Emergency-Power Price Cap Is Working, Data Indicate

TIMES STAFF WRITER

A widely criticized federal order to limit California power prices significantly reduced rates for last-minute electricity purchases during two power emergencies last week, new data show.

Also Thursday, more evidence emerged of a broad downward trend in California energy prices--well beyond what can be attributed to the consequences of government intervention.

The unexpectedly positive data on the initial effect of the Federal Energy Regulatory Commission's price limits immediately touched off a stormy debate.

The agency's besieged chairman claimed vindication. But critics said electrical generators were already finding loopholes in the price limits and argued that the order needs more toughening to be truly effective.

The FERC order--which went into effect May 29--resulted in a 64% cut in the wholesale price of power immediately after an emergency was declared the next day, according to data posted on the California Independent System Operator's Internet site.

Prices dropped from $300 per megawatt-hour just before noon to $108.47 the following hour after Cal-ISO, the state's power grid operator, declared an official emergency that triggered the federal price limits.

A similar scenario unfolded during another declared emergency on May 31. Prices dropped from $187 per megawatt-hour before the emergency declaration to $66.51 immediately after.

During the May 31 emergency, power plant owners in California began selling more electricity to out-of-state buyers. That electricity can later be sold back to the state by out-of-state marketers, who are not as tightly controlled by FERC's order. Market watchers call that "megawatt laundering."

"We saw an increase in exports pretty quickly as a result of that" FERC order, said Ray Hart, deputy director of the state Department of Water Resources, in an interview. "So that clearly shows they're looking for ways around it. As soon as they export it, they bring it right back through a marketer, and then the marketer has a price that's not challengeable under the FERC order."

FERC Chairman Curt Hebert disputed that, saying the agency can order marketers to justify their prices.

Meanwhile, the continued across-the-board drop in California power prices is beginning to attract at least as much attention as the controversy over FERC's actions.

According to analysts at Platts Electric Utility Week, which monitors the industry, forward-looking prices for August delivery of electricity in Southern California have fallen 69% since April. Prices for August electricity stood at $220 per megawatt-hour on Wednesday, down from $700 in April.

The figures are significant because they apply to purchases made under long-term fixed contracts, not just the emergency purchases made by Cal-ISO and subject to the FERC order.

Market watchers at Natural Gas Week reported that gas prices at a key pipeline junction on the California-Arizona border had dropped precipitously. Prices fell from $8.16 per million British thermal units on Wednesday to $5.93 at the close of business Thursday--a 27% plunge in one day.

High natural gas rates have been widely blamed for aggravating California's power crisis, since gas is the fuel most commonly used by electricity generators.

At FERC, a small federal agency that functions like a national utility commission, Hebert said the lower prices during last week's power emergencies show that the commission's efforts are finally paying off.

"Thus far, what we are seeing is that the price mitigation order is bringing real-time prices down, which is exactly what I said it would do," Hebert said in an interview.

But Cal-ISO officials said it was too soon to break out the champagne. Indeed, the state is threatening to sue Hebert's agency for not doing enough to restore "just and reasonable" prices in California.

"It is too early to make any conclusions at this point," said Stephanie McCorkle, a Cal-ISO spokeswoman. "We just feel we need more days of emergencies to see how it is really working."

And there were signs that generators were looking for ways to sidestep the FERC order.

The federal order relies on a complex formula to limit the price power plant owners can charge whenever the state's electricity reserves are depleted. The maximum price allowed in any given hour can vary according to factors included in a formula. The FERC order requires California generators to offer all their available power for sale when Cal-ISO declares an emergency.

But by contracting to sell electricity a day or more in advance, generators can essentially tell Cal-ISO they have no power available to sell in an emergency. Such a maneuver becomes all the more attractive if prices being paid in surrounding states are higher than the controlled price offered in California during an emergency.

Mike Wilczek, a senior market reporter for Platts, said that on Wednesday of last week, when the first emergency was declared under the FERC order, generators were unsure how to respond. But by the second emergency on Thursday, a strategy seemed to be emerging.

"People were selling ahead to try to get away from the order," Wilczek said. "They wanted to avoid being 'mitigated.' In the northern part of California, we saw some hours in which the ISO couldn't get any offers, even when they [generators] were being forced to sell into the ISO."

Hart said his market watchers observed the same ploy. The Department of Water Resources is purchasing power for the state's financially hobbled utilities.

Rep. Doug Ose (R-Sacramento) said FERC needs to toughen the order by extending it to all hours--not just periods covered by power emergencies--and to every Western state. Ose said his proposal is picking up support among Republicans who oppose Democratic demands for FERC to impose fixed price caps on wholesale electricity in the West.

"The evidence is that the FERC order is working," Ose said. "If it works, then let's use it. They need to take their order and extend it. Let's take it to all the Western states. Twenty-four/seven coverage needs to be in there also."

Paul Joskow, a Massachusetts Institute of Technology economist who supports temporary price caps, said strengthening the FERC order may prove to be a workable compromise to rein in costs for the rest of the summer. "It's getting late in the game, and expanding the number of hours of mitigating, making sure there aren't loopholes, would be a very productive thing to do," he said.

FERC Chairman Hebert said the commission plans to review the order, but he would not commit in advance to suggested changes. "My position as chairman is not to follow House or Senate members, or anybody else, but to do what is in the best interest of America," he said.

Meanwhile, power generators complained the FERC order is forcing them to sell at rates below their costs. "We had no power plants that were producing power at a cost of $108 on Wednesday," said John Stout, a vice president of Reliant. "Some were in the mid-$100s, others were above $200."

Reliant is urging FERC to adopt a new formula to more fully account for higher natural gas prices in Southern California.

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Times staff writer Nancy Vogel in Sacramento contributed to this story.

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