June prices reached

record high levels. While an ISO price cap of $750 existed during the early part of

the summer, prices became highly volatile and the hourly price hit the cap on 3 days

in June. Average June prices reached record levels of $120 in the PX.

• Average prices were lower in July than in June, but total costs paid by

purchasers in August were higher than in June. Caps of $500 in July and $250 in

August had a dampening effect on high hourly prices, but average prices in August

rose to $166 in the PX after falling below June levels to $106 in July. The lower

caps may have played a role in increasing exports in July and August.

• Prices at other trading hubs in the West generally correlated with California

prices, suggesting that opportunities to sell at high prices existed in these

regions when California prices were high. However, it is not yet clear how scarce

supplies were in these regions or to what extent prices outside California were for

California imports rather than consumption in other regions. While information for

certain weeks in the West indicated supply was scarce, it was not possible to make

an overall assessment on scarcity throughout the West without additional

information.

• Cost for fuel and environmental compliance (NOx credits) increased significantly

in July and August. Gas prices rose from approximately $2 per MMBtu early in

the year to approximately $5 per MMBtu in August. Credits to comply with NOx

standards rose from $6 per pound in May to $35 in August and $45 in September. 

Lowered caps in July and August reduced the ceiling for market prices while these

fuel and environmental costs raised the “floor.” As a result, prices traded over a

narrow range. 

• Prices in some hours appear to be above those that would have prevailed in a

competitive short-term market, if prices were determined from short-term

marginal costs. 
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• Examination of bid patterns in the PX and ISO replacement reserve markets and

a review of ISO out of market purchase activity does not suggest substantial or

sustained attempts to manipulate prices in these markets. Supply curves bid into

the PX show higher bids, on average, when the price caps are lowered. However, the

increases are not correlated with particular classes of bidders, suggesting that the

pattern may reflect increased costs for most participants rather than a pattern of

individual bidders or classes of bidders attempting to raise prices intentionally. 

Section 4 outlines the statutory and regulatory framework related to energy markets

in the West. The report describes the roles and policies of the federal and state economic

and environmental agencies in regulating electric utilities in California and the western

states. It also discusses the restructuring efforts in California and the establishment of the

California ISO and PX, as well as the creation of the California Electricity Oversight

Board. Additionally, this section outlines requirements imposed on the California utilities

by the California Public Utilities Commission (CPUC).

Section 5 discusses the issues that were raised as possibly causing the high prices of

this summer. These fall into three general categories: (a) competitive market forces, (b)

market design problems and (c) market power. The data clearly show that a general scarcity

of power in the West and increased costs to produce power were factors causing these high

prices. It is also clear that existing market rules exacerbated the situation and contributed

to the high prices. The data also indicate some attempted exercise of market power, if the

standard of bidding above marginal cost is used, and some actual market power effects, to

the extent that prices, at least in June, were significantly above competitive levels. 

However, the data do not isolate specific exercises of market power or suggest that the

exercise of market power was more important than other primary explanatory factors. 

Section 6 provides a range of options to address the problems identified in this

report. Staff also attempts in this section to provide the possible benefits and drawbacks of

various options. 

This investigation was conducted on an expedited basis so there was not enough time

to address all issues in depth. This report is intended to provide the Commission with “the

big picture.”