State Objects to Power Pricing Formula
California air quality officials charged on Thursday that a federal order to contain electricity prices is vulnerable to manipulation and creates powerful incentives for energy companies to increase pollution to boost profits.
The order by the Federal Energy Regulatory Commission, which took effect May 29, places a limit on how much generators can charge when the state’s electricity reserves are depleted. The price is based in part on the maximum cost incurred by any of them to generate a megawatt of electricity.
State clean-air officials object to that pricing formula. In addition to fuel and labor costs, power companies can include prices paid for air pollution credits, as well as the penalties and fees assessed for producing excessive emissions from power plants running to keep the lights on.
Air quality officials are concerned that may entice companies to manipulate the price of the credits in order to inflate their overall base costs, thereby raising the profit bar for everyone. The issue is crucial, because FERC is scheduled Monday to consider expanding the price limits to all time periods.
“Nobody else that we can figure out would benefit from this” but power generators, said Barbara Baird, legal counsel for the South Coast Air Quality Management District. “The power companies would all be able to recover that cost, regardless of whether they actually incurred that cost.”
Ironically, power plants no longer are required to buy and sell credits to exceed the standards after Gov. Gray Davis granted them special relief earlier this year. Nonetheless, power companies, among others, continue to actively trade the credits on the open market. That practice, air quality officials say, is driving up the costs of the credits and making it harder for other industries to buy them.
Because of increased electricity generation, the price of pollution credits traded in the Los Angeles region has risen astronomically in the past year. Credits that traded for about 25 cents per pound of pollution a few years ago now fetch roughly $40 per pound.
Mike Scheible, deputy executive officer for the state Air Resources Board, says the federal order also creates incentives for generators to use high-polluting equipment, which is more expensive to operate, in order to boost the amount they can charge for electricity when rate limits affect pricing.
“It’s unfair to make California ratepayers pay more for electricity to mitigate their emissions. It doesn’t pass the straight-face test for being fair,” Scheible said.
Since California power prices began to escalate last year, third parties have bought pollution credits and then sold them back to the power companies at a steep profit, air quality managers told state senators at a hearing Thursday.
Carol Coy, deputy executive officer at the AQMD, said one company, Phoenix-based Pinnacle West, reported a $412,500 air emissions credit purchase on March 12, then sold the same credits March 29 for $1.1 million.
Company spokesman Alan Bunnell said the transaction was perfectly legal and not dissimilar from other trades that routinely occur in the emissions trading market.
But state Sen. Joe Dunn (D-Santa Ana), chairman of the Senate select committee inquiring into the matter, said wholesalers often blame the cost of the credits in part for the high price of electricity. He said he is concerned that there has been “a laundering of NOx [nitrogen oxide] credits” that’s driving up the cost of both the credits and electricity. Nitrogen oxide is a smog-forming gas caused by fuel combustion.
“It actually would be beneficial for energy companies to have those [smog credit] costs go higher,” said state Sen. Debra Bowen (D-Marina del Rey).
Air quality officials aired their objections on Thursday before Dunn’s committee, which is investigating whether companies manipulated California power prices for greater profits after the state deregulated electricity in 1996. In recent weeks, it has begun to subpoena documents from various energy companies and utilities.
The federal order regulating prices has been widely criticized in California as full of loopholes that will allow power producers to continue making exorbitant profits. During official power emergencies spurred by shortages of electricity, it requires generators to charge prices based on a complex formula that includes pollution mitigation costs and the price of natural gas.
Air quality officials have also filed objections with FERC. The federal regulator has been reluctant to interfere in the energy crisis and has continued to defend the free market as a solution to the state’s power problems, but it is under increasing pressure to act.
The state Senate committee, known as the Select Committee to Investigate Price Manipulation of the Wholesale Energy Market, was also expected to hear testimony Thursday from Southern California Edison. However, in a turn of events that surprised and angered lawmakers, the utility refused to send a witness. It also sent a letter stating it would not comply with a formal request to produce documents.
“At present, our company’s resources are devoted to survival,” a company lawyer wrote, adding that “our law department is stretched to the limit.”
