U.S. Agency to Consider Limits on Power Costs

Federal energy regulators are expected to decide this week on a complex plan designed to limit California’s power costs, amid signs the political ground is beginning to shift in the debate over price controls.

The Federal Energy Regulatory Commission, which regulates wholesale electricity rates, meets Wednesday. On the agenda is a staff proposal for handling the power shortages expected to afflict California this summer. The plan would require producers to sell into the California grid during Stage 3 emergencies, and would limit what they could charge.

The FERC staff describes the proposal as a balancing act that would counteract the worst forms of price-gouging while maintaining an economic incentive for producers to address California’s underlying supply problem.

But critics say the proposed price limits don’t go far enough and should be in effect at all times, not just during emergencies. California’s power grid operator has alleged that producers have overcharged the state more than $6 billion during periods that were not Stage 3 emergencies.

The commission is also expected to weigh a potentially important proposal to increase the availability of power throughout the West by encouraging large industrial enterprises to shut down and sell back electricity during shortages.

The price control plan is unlikely to satisfy Democratic Gov. Gray Davis, who has called for a temporary return to regulated prices throughout the region to stabilize power markets.

However, it would mark a significant step for the federal agency, whose chairman holds fast to a free-market philosophy and sees California’s problems as largely the result of the state’s own miscalculations.

The Bush administration and FERC Chairman Curt Hebert still maintain their adamant opposition to “price caps,” but a senior aide to Hebert said the chairman is willing to consider “price mitigation” under certain conditions.

Semantics can be hugely important in Washington.

“My boss wants FERC to act, no matter whether they call it price caps, price mitigation, cost-of-service rates or something else,” said Jim Hock, a spokesman for Sen. Dianne Feinstein (D-Calif.). Feinstein believes the FERC staff proposal is “a positive step forward,” he said.

FERC has already concluded that some power generators are overcharging, and it set up a program to monitor rates and seek refunds. The commission has set a May 1 deadline to enact a relief plan for California, meaning it must decide soon or face another barrage of withering criticism for its seeming aloofness. Feinstein believes FERC “has shrugged off its responsibility,” Hock added.

In recent days, FERC Commissioner Linda Breathitt has indicated that she is seriously considering supporting price controls. Breathitt is the potential swing vote among the three sitting commissioners.

Meanwhile, Mirant, a large power supplier formerly known as Southern Energy, has said that while it remains philosophically opposed to price caps, temporary controls could bring needed stability to the California market.

The plan proposed by the FERC staff carefully avoids the term “cap.” It instead speaks of “price mitigation.” It would come into play only during Stage 3 emergencies, when reserves of power are dangerously low.

Power producers would be required to sell into the California grid at a price pegged to the production costs of the least efficient plant called on to provide electricity.

That would allow the efficient producers to profit handsomely, and theoretically, create an incentive to keep supplying California’s needs. By contrast, more conventional types of price controls would pay each producer its costs plus a fixed profit margin.

The staff plan would be temporary, lasting no more than a year.

Critics say the plan’s minimalist approach is seriously flawed.

“It only focuses on periods when there are extreme emergencies, which occur relatively rarely,” said MIT economist Paul Joskow, an expert on electric deregulation and California’s problems. “There is substantial evidence that prices are way above the competitive level at times other than Stage 3 emergencies.”

The FERC commissioners are likely to address these and other objections in their debate. Critics have also said that “mitigation” should apply to the entire 11-state Western region and not just California.

The five-member commission is reduced to three, pending Senate confirmation of two new commissioners nominated by President Bush. Commissioner William Massey believes price controls are needed, while Chairman Hebert opposes them. Commissioner Breathitt, a former chairwoman of the Kentucky public utilities commission, holds the key vote.

Breathitt has issued a checklist of issues that she wants resolved if price caps are to be imposed. Among them are such matters as how long the caps should remain in effect, whether all Western states should be covered, and whether investment in new generating facilities would suffer.

Walter Ferguson, a senior aide to Hebert, said the chairman has his own checklist for “price mitigation.” Hebert will not consider any proposal “unless it provides some significant, measurable benefits to increase supply or reduce demand, without causing long-term damage.”

Asked whether the staff plan meets those tests, Ferguson was noncommittal.

Breathitt said in an interview that she hoped the three commissioners could overcome their past differences and coalesce around a plan.

“The whole notion of price mitigation--some like to say price caps--is very much on my mind these days,” said Breathitt, without spelling out how she would vote.

Jim Hoecker, a Democrat who resigned as FERC chairman at the end of the Clinton administration, said price caps are not a panacea.

“Price caps have a lot of problems associated with them,” he said. “They don’t tend to be effective, and they deter some companies from participating in the market.”

Hoecker said a high price cap might be a temporary option to allow time to work out regulatory and political solutions to California’s problems. He added that criticism of FERC by California officials hasn’t helped matters.

“It’s very hard to come up with a solution in an atmosphere poisoned by accusations of insensitivity and incompetence,” said Hoecker. “I think that has effectively delayed a solution.”

The FERC commissioners should have an easier time deciding on a second proposal before them, a plan to encourage large industrial users of electricity to sell back power during shortages.

These large users have long-term contracts to buy electricity at reduced rates. By shifting some of their operations to off-peak times, they could make money selling the electricity back into the grid at a higher price than their purchase price. Theoretically, that would reduce demand and help keep spot electricity prices from hitting astronomical levels.

Craig Goodman, president of the National Energy Marketers Assn., said his research indicates that a 1% drop in demand would lead to a tenfold drop in spot market electricity prices.

“Personally, I believe this is going to be more effective than price caps,” Goodman said. “If demand shifts, it can move prices down in the blink of an eye.”