Energy Secretary Rejects Calls for Power Price Caps

Energy Secretary Spencer Abraham rebuffed calls for limits on wholesale electricity prices Friday, leaving some Western governors sharply critical of the Bush administration and predicting energy shortfalls this summer, even with California’s new $10-billion power-buying program.

“Is it a crisis? Well, if it’s not a crisis we are absolutely vulnerable to it--it is that serious. . . . The rates may in fact go through the roof,” Idaho Gov. Dirk Kempthorne said as eight Western governors settled on a short-term strategy for managing the region’s electricity dilemma.

Gov. Gray Davis was greeted with warm congratulations for California’s move to help ease wholesale price inflation in the West by making billions of dollars available to negotiate cheaper long-term power contracts. That action was accompanied by an $800-million conservation program.

But utility operators and nearby states whose consumer power rates have as much as doubled in recent months continued to apply quiet pressure on California to go beyond the 9% temporary rate hike approved by the Public Utilities Commission and make electricity users feel the pinch for higher and peak-hour power usage.

“We need to put in place rate structures that give consumers appropriate signals about the consumption of electricity,” said Oregon Gov. John Kitzhaber.

Though the governors did not directly address the issue of across-the-board rate hikes, they adopted a statement that said rate reforms are “the first step in empowering customers to make wise decisions about their energy use.” That could include rewarding employers who shift consumption to off-peak power usage hours, according to a 13-point program of short-term measures to ease the electricity pricing crisis.

The governors also called for following California’s move toward long-term, lower-cost energy contracts, streamlining of permits for new power plants and expanding programs to compensate energy users--from farmers to factories--who temporarily give up their power allocations. They continued the push for greater conservation measures.

“My office is so dark you can almost develop film in it,” Davis declared, trumpeting the state’s program of incentives for electricity demand management and mandatory power cutbacks for businesses.

“Our employees now refer to it as mood lighting,” Intel Vice President Jim Jarrett said of his company’s 50% reduction in electric lighting in California.

Davis’ reception was a remarkable contrast to the California bashing that has characterized most regional gatherings on the electricity crisis. Although state officials in the Pacific Northwest have loudly blamed the problem on California’s failed deregulation plan and balked at federal orders to sell power to beleaguered California utilities, the governors seemed to make a point of shaking Davis’ hand, commending California for this week’s energy-buying bill and emphasizing that the power crisis is a regional problem.

“I’m pleased that California is stepping up to the task, the challenge,” Washington Gov. Gary Locke said.

Davis, in turn, was conciliatory, thanking “the forbearance and sacrifice of the citizens of Washington and Oregon” in shipping power to California and pledging to boost transmission capacity to pay back the favor to its Western neighbors.

At the same time, Davis pointed out that California’s economic engine has enlivened the economy of the entire West.

But it was the issue of limiting wholesale electricity prices that captured most of the governors’ attention, as at least eight governors--four Republicans and four Democrats--endorsed calls for “cost-plus” pricing on wholesale electricity, in which generators would be guaranteed their direct and indirect costs plus a reasonable profit.

Kempthorne’s opposition, coupled with negative signals from Arizona Gov. Jane Dee Hull, blocked the proposed price caps from inclusion in the governors’ resolution despite vocal, repeated endorsements from the rest of the group.

Abraham and Federal Energy Regulatory Commission Chairman Curt Hebert Jr. both sounded discouraging notes about cost-plus pricing, saying it would stand in the way of investment in new power-generating facilities--the most crucial shortfall in the energy equation.

Abraham said he has “great concerns” about any caps on wholesale electricity prices. “At a time when demand is a very serious challenge for us this summer, anything that puts disincentives in place . . . has to be looked at very closely,” Abraham said.

He said more than half the power consumed in the West comes from generators, such as those in Canada, outside the jurisdiction of the FERC.

Hebert said cost-plus pricing creates “an artificial marketplace. What we’re trying to do is move beyond that. . . . By capping the spot market, you penalize those areas that have made good choices [and negotiated long-term contracts],” he said.

But even Davis, who has vowed to move all but 5% of California’s energy buying away from the spot market, still said temporary cost-plus pricing is advisable. “I believe some form of limitation on wholesale prices is necessary to protect the West,” he said.”

FERC commission member William Massey went a step further, saying the commission should “immediately open up an investigation into wholesale prices and give serious consideration to regionwide wholesale price relief.”

“A hands-off approach is both unlawful and politically unacceptable,” Massey said.

The Democratic governors of Washington and Oregon were particularly critical of Abraham’s reluctance to consider price limits.

“For the Bush administration to say they’re only focusing on increasing supply that will take seven or eight years to bring on line is too long. . . . Are we then to ask our citizens to endure several years of very high, unjustified rates for electricity? I don’t think our economy can wait that long,” Gov. Locke of Washington said. “I’m disappointed in Secretary Abraham’s statement that he does not support any kind of price controls, not even cost-plus. . . . Basically, it’s the Bush administration abandoning the Western United States.”

Oregon’s Kitzhaber also said he was unhappy with the Energy secretary’s response. “I’m very disappointed that the secretary rejected that so abruptly, without having the opportunity for a dialogue,” he said.

Most of the governors--many of whom have grumbled at federal orders to sell California electricity over the past few months--went out of their way to applaud Davis and the package approved by the California Legislature this week.

“We commend Gov. Davis for recent actions he has taken,” said Kempthorne, a Republican and former U.S. senator who chaired the meeting. Abraham expressed similar support: “He [Davis] told us: Give us two weeks; we’ll get the job done. They got the job done,” he said.

“We also recognize the problem is not just California’s problem . . . we all face the challenge,” Abraham said. “I think it’s pretty clear that America’s national security as well as its economic security is highly dependent on its energy security.”

Though no governors openly raised the issue of consumer rate increases in California, Davis was questioned by local reporters about the state’s failure to implement permanent rate hikes, and several of the governors’ staffs were critical.

Seeing consumers in California pay more for their electricity “is very important,” said Dana Middleton, Locke’s spokeswoman. “Certainly, if the people in Washington state are facing increases anywhere from 10% to 50%, it hardly seems sane and rational to not have a comparable situation in California.”

But Davis emphasized that Californians have long paid a higher rate than residents of nearby states, and their natural gas prices--about half their energy bills--have risen 200% to 300%.

In addition to the temporary 9% increase approved by the PUC, the energy plan approved this week would allow rate increases for residential customers who use substantially more than “baseline” power levels for their area.

“I believe our customers are getting price signals to conserve,” Davis said.