Union Tribune

July 31, 2002

Governor, regulators clash over ISO board


WASHINGTON Gov. Gray Davis and federal energy
regulators are once again on a collision course, this time over who
will govern the state's power grid.

Davis is balking at a recent federal order that would disband the
board he appointed to oversee the California Independent System
Operator, which manages the grid. It would be replaced by a
board ostensibly "independent of market participants," under the
order by the Federal Energy Regulatory Commission.

While the clash lacks the sizzle of Davis' previous confrontations
with FERC over electricity price controls and refunds from power
sellers accused of gouging, it goes to the heart of who will control
the direction of California's wholesale power market.

FERC remains committed to developing a nationwide competitive
marketplace for electricity and views independent grid managers
as necessary to achieving that goal. Davis and other California
officials moved to exert more authority over the market in the
wake of the state's 2000-01 power crisis.

While FERC claims jurisdiction over the ISO as a "public utility," a
state law gives Davis power to appoint the board.

Power sellers have complained the current board cannot be an
impartial arbiter, especially since the state has become the largest
electricity buyer in California. FERC agreed, contending the
arrangement is hampering the state's ability to attract needed
power plants and violates earlier commission orders.

"We find that the Board's lack of independence presents a
significant impediment to a well-functioning Western energy
market," FERC said in its July 17 order. "It will be difficult, if not
impossible, for the current Western energy market to foster badly
needed infrastructure development and maintain just and
reasonable prices unless the (ISO) has an independent Board and
a formal stakeholder advisory process that takes into account the
concerns of all market participants."

The Davis administration contends the current setup protects
consumers from predatory energy companies and makes the
board publicly accountable.

"The board has showed independence and guided the state back
to energy sanity," said Davis spokesman Steve Maviglio. "We're
formulating our strategy (on the FERC order) at this point. I think
we'll use every tool in our toolbox to fight it."

That could range from an administrative appeal of the FERC order
to a court battle.

The Folsom-based ISO manages the flow of power over 25,526
miles of transmission lines, balances power supplies with demand,
allocates transmission space and monitors prices. The
once-obscure organization was catapulted to prominence during
the power crisis as it confronted severe electricity shortages that
prompted it to order rolling blackouts on several occasions.

As the crisis took hold, the ISO was governed by a 26-member
board representing power companies, energy traders, utilities and
consumers. Critics said the board was ineffectual and dominated
by the power industry.

In January 2001, the California Legislature passed a law that
disbanded the board and replaced it with a five-member body
appointed by Davis.

That same month, the California Department of Water Resources,
or DWR, started buying power on behalf of the state's
private-sector utilities, which no longer were able to afford the
sky-high prices being charged for wholesale electricity.

Power sellers since have leveled a variety of complaints about the
ISO. For instance, electricity buyers for the water resources
department were given access to the ISO's control room, where
the sellers alleged they were privy to sensitive price and demand
information that gave them an edge on power purchases.

State officials defended the practice as necessary to help stem the
power crisis. They ultimately agreed to remove the buyers.

"You can exert market power as a buyer through your control of
the grid," said Mark Stultz, a spokesman for the Electric Power
Supply Association, an industry group. "I think the (sellers) out in
California think there is evidence they've been doing that."

State and ISO officials dispute that.

"The only people who think the ISO board is not independent are
the generators and marketers Enron and people like that," said
Michael Kahn, a San Francisco attorney who heads the board.

FERC commissioned an outside audit of the ISO that concluded
its independence had been compromised. The auditors
recommended the creation of "an independent, 'corporate type'
(board) which consists of qualified professionals that do not have
any financial or political ties to any of the parties."

Under FERC's order, the current ISO board would be replaced
by Jan. 1 through a complex selection process.

A committee made up of ISO "stakeholders" including power
sellers and consumer groups, but not the state would elect a
Board Selection Committee. The selection committee would hire
an executive search firm to come up with a list of candidates
unaffiliated with market participants for a new nine-member

If the search firm recommends more than nine candidates, the
selection committee would vote on which ones to seat. Board
members would serve three-year terms and could serve a
maximum of six years. They would be subject to removal "for
cause" by the selection committee.

Two board advisory bodies would be formed, one consisting of
ISO stakeholders and the other made up of members of the
California Electricity Oversight Board.