The Federal Energy Regulatory Commission appears headed for a showdown with Gov. Gray Davis, perhaps as early as today, over political control of the powerful nonprofit corporation that runs California's electricity transmission grid.
Responding to an industry complaint that the grid operator lacks required independence, FERC could immediately disband its governing board, which was appointed by Davis. But several observers said Tuesday that such a politically provocative step seems unlikely in the heat of summer. They predicted the commission will find some other way, such as negotiations with Davis, to address its concerns.
Most consumers know the California Independent System Operator, or Cal-ISO, as the agency that declares power emergencies and schedules rolling blackouts.
But the Folsom-based ISO is more than that: It functions as California's electricity traffic controller, scheduling delivery of power to match shifting demand throughout a service area that covers three-quarters of the state. It is the fifth-largest entity of its kind in the world.
Under emergency legislation passed in Sacramento earlier this year, Cal-ISO is now governed by a five-member board appointed by Davis, and there lies the controversy.
Power companies have formally complained to FERC that Cal-ISO can no longer be considered an unbiased player in the market, as federal rules require it to be. They point out that the state, through the Department of Water Resources, is now a major power buyer.
The industry fears that Davis might one day use his leverage over Cal-ISO to deny access to the California market to sellers that fall from political grace or don't deal with the water department on favorable terms.
Senior FERC officials agree that a conflict of interest exists. Previously, Cal-ISO was governed by a board that represented a cross-section of interest groups from industry to consumers. But that arrangement was widely considered ineffective.
The issue is scheduled for consideration today at FERC's last meeting of the summer. Agency sources said FERC's five commissioners are considering a wide range of options, from ordering the current ISO board disbanded to postponing a decision altogether.
New Board Could Be One Compromise
One middle-of-the-road proposal calls for negotiations and arbitration with Davis and other interested parties, with the goal of creating a new Cal-ISO governing board not directly answerable to the governor.
"The ISO is not independent," said a senior FERC official who asked not to be identified. "There is ample evidence of that. The governor should not be appointing the board.
"We believe the law is on our side," the official added. "But having the law on your side may mean sending federal marshals. To some extent, this has the flavor of a government takeover. Do you kick the doors in and install a new board?"
Michael Kahn, a San Francisco lawyer appointed by Davis to head the Cal-ISO board, indicated the state would be willing to negotiate.
"Precipitous intervention is not warranted," Kahn said. "We should try to initiate some sort of dialogue to see if this can be resolved otherwise."
Added Kahn: "The generators and the marketers don't like the ISO because it is independent of their interests."
In a legal brief submitted to FERC in May, the industry declared that it has no confidence in the current setup and warned that doubts about Cal-ISO could crimp needed investment in new power plants.
"The establishment of an independent [Cal-ISO] is vital to the long-term resolution of California's energy problems and the stability of the entire Western region," wrote Julie Simon, vice president for policy at the Electric Power Supply Assn. "The continued influx of capital for new or expanded in-state generation, the willingness . . . of out-of-state suppliers to sell into the California market and the ability to seamlessly integrate California's grid with other Western regional transmission organizations will require that [Cal-ISO] function as an 'honest broker.' "
But Cal-ISO, she added, "has been transformed from an independent operator of interstate transmission resources to a partisan advocate for the state of California. . . . If the governor is dissatisfied with the [Cal-ISO] board, he can appoint a new board."
Consumer advocates say that presents a problem for power marketers such as Mirant Corp., Duke Energy Corp., Dynegy Corp. and Enron Corp., but not for the public.
Differing Views on Panel's Role
"The ISO is finally operating in the public interest, and it drives these companies nuts," said Mark Cooper of the Consumer Federation of America. "FERC has continually complained that California is supposed to fix its own problem. There is an ISO that appears to be working. So why would anybody want to go and stir this up?"
However, Rep. Doug Ose (R-Sacramento) said the close link between the grid operator and Davis has hurt California's credibility in the energy policy debate.
"The purpose of that board is to run the transmission grid," Ose said. "You can have a consumer representative, but you've got to have people who have significantly greater experience running electric transmission."
Kahn, the Cal-ISO chairman, said the board has not tried to put itself in the place of the professional staff running the grid. "ISO management has been allowed to do what they want. There has been very, very limited interference by the board. If FERC now wants to come in and micromanage the ISO, that would be extraordinary."
A veteran Washington energy lawyer said he doubts that FERC will take such a drastic step as dismissing the board appointed by Davis. Although the agency appears to have the legal authority to do so, since federal law supersedes state law, such a move would likely trigger a rhetorical backlash from Davis and a lawsuit by the state.
"It is a red-hot issue, and this is the summer peak," said the lawyer, who asked not to be identified. "You can make a pretty good argument that the commission ought to take a crack at negotiating a way out of this."
Tension between FERC and Davis is likely to continue for months and spill into other areas. For example, FERC wants the California grid to eventually form part of a regional transmission network governed by a board that represents the entire West. The governor wants the California grid to remain under state control.
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