FERC Holds Key to Power Prices in State This Summer
A key to controlling electricity prices in California this summer lies in a little-noticed bureaucratic process now underway at the Federal Energy Regulatory Commission.
FERC must decide whether to renew energy producers’ right--first granted in 1998 for three years and then subject to review--to sell power to California at whatever price the market will bear.
Five big power plant owners and marketers have begun to petition the commission to allow them to continue doing just that.
By revoking the right of energy companies to charge as much as they like, FERC could quickly fix much of California’s energy crisis, some say. Prices would be regulated by the commission, much as they were for 70 years before the 1990s, when the agency embraced competitive power markets.
It would spare the state from power prices that are expected to soar this summer, said Stanford economist Frank Wolak.
“If FERC refuses to grant market-based pricing to all these guys,” said Wolak, “we’re done. The financial side of the California power market is solved.”
The federal agency can take as much time as it wishes to act on the companies’ petitions, said commission spokeswoman Celeste Miller.
And it’s not clear that the commission will crimp the energy companies’ profits. It has turned away California’s pleas that the agency cap wholesale electricity prices across the West. Commission Chairman Curtis L. Hebert, who wields great control, says price spikes will attract new power plant builders to California.
But in weighing whether to allow the companies to keep selling at market rates, FERC will be hard-pressed to ignore its own findings that the companies have manipulated the market, some say.
To allow companies to earn market prices, federal regulators must first conclude that the firms do not wield “market power.” That is the ability to drive prices up and keep them there by, for example, withholding electricity to create scarcity.
In a December report, the commission concluded that manipulation of California’s market at times produces “unjust and unreasonable” prices. In March, it ordered more than a dozen power companies to rebate $124 million in excess charges for January and February.
On Monday, the commission told three companies to be prepared to rebate $588,000 for power they sold in March at prices higher than deemed reasonable.
“The evidence is pretty clear that this is not a sufficiently competitive market to meet the FERC standard,” said Severin Borenstein, director of the University of California Energy Institute in Berkeley.
Pressure is building on the agency to act. Gov. Gray Davis on Friday called FERC the clearest “villain” in the state’s electricity crisis.
“It’s sort of a misnomer,” he said. “They don’t regulate anyone.”
On Monday, U.S. Sens. Joseph Lieberman (D-Connecticut) and Jean Carnahan (D-Missouri) asked the General Accounting Office to investigate whether the commission is upholding its mandate to ensure that wholesale electricity prices are reasonable.
The senators pointed to “mounting evidence that FERC may not have fulfilled this role in the California situation.”
After California opened its electricity marketplace in March 1998, the cost of electricity consumed leaped from $7 billion in 1999 to $27 billion in 2000. So far this year, state taxpayers--buying electricity on behalf of financially crippled utilities--have committed $5.2 billion to power purchases.
Much of that money has been paid to a diverse group of power generators and marketers, some publicly owned and others under the jurisdiction of FERC.
Among those firms ordered by the federal agency to refund money is Williams Cos. of Tulsa, Okla. Williams holds an exclusive contract to sell the electricity generated at big power plants in Huntington Beach and Redondo Beach. The company controls enough power to supply roughly 4 million homes.
In March, FERC launched an investigation of Williams, accusing it of shutting down power plants last spring to drive up prices and earn nearly $11 million that is now subject to refund.
The same week that the federal commission made its investigation public, Williams petitioned the agency to extend its authority to sell electricity at prices set by the market. California officials filed a protest Friday.
“There is overwhelming evidence that Williams has exercised market power and collected rates well in excess of those that are just and reasonable,” wrote the California Independent System Operator, which manages most of the state’s transmission system. “Williams’ continued ability to do so can only exacerbate conditions in California markets.”
Williams spokeswoman Paula Hall-Collins downplayed the company’s filing to the federal agency as a routine action.
“It’s kind of like renewing your driver’s license,” she said. “Every three years we have to file again with the FERC.”
It is not surprising, Hall-Collins said, that California interests would jump on the usually obscure filing to “make their points.”
Williams is the first company to file for an extension of its 1998 authority to sell at market prices in California. But the handful of other companies that purchased power plants from utilities under the state’s 1996 deregulation plan are coming due for an extension. They include Virginia-based AES, Reliant Energy and Dynegy of Houston, and Duke Energy North America, based in Charlotte, N.C.
To decide that these companies do not wield market power, said Gary Stern, director of market monitoring for Southern California Edison, “in spite of all the evidence put before them, [would show] that regulation of the California market is a sham.”
Several other observers said they are not optimistic that the federal agency will reregulate prices. That is partly because the commission uses a crude measure to determine whether a company wields market power, said Borenstein.
The agency historically has simply looked to see if a company controls 20% or more of the market, he said.
California suffers such an acute shortage of power, Borenstein said, that companies with control of just 6% of the market--as most of the private power plant owners have-- can drive up prices through bidding behavior or by withholding power.
“Take a day that’s hot,” he said, “and you need 95% of the market running or you’re going to have blackouts. The guy with 6% of the market recognizes that if he doesn’t supply power they’re going to have blackouts, and so he can charge anything he wants.
“Allowing market-based rates is simply relying on their benevolence or stupidity to keep from charging exorbitant prices,” said Borenstein. “And if there are two things we’ve learned, [they are] that they’re not benevolent and they’re not stupid.”
