General Position:

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.

California Situation:

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.