Universal's Position

In its Opening Brief, Universal summarizes its position in this case as follows:

"Universal believes that Edison's own actions were a proximate cause of the June 27 curtailment. Edison deliberately underscheduled its load requirements in the (PX) day ahead market for June 27. Edison's practice of deliberately underscheduling its purchases in the Power Exchange day ahead market forced the ISO to have to make up for Edison's underscheduling by purchasing more generation on the spot market. Faced with the large gap between scheduled supply and actual demand, there was a much higher and more substantial probability that the ISO would not be able to maintain the minimum five percent reserve capacity needed to avoid a Stage 2 alert, thus causing Edison's curtailment of Universal." (Universal Opening Brief, p. 4.)

Universal begins by addressing the argument that as an interruptible customer, it had no cause to complain when it was asked to curtail its service down to zero on June 27, 2000. Universal's response is that it agreed to become an interruptible customer in the mid-1990s after concluding that historically, Edison had imposed very few curtailments, and also after taking into account Edison's obligation under Rule 14 to "exercise reasonable diligence to furnish/deliver a continuous and sufficient supply of electricity to its custom-mers . . ." Universal states that like Edison's 1500 other interruptible customers, it "had no intention that it would curtail its full requirements, and the I-6 Tariff did not require such a response." Moreover, once scheduling and system reliability became the responsibility of the ISO in 1998, "Universal reasonably anticipated that interruptible status would remain secure and that [Edison] would continue to operate in accord with prudent utility practices and ISO guidelines intended to maintain system reliability." (Id. at 6.) However, Universal continues, that is not what happened:

"Instead, Edison embarked on a procurement strategy that sacrificed reliability for lower prices. In effect, Edison introduced the greatly increased risk of economic curtailment into the interruptible customer relationship. Economic curtailment as practiced by Edison does not meet the `reasonable diligence' standard required by Rule 14." (Id. at 6-7.)

Universal also argues that in view of the bidding strategy Edison admits it was using at the time in question here, the risk of a curtailment for economic reasons was greatly increased on June 27, 2000. Universal gives the following description of what Edison did on that day, as opposed to what Universal believes SCE should have done under a proper interpretation of Rule 14:

"Edison's best forecast of its load for Hour 16, the peak hour, on June 27, 2000 was 13,938 MWh. Edison submitted a bid curve based on a market clearing price of $556.00 per MWh. As a result of its bidding strategy, Edison's final schedule awarded in the PX day ahead market for Hour 16 was 12,026 MWh.

"If Edison had submitted bids for its entire forecasted load at prices of at least $730.56 per MWh, Edison would have been able to purchase its full forecast hour 16 load. However, Edison `would have had to pay more than $1.1 million of additional cost for hour 16 alone.' . . . It is clear that Edison was seeking to avoid the additional cost, as stated in its procurement strategy.

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"After being awarded only 12,026 MWh in the PX's day ahead market, Edison next tried to gain additional energy in the PX day of market. Edison received only about 10% of the quantity that it required. The remaining energy would have to be purchased in the ISO real-time market, or curtailments would be necessary.

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"Edison's lack of success in the day of market on June 27 was consistent with Edison's overall results. According to Edison's data request responses, Edison's typical success rate in the day of market was only about 46%, compared to about 97% in the day-ahead market.

"As stated by Stern, Edison purchased 16% of its peak hour requirements from the ISO real-time market on June 27, 2000 . . . That volume of purchases from the ISO real-time market far exceeded the design volume intended for that market, and contributed directly to the resulting curtailment. As the ISO [had] pleaded, Edison's actions were `entirely unacceptable, from a reliability . . . standpoint.' (Id. at 9-10; citations omitted.)

Universal also points out that, as the last sentence in the preceding quotation suggests, the ISO had been very critical of the practice (used by the other California utilities as well as Edison) of capping bids in the PX day-ahead market and purchasing the balance of the energy needed to serve load in the ISO's real-time market. As evidence of the ISO's dissatisfaction with this practice - which the ISO saw as compromising reliability -- Universal points to the following cross-examination of Edison's principal witness, Gary Stern:

"Q. Did the ISO ever express to Edison any concerns that the ISO had with Edison's scheduling practices?

"A. The ISO expressed concerns with the fact that the real-time market was large, and there certainly were times when the ISO blamed the load for those real-time problems.

"Edison and I in particular on many occasions tried to convince the ISO that they needed to look at what was happening in the PX to understand that we had no choice but to use the real-time market. Eventually the PX gave this demonstration to the Oversight Board to make that very point.

"So the fact that the ISO, other than the division of market analysis, was slow to pick up on this point doesn't belie the fact that supply withholding, as has been identified since 1998, was the cause of this so-called `underscheduling of load.' One cannot purchase what is not offered for sale.

"Q. So the answer to my question is `Yes'?

"A. Yes." (Transcript, pp. 155-56, quoted in Universal's Opening Brief, p. 11.)

As the final leg in its argument, Universal points to criticism by the Federal Energy Regulatory Commission (FERC) of load underscheduling by the California utilities, and to the fact that in a December 15, 2000 order, FERC prospectively imposed a penalty on the California utilities to the extent they continued to underschedule load in the PX's day-ahead market.

Universal notes that one of the bases for FERC's conclusion that load underscheduling had contributed to the California electricity crisis was a report submitted by the ISO on September 6, 2000. This report asserted that excessive underscheduling created a reliability threat, and concluded that the volume of recent purchases in the ISO's real-time market "far exceeded" the original market design, often equaling 20-30% of total market demand rather than the 5% of total demand that the market's designers had envisioned. (Exhibit 2, p. 4; Universal Opening Brief, pp. 14-15.)

FERC's response to the ISO report came in its December 15, 2000 Order,⁴ from which Universal quotes in its testimony and briefs. In particular, FERC expressed concern that "the ISO was being forced to supply a large portion of California's load at the last minute as the supplier of last resort. System operations were jeopardized as the ISO was effectively transformed from providing the imbalance services needed for reliable transmission to the supplier of last resort." (93 FERC at p. 61, 993.) To address what it saw as the problem of chronic underscheduling, FERC decided to impose a penalty on utilities that failed to purchase at least 95% of their forecast demand in the PX's day-ahead market. FERC said:

"Market participants will be required to schedule 95 percent of their loads prior to real-time and will be subject to a penalty for deviations in scheduling in excess of five percent of an entity's hourly load requirements, with disbursement of revenues to all loads that scheduled accurately." (Id. at p. 61, 982.)

Although Universal acknowledges that FERC rescinded this penalty in its December 19, 2001 Order reconsidering the December 15, 2000 Order,⁵ Universal emphasizes that in the December 19, 2001 Order, FERC (1) reserved the right to re-impose the penalty under appropriate circumstances, and (2) continued to assert that underscheduling in the day-ahead market had created a serious reliability problem. (Universal Opening Brief, pp. 17-18, quoting 97 FERC at p. 62,227.)

Universal concludes by asserting that under the relevant statutory schemes, this Commission is not free to ignore the findings of FERC or the ISO on the underscheduling issue. Universal states:

"Regulatory jurisdiction over electricity is divided by federal law into two spheres of authority: states have regulatory authority over retail sales of electricity and the federal government has authority over interstate, i.e. wholesale sales. This scheme for dual authority is codified in the Federal Power Act, 16 USC Sec. 824-824m.

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"Under this scheme, individual states are empowered to regulate retail sales as well as local distribution services involving electric power, but may not intrude on the federal government's plenary power to regulate interstate transmission and wholesale sales of electricity in interstate commerce. The federal government exercises its jurisdiction by delegating authority to the FERC, which has exclusive jurisdiction over all facilities for interstate transmission and sale of electric energy. Pursuant to this grant of jurisdiction, FERC has authority to regulate the rates, terms and conditions of interstate transmission, transportation and wholesale rates by nongovernmental entities.

"All of the transactions relating to the June 27 curtailment were FERC jurisdictional: i.e., the underscheduling of purchases in the PX day-ahead market, the bidding strategy in the PX day of market, the over-reliance on the ISO real-time market. The ISO found that these practices unreasonably impaired the reliability of its operations, and the FERC concurred. This Commission is bound by those findings by the ISO and the FERC and does not have the jurisdiction to overrule their findings." (Universal Opening Brief, pp. 18-19.)