EXHIBIT 99.470
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
INVESTIGATION OF CALIFORNIA ENERGY MARKETS
DOCKET NOS. ELOO-95-000, ET AL.
NOVEMBER 9,2000 PUBLIC CONFERENCE
COMMENTS OF GEORGE SLADOJE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CALIFORNIA POWER EXCHANGE CORPORATION
I. PRELIMINARY STATEMENT
Thank you Commissioners for the opportunity to respond briefly to your
November 1st order. We plan to share our detailed thoughts with you in our
comments that will be filed on November 22nd. In the meantime, I want to discuss
several "Big Picture" issues as we at the PX see them so far. But before I get
to those points, I have three initial comments.
Number one - We congratulate the Commission staff for its thoughtful
analysis and recommendations provided in a short period of time. We are well
aware of the enormous amount of data that was examined, and we are impressed by
the staff's efforts.
Number two - We appreciate the vote of confidence in the CalPX
management that is expressed in the order. I also want to emphasize, however,
that from its inception the CalPX Board has handled its responsibilities in
exemplary fashion. Contrary to the implication in the order, CalPX management
has had a highly effective working relationship with the Board, and we have been
able to get things done in an efficient
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manner during our short history. Throughout its service, our Board has acted
responsibly and constructively; it has represented the public interest, remained
focused on the broad policy issues, and there have been no delays in
decision making brought on by a failure to achieve consensus. The Board has
clearly been a plus during our formative years, and we have deep respect for the
work and dedication of these public-spirited individuals.
Number three - We agree with you that in order to succeed in
California, we will need a cooperative effort by both state and federal
officials. As you move forward, we urge you to remain focused on the State as
well as Federal objectives during this transition to a competitive electricity
market. Although an exchange rarely comments on the level of its prices, as you
reflect in your order, wholesale electricity prices increased dramatically to
unacceptably high levels in California and throughout the Western region this
summer. Continued high power price levels of this magnitude will ultimately
cause severe dislocations in the region's economy, creating hardship situations
for consumers and businesses alike. California's urgent need to address these
difficulties is therefore paramount, and we support FERC's commitment to
ensuring that these vital State interests are addressed.
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Let me now turn to the "Big Picture" issues that I want to highlight
here, and that we will address in more detail in our November 22nd comments.
To summarize these issues, first the CalPX brings value to the market
as a reliable, independent market operator. We already offer a spectrum of
products with terms ranging from one-day to five-years in both pay-as-bid and
uniform price formats.
Second, we believe that the mandatory buy requirement has been a
critically important and beneficial ingredient in the initial market design.
However, given the Commission's order, if the requirement ends early, we will,
of course, adjust accordingly. In that event, CalPX must be able to compete on a
level playing field and receive the same light-handed regulation as other
trading venues.
Third, a level playing field also requires that any price mitigation
and refund measures that are adopted must be applied consistently across all
market transactions and market participants -- including other exchanges, dot
coms, and bilateral traders -- in a way that does not skew market incentives,
allow for gaming, or impair market efficiency. In particular, you should not
inadvertently drive business out of the effectively functioning
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day-ahead and day-of markets or out of California by selectively applying price
mitigation and refund measures only to our markets.
II. "BIG PICTURE" ISSUES
1. CALPX BRINGS VALUE TO THE MARKET.
As the November 1st order recognizes, CalPX and its long-term and
near-term markets bring significant value to the Western region. As you know, we
operate the day-ahead and day-of markets which are uniform price auctions that
provide practical load shaping capability for participants, and we provide some
20 forward trading products in a pay-as-bid format.
Moreover, vigorous day-ahead and day-of markets are necessary to and
indispensable for the development of financial markets and demand-responsiveness
that the Commission has recognized as critical to achieving workable
competition.
These established CalPX markets are the most traded and advanced
exchange-based markets in North America. The CalPX has repeatedly demonstrated
its ability to add new products and to redesign existing ones to meet the
business objectives of market participants. Restrictions on using the existing
forward products need to be eliminated, and market participants and regulators
need to recognize the contribution that these products make to the advancement
of efficient electricity markets.
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a. LONG-TERM FORWARD EXCHANGE PRODUCTS HAVE ADVANTAGES OVER
INDIVIDUAL BILATERAL CONTRACTS.
The Commission's emphasis on long-term forward bilateral contracts
appears to obscure the important advantages of arranging power supply through
long-term forward products provided by an exchange. We have again demonstrated
the viability of these markets as recently as this last quarter where our
forward markets surpassed NYMEX's comparable Western trading volumes by more
than 685% and, in fact, exceeded all the forward trading activity of the
published energy exchanges combined. I would also note that prices in our
forward markets show convergence with other published markets.
There is no need to "kick start" exchange-based forward markets in the
West. These markets already exist and are viable.
We have explained in prior submissions to the Commission that
providing long-term forward trading opportunities through an exchange-based
platform has a variety of advantages, as compared to a series of individual
bilateral trades. For example, the exchange platform offers (1) a competitive
market that facilitates trading liquidity among buyers and sellers; (2) ease of
access and administrative convenience for participants of all sizes; (3)
standardized contracting and credit management practices;
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(4) price transparency that gives the necessary signals for generation expansion
and load responsiveness, while providing a tool that regulators and market
monitors can use to assess market behavior; and (5) a mechanism for buyers and
sellers to transact all the way from initial commitment to delivery,
independently and anonymously.
The bilateral contracting process offers none of these advantages.
Pushing the market toward increased use of bilateral transactions to the
exclusion of long-term forward exchange products will eliminate or obscure these
important benefits to the potential detriment of consumers.
b. LONG-TERM FORWARD TRADING DOES NOT ELIMINATE THE NEED FOR
EFFICIENTLY FUNCTIONING DAY-AHEAD AND DAY-OF MARKETS.
The Commission's emphasis on, and CalPX development of, long-term
forward trading tools provide an important lynchpin in a correctly designed
competitive market model. A long-term forward market does not remove, however,
the need for effectively functioning day-ahead and day-of markets. While the
Commission is correct that only minimal transaction volumes should be left for
the ISO's real-time balancing operations, it is also important to recognize that
neutral, exchange-based, day-ahead and day-of markets are critical to
facilitating an efficient, overall competitive market.
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CalPX's day-ahead and day-of markets bring to near-term forward
trading the same kinds of advantages that are found in the long-term forward
markets. In addition, our day-ahead and day-of markets (1) enable supply and
demand to balance to expected load shortly before actual operations; (2) allow
parties with bilateral contracts to adjust to current market conditions; and (3)
allow end-users to modify consumption patterns to achieve the objectives of
demand-responsiveness programs. Perhaps most importantly of all, the day-ahead
and day-of markets also provide an indispensable foundation for a flourishing
market in energy-based financial instruments. To function most effectively,
these energy markets must be administered separately from the ISO's grid
management functions.
2. THE CALPX WOULD RELUCTANTLY ACCEPT EARLY TERMINATION OF THE MANDATORY
BUY-SELL REQUIREMENT, BUT CONCURRENTLY, CALPX MUST BE ALLOWED TO
OPERATE ON A LEVEL PLAYING FIELD WITH LIGHT-HANDED FERC REGULATION.
We believe that much of the Commission's concern has been erroneously
focused on the mandatory buy-sell requirement in the California market. From the
beginning, we recognized that the requirement for all energy to be transacted on
a short-term basis could create significant risk in times of tight supply. This
is precisely why we developed the longterm forward markets that provide many
different forms of hedges against
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price volatility. However, as I explained earlier, the market also needs a
robust day-ahead and day-of market. The mandatory buy-sell requirement has been
critically important for purposes of fortifying the day-ahead and day-of markets
during California's transition to a competitive framework. And, for the initial
two years of market development, when adequate supply was present, attractive
electricity prices were achieved in California under this market design.
Nevertheless, given the Commission's November 1lc order, the PX
recognizes that the mandatory buy-sell requirement may be ended prematurely, and
we will have to adjust as necessary. We believe, of course, that we offer a
combination of services that will become increasingly attractive to the bUs and
others on a voluntary basis.
Once mandatory buy-sell is gone, however, as the Commission states in
its order, the CalPX "may be operated as any other power exchange" (p. 31). This
is certainly consistent with your earlier orders, which justified traditional
tariff-based regulation of CalPX on the ground that the IOUs were analogous to
native load customers. Therefore, among other things, along with lifting the
mandatory buy-sell requirement, the Commission must also provide the CalPX with
light-handed regulation and
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ensure that both benefits and restrictions are applied evenly among all trading
venues.
3. A LEVEL PLAYING FIELD ALSO REQUIRES THAT PRICE MITIGATION MEASURES
APPLY CONSISTENTLY TO ALL MARKET TRANSACTIONS, AND DO NOT SKEW MARKET
BEHAVIOR TO THE DETRIMENT OF THE MARKET.
We have significant concerns as to how the $150/MWh "soft price cap,"
the related reporting requirement, and refund liability will work. First,
applying the soft cap to the CalPX markets could discourage participants from
trading in these markets, and cause them to shift their transactions to other
trading arenas, such as those operated by brokers, bilateral trading or other
exchanges. As demonstrated by price caps in California this past summer,
administrative interventions can cause suppliers to move to those markets that
are uncapped. The end result could be reduced supplies to Californians and a
loss of transparency in the day-of and day-ahead markets, thus frustrating the
development of financial markets and demand-responsiveness.
Second, to avoid adverse impacts on California's day-ahead and day of
markets, to avoid gaming between markets, and in recognition of the regional
nature of the WSCC marketplace, any reporting, monitoring, pricing and refund
requirements must be applied across the board on a
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level-playing field basis to all sales within the WSCC, regardless of the
vehicle used to make those sales.
My experience in commodity markets convinces me that there are a
number of viable approaches to limiting excessive volatility. In our November
22nd comments, we plan to offer an analysis of the "soft cap" proposal and other
remedies described in the order, as well as additional remedies we have already
been exploring at both the State and Federal levels.
III. CONCLUSION
The CalPX will continue to bring value to the Western marketplace. We
are committed to working actively with this Commission and the State in
developing solutions so that the goal of a workably competitive market that
benefits consumers can be realized.
Thank you for this opportunity to address you today.