Federal Caps Will Let Electric Costs Soar, Critics Say
The federal order aimed at stabilizing wholesale power costs in California is so flawed that prices will continue soaring, putting even greater pressure on state coffers and consumer bills, government officials and energy experts said Thursday.
The temporary cost controls, approved Wednesday, were characterized by the Federal Energy Regulatory Commission as the light at the end of California’s deregulation debacle. That optimistic portrayal was called into question when the full details were released Thursday.
Although the price ceilings apply to companies that generate electricity in California, the order does not affect the hefty sales by out-of-state generators.
It imposes only loose restrictions on brokers, or marketers, allowing them to continue selling and reselling electricity for escalating prices before it reaches the state’s market for its final purchase.
Moreover, the order does not cover periods when power supplies are not officially deemed to be dangerously low. That is a problem, according to California’s grid operators, because suppliers have been able to boost prices even when there was no severe supply crunch.
Gov. Gray Davis blasted the order as a “shell game” that appears to offer aid to California but ultimately is empty. Davis was particularly critical of a provision that requires the state to give up some control of its transmission grid in exchange for the price protections.
A central component of the governor’s multibillion-dollar plan to restore order to the unruly electricity market is the purchase of the grid from the state’s ailing utilities: Southern California Edison, San Diego Gas & Electric and Pacific Gas & Electric, which has filed for bankruptcy protection.
“They had a chance to provide real relief for energy prices this summer,” Davis said of the federal regulators, “and they simply blew it.”
Evidence of the market’s seemingly unending volatility can be found every day. On Wednesday, the state paid $90.3 million to buy electricity for customers of Edison, PG&E;, SDG&E--roughly; double the daily costs of a month ago.
Those runaway prices will not be derailed by the federal commission’s long-awaited “price mitigation” order, said Severin Borenstein, director of the University of California Energy Institute. “This one is not going to work.” Borenstein said the state could end up paying as much as $1 billion a week during the high-temperature, high-demand summer months.
The federal order--approved 2-1 by the three-member commission Wednesday--limits the price that power generators can charge when the state’s electricity reserves slip to less than 7%, a so-called Stage 1 emergency. FERC staff originally had proposed price constraints only during Stage 3 emergencies, when the state is within 1.5% of running out of available power and rolling blackouts are imminent.
Some Say the Plan Is a Good One
Under the commission’s plan, the top price paid for power during electricity emergencies would be set by the least efficient generator, providing bigger profits for newer, more efficient generators. Generators also would be required to offer available power to California during an emergency.
The commission said the plan strikes a balance between consumers and energy producers by bringing price relief to a “dysfunctional” market while providing incentives for generators to invest in California’s future.
“California consumers can rest assured that the commission has been attentive to their problems, and has worked tirelessly to ensure that they receive necessary relief in a manner that doesn’t compound current problems or undermine longer term solutions,” FERC Chairman Curt Hebert said in a statement Wednesday.
On Thursday, with the details public for the first time, the commission order won praise from power sellers for being short-lived--it expires in May 2002--and market-based.
“It seems to recognize the fact that we need to bring not only stability but new supply to the California market,” said Brian O’Neel, spokesman for Mirant Corp., which bought three San Francisco Bay Area power plants from PG&E; after California moved to deregulate its electricity industry in 1996.
Rep. Doug Ose, a Sacramento-area Republican who chairs the House Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs, called the federal order a step in the right direction.
By setting the price cap to cover the expenses of the highest-cost power plant, he said, the plan “ensures that all generators can financially stay on line, prevents excessive prices, and rewards those low-cost, energy-efficient generators.”
But critics say the order allows marketers, or brokers, to avoid those price caps. All they must do is justify their prices based on what they paid, not how much the power cost to produce.
“Isn’t that a loophole big enough to drive all the power through?” said S. David Freeman, who resigned as general manager of the Los Angeles Department of Water and Power this month to serve as an energy advisor to Davis.
The order, Freeman said, “says in principle that California is right: A completely unrestrained market is no good. But it looks like a fig leaf, like a penny on the dollar.”
Frank Wolak, a Stanford University economist, called the federal order “almost meaningless” because power plant owners, by cutting deals with marketers, can avoid both price caps and a provision of the order that requires them to sell any available electricity when California grid operators need it to keep the state from plunging into blackouts.
Mike Florio, senior attorney with the Utility Reform Network, predicted that power sellers would create a “daisy chain,” selling to one another to drive up prices.
Only the last company in the chain, which sells to grid operators at the California Independent System Operator, would be limited by the federal order from making much of a profit.
“All the money would have been made at the earlier steps in the chain,” said Florio. “There are all kinds of ways to manipulate this.”
“They’ve probably already got the diagrams on the board in the trading room to figure out how to defeat this,” he said.
In Washington, “inadequate” was the word commonly used by California Democratic lawmakers to describe their reaction to the federal order.
“FERC once again has completely missed the opportunity to assist California,” grumbled Rep. Sam Farr (D-Carmel), leader of the California Democratic House members.
Democrats pledged to press ahead with congressional legislation that would temporarily impose cost-of-service based rates on wholesale power sales in the West.
“I have been waiting for FERC to act strongly for many months but, instead, it has taken action that appears more for public relations than to solve this crisis,” said Sen. Barbara Boxer (D-Calif.).
Farr complained that the FERC order “only applies during power emergencies. This is totally inadequate. We have excessive rates at all hours.”
The order comes as temperatures, consumption of power for air-conditioning and electricity prices are rising. The state has emptied its budget of at least $5.2 billion since mid-January to buy electricity for the customers of Edison, PG&E; and SDG&E.; Efforts to get the utilities back into the business of buying power and plug the hole in the state budget have been stalled in the Legislature and Bankruptcy Court.
On Thursday, state Senate Budget Committee Chairman Steve Peace (D-El Cajon), concerned about the slowing economy and the cost of the energy crisis, called on committee members to develop a list of cuts of between $2 billion and $4 billion, out of a state budget that will exceed $100 billion. Lawmakers are working on the budget for the 2001-2002 fiscal year starting July 1.
Peace said the cuts will be far deeper if California lawmakers fail to approve legislation necessary for Treasurer Phil Angelides to obtain loans and sell bonds to finance electricity purchases.
“If we don’t get the long-term borrowing authority, then we’ve got a problem,” Peace said. “We’re $6 billion out in cash.”
Legislators in Sacramento said the limited reach of the FERC action made it all the more urgent that the state reach a deal to purchase the utilities’ transmission grid within the next 30 to 45 days. Davis has proposed such a deal as a way to infuse the utilities with cash and get them back in the business of buying power for customers.
Searching for a long-term solution to the energy crisis, a divided Assembly approved legislation Thursday to forcefully thrust California into the power business by creating a state power authority.
Idea for a Power Authority Praised
Assembly Speaker Bob Hertzberg (D-Sherman Oaks) and other leaders of the lower house’s Democratic majority praised a power authority as a way for California to place a check on the volatile free market forces that have caused electricity prices to skyrocket in the state.
“Never again should we allow California to be put in such a perilous position by out-of-state cartels,” said Assemblyman Dennis Cardoza (D-Merced).
But Assembly Republican leader Dave Cox (R-Fair Oaks) and other members of the GOP minority strongly opposed the power authority idea, arguing that the state had proven inept at handling the energy crisis and further government intervention would only make matters worse.
“Is this really what you want? Do you want to socialize the energy system in California?” Cox said, predicting that the agency would quickly become “a monster in the state.”
The bill by Senate leader John Burton (D-San Francisco) would create a state power authority modeled after similar government bodies in New York and Nebraska that would build and run power plants and help others to do so.
In other action in Sacramento, a bill that would speed construction of power plants was defeated in the Senate on Thursday after Republican lawmakers balked at a late addition that would allow workers sent home because of unexpected power outages to collect unemployment insurance.
The measure, by Sen. Byron Sher (D-Stanford), went down on a vote of 26-11--just one vote shy of the two-thirds majority needed to send it to Gov. Davis.
The Senate, however, agreed to allow Sher to bring the measure back for another vote.
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FERC Order’s Provisions
The Federal Energy Regulatory Commission order:
* Limits the price certain power plant owners can charge for electricity when California’s power reserves are so low grid operators declare a Stage 1, 2 or 3 emergency
* Bases the price limits on the cost to run the most inefficient, expensive power plant selling electricity that day to grid operators
* Allows marketers--companies that do not produce electricity but simply buy and sell it--to sell power to grid operators at prices higher than the price limits set for generators
* Takes effect May 29 and lasts one year, by which time the commission figures new power plants will ease California’s power supply problems
* Forces all power plant owners, even those that are publicly owned, to sell any available electricity they have when grid operators ask for it
Source: Federal Energy Regulatory Commission
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Dan Morain, Jenifer Warren, Miguel Bustillo and Julie Tamaki in Sacramento and Richard Simon in Washington, D.C., contributed to this story.
