Staff Report to the 
                    Federal Energy Regulatory Commission
                     on Western Markets and the Causes
                   of the Summer 2000 Price Abnormalities





                                   Part I
                                     of
                  Staff Report on U.S. Bulk Power Markets











                              November 1, 2000




     The analyses and conclusions are those of the study team and do
     not necessarily reflect the views of other staff members of the
     Federal Energy Regulatory Commission, any individual
     Commissioner, or the Commission itself.







                                  Contents

                                                                  Page

     1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . 
                                                                   1-1
          Brief Overview of Conclusions  . . . . . . . . . . . . . 
                                                                   1-2

     2.  Supply and Demand Conditions  . . . . . . . . . . . . . . 
                                                                   2-1
          A.  Supply and Demand Background . . . . . . . . . . . . 
                                                                   2-2
               1.  Brief  Description of Bulk Power System in the West
     . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
                                                                   2-2
               2.  Historical Load Growth and Resource Mix . . . . 
                                                                   2-3
               3.  Spring Expectations for the Summer of 2000  . . 
                                                                   2-7
          B.  Summer 2000  . . . . . . . . . . . . . . . . . . . . 
                                                                   2-9
               1.  Demand Growth . . . . . . . . . . . . . . . . . 
                                                                   2-9
               2.  Increased Exports from California . . . . . . 
                                                                  2-15
               3.  Increased Plant Outages . . . . . . . . . . . 
                                                                  2-19
               4.  Scheduling of Supply and Demand in California     
                                                                  2-22
               5.  Generation Capacity Availability and Utilization     
                                                                   
                                                                  2-24
               6.  Transmission Congestion . . . . . . . . . . . 
                                                                  2-30

     3.  Prices and Costs  . . . . . . . . . . . . . . . . . . . . 
                                                                   3-1
          A.  Prices . . . . . . . . . . . . . . . . . . . . . . . 
                                                                   3-2
               1.  Market Players and Ownership  . . . . . . . . . 
                                                                   3-3
               2.  Trading Patterns and Hubs . . . . . . . . . . . 
                                                                   3-5
               3.  Recent Price Trends in Western Markets  . . . . 
                                                                   3-7
               4.  Correlation of Prices in Western Markets  . . 
                                                                  3-15
          B.  Cost Factors in Prices and Price Increases . . . . 
                                                                  3-20
               1.  Input Price Increases . . . . . . . . . . . . 
                                                                  3-20
          C.  Bidding in the CalPX and Selected ISO Markets  . . 
                                                                  3-22
               1.  Bidding in the CalPX  . . . . . . . . . . . . 
                                                                  3-22
               2.  Cal-ISO Replacement Reserve Markets and 
                    Out-of-Market Purchases  . . . . . . . . . . 
                                                                  3-27
               3.  Transmission Congestion Costs and Prices  . . 
                                                                  3-28

     4.  Regulatory and Institutional Environment  . . . . . . . . 
                                                                   4-1
          A.  Economic Regulation of Utilities . . . . . . . . . . 
                                                                   4-1
               1.  Federal Economic Regulation . . . . . . . . . . 
                                                                   4-1
               2.  Economic Regulation of Electric Utilities in
     California  . . . . . . . . . . . . . . . . . . . . . . . . . 
                                                                   4-2
               3.  Economic Regulation of Electric Utilities in Other
     Western 
                    States . . . . . . . . . . . . . . . . . . . . 
                                                                   4-8
          B.  Environmental Regulation of Electric Utilities . . 
                                                                   4-8
               1.  Federal Environmental Regulation of Electric
     Utilities   . . . . . . . . . . . . . . . . . . . . . . . . . 
                                                                   4-8
               2.  Environmental Regulation of Utilities in California
     . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
                                                                   4-9

     5.  Why Were Prices High This Summer? . . . . . . . . . . . . 
                                                                   5-1
          A.  Market Forces: Costs and Scarcity  . . . . . . . . . 
                                                                   5-2
               1.  Increased Power Production Costs  . . . . . . . 
                                                                   5-2
               2.  Scarce Resources Throughout the West  . . . . . 
                                                                   5-3

                                     ii







          B.  Market Rules . . . . . . . . . . . . . . . . . . . . 
                                                                   5-8
               1.  Lack of Forward Contracting . . . . . . . . . . 
                                                                   5-9
               2.  Demand Responsiveness . . . . . . . . . . . . 
                                                                  5-11
               3.  Underscheduling . . . . . . . . . . . . . . . 
                                                                  5-14
               4.  Exports/Imports . . . . . . . . . . . . . . . 
                                                                  5-16
               5.  Auction Rules . . . . . . . . . . . . . . . . 
                                                                  5-17
          C.  Market Power . . . . . . . . . . . . . . . . . . . 
                                                                  5-18
               1.  Measuring the Effects of Market Power on Price     
                                                                  5-19
               2.  Demand Conditions . . . . . . . . . . . . . . 
                                                                  5-20
               3.  Market Power and Scarcity . . . . . . . . . . 
                                                                  5-20
               4.  Methods of Exercising Market Power  . . . . . 
                                                                  5-22
               5.  Evidence from Summer of 2000  . . . . . . . . 
                                                                  5-23
               6.  Market Power in Context . . . . . . . . . . . 
                                                                  5-24
          D.  Conclusion . . . . . . . . . . . . . . . . . . . . 
                                                                  5-26

     6.  Policy Options  . . . . . . . . . . . . . . . . . . . . . 
                                                                   6-1
          Discussion of Options  . . . . . . . . . . . . . . . . . 
                                                                   6-4
               1.  Encourage Investment in New Generation  . . . . 
                                                                   6-4
               2.  Remedy the Over-Reliance on Spot Market Purchases     
                                                                    
                                                                   6-5
               3.  Provide More Demand Response to Wholesale Prices     
                                                                   6-8
                    
               4.  Provide Some Price Regulation While Generation
                    Resources                       Remain Scarce and
                    until Regulatory Changes Are Made 
                    to Provide More Demand Response  . . . . . . 
                                                                  6-10
               5.  Create a More Stable Regulatory Environment . 
                                                                  6-17
               6.  Other Options . . . . . . . . . . . . . . . . 
                                                                  6-19




























                                    iii







     Tables
          
     2-1.  Subregions in the WSCC  . . . . . . . . . . . . . . . . 
                                                                   2-2
          
     2-2.  Comparison of 3-Year Average Growth in Summer Peak, in the
          WSCC, 
               1998 and 1995 . . . . . . . . . . . . . . . . . . . 
                                                                   2-4
     2-3.  Current and Planned Generation Capacity in the WSCC, as of 
     January 1, 2000 . . . . . . . . . . . . . . . . . . . . . . . 
                                                                   2-5
     2-4.  Generation, Imports and Exports in WSCC, 1990 to 1998 . 
                                                                   2-7
     2-5.  WSCC-U.S. Forecasted Demand and Supply, Summer 2000 . . 
                                                                   2-8
     2-6.  WSCC-California Forecasted Demand and Supply, Summer 2000     
                                                                    
                                                                   2-8
     2-7.  Projected Cal-ISO Peak Loads and Resources  . . . . . . 
                                                                   2-8
     2-8.  Load Growth in the West, May and June 1999 to May and June
     2000  . . . . . . . . . . . . . . . . . . . . . . . . . . . 
                                                                  2-11
     2-9.  Cal-ISO Day-Ahead Forecast and Actual Average Loads, 1998
     to 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 
                                                                  2-13
     2-10.  Electrical Emergencies Declared by the Cal-ISO (May-
     August) . . . . . . . . . . . . . . . . . . . . . . . . . . 
                                                                  2-15
     2-11.  Offpeak Loads in the Cal-ISO Area  . . . . . . . . . 
                                                                  2-15
     2-12.  Summary of California Exports and Imports by Zone  . 
                                                                  2-18
     2-13.  Percent of Unplanned Outages by Duration, Cal-ISO Units,
     1999 and 2000 . . . . . . . . . . . . . . . . . . . . . . . 
                                                                  2-21
     2-14.  Correlation of Outages with the PX UMCP, May to August
     2000  . . . . . . . . . . . . . . . . . . . . . . . . . . . 
                                                                  2-21
     2-15.  Hydroelectric Generation in the West, 1999 to 2000 . 
                                                                  2-27
     2-16.  Summary of WSCC Capacity Availability During the Week July
     31
               to August 4, 2000 . . . . . . . . . . . . . . . . 
                                                                  2-29
     2-17.  Summary of Capacity Available and Energy Supplied in the
     Cal-ISO at                              Hour 16 on August 4, 2000
     . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
                                                                  2-30
          
     2-18.  Percentage of Time Major California Transmission Paths
          Congested, 
               May through August, 1999 and 2000 . . . . . . . . 
                                                                  2-31
     3-1.  Ownership of Plants in the WSCC by Class of Owner . . . 
                                                                   3-4
          
     3-2.  Correlations of Western Market Prices:  Onpeak Prices from
          Megawatt Daily 
               and California Power Exchange . . . . . . . . . . 
                                                                  3-16
          
     3-3.  Correlations of Western Market Prices:  Offpeak Prices from
          Megawatt Daily
               and California Power Exchange . . . . . . . . . . 
                                                                  3-17
     3-4.  Bidding in the CalPX by Participant and Cal-ISO Price Cap,
     May to 
               September 2000  . . . . . . . . . . . . . . . . . 
                                                                  3-26
     3-5.  Transmission Congestion Price During Congested Hours on
     Major Congested Paths
               May through August, 1999 and 2000 . . . . . . . . 
                                                                  3-29


     Figures

     2-1.  Western Power Grid  . . . . . . . . . . . . . . . . . . 
                                                                   2-4
     2-2.  Peak Summer Demand in WSCC  . . . . . . . . . . . . . . 
                                                                   2-6

                                     iv







     2-3.  Capacity Resource Percentages by WSCC Subregions  . . . 
                                                                   2-6
     2.4.  Rank of Regional Temperatures: May to August 2000 . . 
                                                                  2-10
     2.5.  Rank of Regional Temperatures: June 1998 to 2000  . . 
                                                                  2-10
     2-6.  Cal-ISO Load Curve, May to August 2000  . . . . . . . 
                                                                  2-12
     2-7.  Average Loads in the Cal-ISO, Day-Ahead Forecast and Actual
     . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
                                                                  2-13
     2-8.  Peak Loads in the Cal-ISO, Day-Ahead Forecast and Actual     
                                                                   
                                                                  2-14
     2-9.  Net Summer Imports into Cal-ISO, 1999 and 2000. . . 
                                                                  2-17
     2-10.  Imports and Exports, Average Hourly, 1999 and 2000 . 
                                                                  2-17
     2-11.  Offpeak Export Demand, 1999 and 2000 . . . . . . . . 
                                                                  2-19
     2-12.  Comparison of Average Megawatts Out of Service in the Cal-
     ISO                                          Planned and
     Unplanned, 1999 and 2000  . . . . . . . . . . . . . . . . . 
                                                                  2-20
     2-13.  Percentage Change from 1999 in Year 2000 Peak Forecast
               Scheduled and Actual Loads  . . . . . . . . . . . 
                                                                  2-22
     2-14.     Scatter Diagram of Underscheduling, PX Day-Ahead Market
                 . . . . . . . . . . . . . . . . . . . . . . . . 
                                                                  2-23
          
     2-15.  Underscheduling : Minumum Megawatts Underscheduled in PX 
               Day-Ahead Market, by Load Range and Month . . . . 
                                                                  2-23
     2-16.  Volumes of Run-Off at the Dalles, January to July  . 
                                                                  2-25
     2-17.  Volumes of Run-Off, California Statewide Total, October to
     July  . . . . . . . . . . . . . . . . . . . . . . . . . . . 
                                                                  2-26
     2-18.  Percent Change in MWh Generated in WSCC, 1999 to 2000     
                                                                  2-28
     3-1.    Daily Price Indices for Western Market Hubs, 1997-2000     
                                                                   3-8
     3-2.  Bilateral Index Prices at Palo Verde  . . . . . . . . 
                                                                  3-11
     3-3.  Bilateral Index Prices at COB . . . . . . . . . . . . 
                                                                  3-11
     3-4.  Bilateral Index Prices at Mid-Columbia  . . . . . . . 
                                                                  3-12
     3-5.  Western Market Prices for Summer 2000: Bilateral Markets
     vs. California
               Markets . . . . . . . . . . . . . . . . . . . . . 
                                                                  3-12
     3-6.  Palo Verde Forwards: 3rd Quarter Contracts  . . . . . 
                                                                  3-13
     3-7.  COB Futures: July Contracts . . . . . . . . . . . . . 
                                                                  3-15
     3-8.  Day-Ahead Spinning, Non-Spinning and Replacement Reserves      
                                                                     
                                                                  3-18
     3-9.  Day-Ahead and Hour-Ahead Replacement Reserve MWh, NP15     
                                                                  3-19
     3-10.  Daily Spot Prices for Western Natural Gas Markets in 2000     
                                                                     
                                                                  3-19
     3-11.  NOx RECLAIM Prices for SCAQMD, May to September 2000     
                                                                  3-20
     3-12.  Estimated Running Cost for Gas-Fired Generation in
     Southern California . . . . . . . . . . . . . . . . . . . . 
                                                                  3-22
          
     3-13.  Comparison of PX Onpeak Supply Bid Under ISO Cap for
          Selected 
               Participant Types . . . . . . . . . . . . . . . . 
                                                                  3-25
     3-14.  Percentage of Non-Zero Supply Bid at $100 or Below . 
                                                                  3-26
          
     3-15.  PX Bids, Replacement Reserves and Real-Time Payments 
               to Replacement Units, June 12 to June 16  . . . . 
                                                                  3-28


     Appendix A  . . . . . . . . . . . . . . . . . . . . . . . . . 
                                                                   A-1







                                     v







                              Acknowledgments

     The study team consists of:

     Scott Miller, Co-Lead for National Investigation
     Andrea Wolfman, Co-Lead for National Investigation
     Gerald Williams, West Team Lead
     Hollis Alpert
     Lyle Hanagami
     Brian Harrington
     William Meroney
     Ronald Rattey
     John Robinson
     Michelle Veloso

     The team would also like to thank the following for their
     contributions to the report:

     Bryan Craig, Joseph Cholka, Charles Faust, Marie-Beth Hall, David
     Hunger, Thanh Luong, David Mead, Songthara Omkar, Robert Pease,
     and Roland Wentworth.

































                                     vi