Limited Price Controls OKd on Power Suppliers

Federal energy regulators agreed Wednesday to limited, temporary price constraints on wholesale electricity in California. The carefully measured ruling is intended to help the state get through what is expected to be a difficult, power-short summer.

The plan, announced by an ideologically divided Federal Energy Regulatory Commission, was more far-reaching than had been expected, but fell far short of a return to the regulated prices sought by Gov. Gray Davis and other California political leaders.

It elicited a cautious response from California utility executives, power producers and government officials, who questioned whether it would be effective--and doubted that it would stave off what are now seen as inevitable power shortages and blackouts this summer.

After months of refusing the state’s demands for price caps, the commission voted 2 to 1 to put a lid on California’s wholesale electricity prices starting May 1--but only when the state’s supplies slip low enough to trigger an energy emergency.

If it works as intended, the ruling should hold down the prices paid by California utilities and the state government for electricity and, in turn, relieve some of the pressure for more consumer rate hikes. Precise details of the plan were unavailable Wednesday night, however, and some energy experts said they fear it contains loopholes that could undercut its intended effect.

FERC Chairman Curt Hebert--a strong advocate of energy deregulation--told reporters that the agency had tried to carry out a “balancing act” to limit price spikes while maintaining an economic incentive for producers to build new plants to supply California.

“This is about as free market as you can get when it comes to mitigating prices,” he said during the commission meeting.

But Commissioner William Massey, who dissented, said the plan was too narrowly written to be effective. Massey said evidence compiled by California’s power grid operator shows that abusive pricing is taking place around the clock, not just during shortages.

“This agency is required to ensure just and reasonable prices during all hours,” Massey said. “We are now 11 months into the California calamity. Now is not the time for half-a-loaf solutions.”

The FERC plan sets up a complex scheme in which California regulators would use confidential data from power producers, in addition to fuel costs and other factors, to establish a target price for each electricity generator.

During supply shortages, all generators would be required to offer electricity to the state’s grid operator--the California Independent System Operator, or Cal-ISO. The suppliers would be paid based on the price of the least-efficient--and therefore costliest--generator called on to supply electricity.

Proponents said the arrangement preserves market principles by rewarding efficient producers. But critics said it would only pile on more costs for California consumers.

“It is amazing to me that FERC set the market based on the least efficient, most costly plant,” said Sen. Dianne Feinstein, (D-Calif.), who is championing legislation to impose stricter price controls. “[That] will necessitate that the highest possible charge prevails.” She called the FERC action “a small step forward,” but added that it is not enough.

Rep. Bob Filner (D-San Diego), who is pursuing legislation in the House, called the FERC action “way too little, way too late.”

“I guess they’re under real pressure to do something,” he said. “But they haven’t got to the heart of the problem. We’re still paying criminal prices.”

A spokesman for Gov. Davis--who, like Feinstein and Filner, supports strong, regionwide price caps--said the governor would not comment until he had seen the full FERC order.

But the spokesman added: “It doesn’t bode well that the one commissioner who knows California best--Commissioner Massey-- voted against this proposal.”

Wholesale Prices Have Skyrocketed

California has demanded caps on wholesale prices since last year, when a confluence of events squeezed electricity prices up by 10, 20, even 50 times from the year before.

Under California’s energy deregulation plan, which went into effect in 1998, wholesale prices were allowed to float free of regulation, while retail rates charged by utilities were kept under a state blanket. The result, by the end of last year, was that the state’s two largest utilities, Pacific Gas & Electric and Southern California Edison, were tottering on the edge of bankruptcy. Eventually, PG&E; did file for reorganization in federal Bankruptcy Court.

The plan approved late Wednesday night would limit the amount that power producers could charge during shortages, beginning with Stage 1 emergencies, in which reserves fall below 7.5% of anticipated demand. However, the limits do not amount to a fixed price cap, and some producers, especially the most efficient, would still be able to reap a generous profit.

During last summer and winter, the state faced entire weeks--at all hours--of Stage 1 and higher alerts.

“If this is effective, it could reduce by maybe 40% the price of power this summer,” said Gary Stern, director of market monitoring for Edison. He warned, however: “If it’s not effective, prices could be even higher than people are projecting.”

Stern estimated that the ruling could bring the price of electricity during energy emergencies down to roughly $300 per megawatt-hour at today’s natural gas prices. He said that is about $200 lower than the price the state had expected.

But a spokesman for power sellers in California estimated that the cost would be closer to $500 a megawatt-hour. Gary Ackerman, executive director of the Western Power Trading Forum, said the prices would vary with the price of natural gas.

A megawatt-hour of electricity is enough to serve about 800 average homes for an hour. At its peak last year, the price of electricity soared to as high as $1,500 a megawatt-hour in California. Months earlier, prices had been averaging about $30 a megawatt-hour.

Stern and others expressed concern that FERC’s plan appears to apply only to electricity generators, and not to the brokers who often buy electricity from them and sell it on the wholesale market.

“If it doesn’t apply to marketers, it isn’t going to work,” Stern said. He predicted that power generators would simply sell their electricity to brokers to avoid the price limits.

One consumer advocate, Mike Florio of the Utility Reform Network, referred to that prospect as “megawatt laundering.” Unless that issue and others have been addressed in the plan, there will be serious problems, he predicted.

“It may help a little,” Florio said. “But I don’t at this point have any reason to believe it will help a lot.”

Peter Navarro, a professor of economics at UC Irvine, said the FERC plan creates “Swiss-cheese caps” riddled with holes that will keep prices high.

“We’re going to get played like a violin under these rules,” he said.

State Sen. Debra Bowen, (D-Marina del Rey), chairwoman of the Senate Utilities Committee and a key player in the Legislature’s attempts to fix the energy crisis, said the FERC order at least represents movement toward a solution.

“I’d like to be optimistic about it,” she said. “It’s not the pot of gold at the end of the rainbow, but it’s a help. It’s a good thing to have done now, in April, so we can have a little time to see how it operates before we get into what is likely to be the most difficult part of the summer.”

The FERC vote came after a day of intense closed-door deliberations that led to three postponements of the commission’s scheduled meeting, which began 10 hours late. The commission had promised last December to have a summer emergency plan for California in place by May 1.

During the meeting, Commissioner Linda Breathitt, who cast the swing vote, said “the flawed electricity market that exists in California is not at all what the proponents of deregulation had in mind.” But she agreed with Hebert that specific, cost-based price caps for each generating plant would put a damper on long-term efforts to supply more power to the state.

Breathitt and Massey are Democrats, while Hebert is a Republican and a strong advocate of unfettered markets. All three were appointed by former President Clinton; President Bush has moved to fill two vacancies on the five-member board, but his nominees have not yet been confirmed.

The commission staff, partly to avoid offending Hebert, had carefully used the term “price mitigation” instead of “price control” in drafting the plan.

Cal-ISO Gets Greater Control

Details of the FERC plan remained sketchy Wednesday night, but some of its other features would:

* Grant the California Independent System Operator greater control over scheduled shutdowns of power plants for maintenance.

* Require that power suppliers that bid at prices above the target rate set by Cal-ISO justify their costs in writing.

Separately, the commission unanimously approved an order that would pave the way for creation of a single, electricity transmission system throughout the West.

But in a twist, FERC required Cal-ISO to submit a plan by June 1 outlining how California would join that organization. If Cal-ISO fails to meet the deadline, the entire price-relief plan would be withdrawn.

Massey said that provision was ill-considered and would further damage the strained relations between federal and state energy regulators.

“If Cal-ISO fails to make a filing . . . the entire order turns into a pumpkin,” he said. “That makes no sense to me.”

However, Ackerman, the spokesman for California electricity marketers, praised that part of the order.

“It’s time for California to wake up and realize they need to be integrated with the rest of the region--economically as well as politically,” he said.

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Zaldivar reported from Washington, Vogel from Sacramento. Times staff writers Richard Simon in Washington, Mitchell Landsberg and Nancy Rivera Brooks in Los Angeles and Julie Tamaki in Sacramento contributed to this story.