EDITORS: Please do not use
"Pacific Gas and Electric" or "PG&E" when
referring to PG&E Corporation or its National Energy Group.
The PG&E National Energy Group is not the same company as Pacific
Gas and Electric Company, the utility, and is not regulated by the
California Public Utilities Commission. Customers of Pacific Gas
and Electric Company do not have to buy products or services from
the National Energy Group in order to continue to receive quality
regulated services from Pacific Gas and Electric Company.
STATEMENT REGARDING INTERIM ELECTRICITY PRICE CAPS IN CALIFORNIA
The introduction of competition
into the electricity industry should reliably provide consumers
with the widest possible range of products and suppliers at the
best possible prices. Moreover, it is important to assure adequate
capital investment in generation and transmission infrastructure
to support economic growth across the country. A competitive market
achieves these results through appropriate signals. For this
reason, PG&E Corporation as a general matter does not support price
caps. The imposition of price caps dampens proper price signals
and delays the necessary transition period to fully functional,
mature competitive markets.
However, price caps may
be necessary for a limited duration to address situations where
market design flaws or other market problems may exist. Any use
of price caps must be designed to provide a period in which market
problems can be remedied; then the caps must be eliminated.
Price caps should be
used only where analysis shows a specific need. Price volatility
alone is not adequate reason to invoke price caps. There should
be evidence of structural problems with the market that will impair
or preclude full competition. Examples would include market rules
or protocols that distort competitive responses or specific instances
of locational market power.
Any use of price caps
must be limited to the maximum extent possible -- to the shortest
period of time in order to remedy the market flaw and to the smallest
number of products in the market that are affected by the flaw.
Defined, periodic review of the status of underlying market problems
and the need for continued caps is mandatory. Specific standards
must be in place for the timely correction of market flaws and the
removal of caps.
Recent events in California
and issues raised by various participants indicate that there may
be structural problems in the California electricity markets at
this time. One significant concern involves the rules for procurement
of replacement reserves and their potential to raise overall costs
in the electricity markets. Alternative methods of addressing reliability,
capacity and constraint issues are employed by other ISOs in other
areas of the country. An examination of the experience with these
methods may reveal alternative approaches that could lead to better
market outcomes. An even more fundamental concern is the lag in
California in developing generation resources to meet the rapidly
growing demand for electricity. The result is that, during periods
of high load, virtually all generation resources are required to
meet demand and the market becomes very thin. The market problems
associated with this situation are exacerbated by the lack of demand
responsiveness to rising prices.
These specific conditions
support the short-term use of price caps. FERC authorization
of ISO price cap authority extends only to November 15, 2000, thereby
providing a natural timeframe for the reexamination of California
market circumstances and the need for any further responses. Consistent
with these conclusions, the ISO Governing Board today voted to lower
the price cap to $500 effective July 1 through October 15, 2000.
In addition, the Board instructed the ISO staff to investigate the
factors contributing to the lack of a workably competitive market
and to report at the September Board meeting regarding proposals
for changes in market rules and operations that would eliminate
the need for market price caps and the level of caps required until
such changes can be implemented.
The period during which
price caps are in place provides an opportunity for the ISO, market
participants, and the State of California to address the needs of
the competitive market. Extraordinarily hot weather and high loads
have severely tested the tools available to the ISO. Now, the procedures
used by the ISO in dealing with periods of short supply can be evaluated
and revised if necessary. In addition, the State can take steps
to facilitate the siting of new resources and any other measures
necessary to resolve the physical shortage of electric generating
capacity available to California consumers. The resolution of these
important market-related problems will allow competition to bring
consumers the benefits that were intended at the time the California
market was restructured.