U.S. Urges Major Fixes for State’s Power Market

California’s electricity crisis is the product of flaws in the deregulated market and a long-term shortage of power in the state, federal regulators said Wednesday, proposing sweeping changes to fix the $23-billion electricity trade.

But the Federal Energy Regulatory Commission stopped short of ordering retroactive reductions of the sky-high electricity prices paid since June, saying it lacked the legal authority.

The commission, which found no evidence of individual companies driving up electricity prices, left the door open for some sort of refund should it uncover specific instances of such market abuses. That leaves undetermined whether major utilities can pass on more than $5 billion in electricity costs to consumers across the state.

The technical changes proposed to fix California’s flawed market include giving utilities freedom to buy power from sources other than the state-mandated exchange and imposing loose price caps on power purchases.

Still, California faces years of high prices and threatened blackouts, the commission said, unless legislators and regulators tackle problems beyond the federal body’s scope, particularly the faster building of power plants and transmission lines.

“Ideally, some people would want us to round up the bad guys who manipulated this market without restraint or conscience and order disgorgement of all their ill-gotten gains. It’s not as simple as that,” Chairman James J. Hoecker said at a special meeting of the four-member commission. “If information that the market was or is being manipulated unlawfully comes to us through complaint or as product of our own investigation--we will act on that information, I guarantee you.”

The commission’s menu of proposed changes to the California market, which it hopes to enact by the end of the year after public comment, drew scalding criticism from consumer groups, tepid praise from utilities and power generators, and a mixture of hot and cold responses from politicians. Nonetheless, observers expect the proposals will be approved in their current form.

Some lauded the commission’s proposed order for what it didn’t do, mainly impose cost-based electric rates that would have represented a “re-regulation” of the industry. Generators breathed a sigh of relief that the commission--at least for the time being--did not judge the power merchants as having wielded illegal “market power,” and therefore subject to refunds to the utilities and consumers they sold power to.

And even consumer advocates, angry as they are, were comforted by the commission’s finding that electricity rates at times this summer were “unjust and unreasonable,” legal language that could open the way for the California Public Utilities Commission or the California Legislature to go after any profits they consider excessive.

Gov. Gray Davis, during a news conference with U.S. Energy Secretary Bill Richardson to unveil initiatives to improve electricity supply and reliability, called the federal commission’s proposal “a mixed blessing.”

“They do recognize that we’re operating in a dysfunctional market and they do agree that rates are not just and reasonable,” Davis said. “However, they did not, as I encouraged, order rebates to the consumers and businesses in San Diego who were literally gouged for the profiteering and market manipulation San Diego had to suffer through.”

Among the market changes proposed by the Federal Energy Regulatory Commission:

* A temporary reworking for the next two years of the way prices are set for electricity in the California Power Exchange, the primary market for electricity. Currently, the highest bid for each hour sets the price for all the bids during that hour. The commission would change that policy so that bids higher than $150 a megawatt hour could not set the “market clearing price” paid by all participants.

* Freeing the big utilities--Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric--from the requirement that they purchase most of their electricity from the Power Exchange. This would give the utilities greater freedom to shop for the best deals on electricity.

* Requiring all market participants to schedule 95% of their transactions the day before rather than--as happened repeatedly this summer--waiting until the day the power is needed, buying at the last minute in an emergency market operated by the California Independent System Operator. This nonprofit was formed to schedule and transmit electricity, but found itself this summer in the unexpected position of running a major market for electricity as generators sought the best price for their electrons.

* Overhauling the boards of governors of the California Power Exchange and the California Independent System Operator, which currently are composed of “stakeholders” representing all parties to deregulation, including generators, utilities and consumer advocates. Instead, the two nonprofit corporations would have smaller, independent boards selected by the current boards.

(Customers of the Los Angeles Department of Water and Power, which is not participating in market deregulation and has escaped the state’s power woes, are not affected by these proposals.)

The commission based its proposals on a staff investigation that blamed high electricity prices on a supply-demand imbalance and market design problems that give electricity sellers the opportunity to drive up prices when supplies are tight. But the commission found no evidence of specific attempts by individual companies to drive up the price of electricity, partly because there was not enough time to conduct such a thorough, formal investigation.

Curt Hebert Jr., the only Republican on the commission, offered the most criticism of the proposed order.

“If it were up to me, today’s order would be much, much different,” Hebert said. “However, on balance, it appears to be a step in the right direction.”

Hebert said he could support the order only because it does not represent the final order and may be changed after the three-week public comment period. He said he would prefer that the order eliminate all price controls.

California’s two biggest utilities--Southern California Edison and Pacific Gas & Electric--commended the commission for its proposed fixes, calling them “a sound beginning.”

In particular, PG&E; called the proposed reform of bidding “a creative attempt to fix the market and moderate prices, while still allowing competition to evolve.”

Power players praised FERC’s decision to allow utilities to go outside the PX to procure energy--a practice that a couple of years ago was deemed too risky because it might give the big utilities the temptation and impunity to self-deal: buying from their own affiliates.

Although utilities have had limited power to make long-term energy contracts outside the PX, utilities have been reluctant to enter into them. That’s because state regulators reserve the right to review such deals and to force companies and their shareholders to eat added costs if market rates decline below the contracts.

Together, PG&E; and Edison estimate that they have spent at least $5 billion more on electricity this summer than they could pass on to customers who are protected by a rate freeze imposed in 1996 as part of the deregulation law. The Public Utilities Commission is weighing the utilities’ requests to eventually pass on those costs to customers.

But consumer groups were outraged by the lack of rebates to customers of San Diego Gas & Electric, and, by extension, to the customers of SCE and PG&E;, who currently are protected by a rate freeze but could face sharply higher bills if the utilities are allowed to pass along their uncollected electricity costs.

“They are trying to give medicine for an incurable disease, and that’s electricity deregulation,” said Doug Heller of the Foundation for Taxpayer and Consumer Rights. “FERC has found that rates were excessive, yet they failed to take action. That’s like a judge that says we have all the evidence in the world that this guy committed murder, but it’s all inadmissible.”

Mike Florio, a lawyer with the San Francisco-based consumer group called the Utility Reform Network and a member of the Cal-ISO board, said the commission took a step backward by nullifying Cal-ISO’s recent decision to set a sliding rate cap of as low as $100 per megawatt hour. The commission ordered that the price cap in the Cal-ISO market remain at $250 a megawatt hour until the new FERC pricing mechanism is finalized.

“I wasn’t one of those that thought FERC was going to ride in on a white horse and rescue us, but this appears to have made things worse,” Florio said.

San Diego County Supervisor Bill Horn said that county attorneys would review the FERC order to assess the county’s options for pursuing rebates.

“We’re proceeding on our own,” he said. On Tuesday, supervisors voted to study creating a municipal utility district.