Regulators OK Price Limits on Power in West

TIMES STAFF WRITERS

Federal regulators Monday imposed round-the-clock price limits on electricity throughout the West, significantly expanding their previous efforts to check power costs and winning support from at least some of their critics.

The Federal Energy Regulatory Commission, once deeply divided over how to help California, approved the plan on a unanimous vote, with three Republican commissioners joined by two Democrats, including FERC's most vocal dissenter.

FERC's action will have little immediate effect on electricity consumers in California because retail rates are set by the Public Utilities Commission and do not fluctuate with market changes. But state taxpayers ultimately will benefit if the plan succeeds in reducing the cost of electricity now being purchased by the state.

In addition to making the plan apply at all times and across the region, FERC confronted the issue of "megawatt laundering," a heavily criticized loophole in its previous order. Under the new rules, generators can no longer circumvent California price curbs by transmitting power out of state and then importing it back at higher rates.

"Clearly they put a lot of muscle into this," said Mark Cooper, research director at the Consumer Federation of America and a leading FERC critic. "There is no doubt about why they got a 5-0 vote: They took a whack out of the monopoly rents."

Like others, Cooper said he still has concerns about elements of the complex plan, including a 10% allowance that FERC tacked onto the maximum rate that electricity generators can earn during power emergencies. Nonetheless, "California taxpayers will benefit," Cooper concluded.

The plan also calls for a meeting of the various parties in California's crisis to resolve issues of refunds and unpaid generator bills and to chart a future energy course for the region. That conference, to be overseen by a FERC judge, is expected to be held later this month.

The new order will go into effect almost immediately, one day after its official publication, which is expected today. The year-round price curbs are set to expire Sept. 30, 2002.

FERC stopped short of satisfying demands by California Gov. Gray Davis and others for hard price caps on wholesale power. Davis, a Democrat, wants FERC to return to the traditional way of setting electricity rates, in which generators were allowed to recover their costs plus a specified margin of profit.

FERC commissioners and Republican lawmakers on Capitol Hill hope the agency's more market-oriented plan will be embraced as a politically acceptable alternative, particularly if it succeeds in stemming price spikes.

"Realistically, this is the best we're going to get out of FERC," said Severin Borenstein, director of the University of California Energy Institute in Berkeley. "It is now time to turn the focus away from the federal government and turn it much more heavily to conservation, because we really can make this problem go away this summer with conservation."

Davis, who has threatened to sue FERC over its approach to rate regulation, offered a measured reaction to Monday's move.

"Today, the FERC has finally taken a step in the right direction, but there is much more they should do," Davis told reporters. "This order may well have some loopholes, as the first one did, and if that's the case they need to be closed immediately."

Monday's FERC vote was preceded by more than two hours of suspense, as the board meeting was delayed without explanation and the two Democratic commissioners were nowhere to be seen as lobbyists, staffers, reporters and other observers waited in a packed hearing chamber. Commissioner William L. Massey, a Democrat and FERC's most activist member, finally appeared with a final draft of the order.

"This order moves strongly in a direction I have been advocating for eight months," Massey said. "It includes price controls that apply throughout the West, 24 hours a day, seven days a week. It eliminates any opportunity for megawatt laundering."

FERC Chairman Curtis L. Hebert Jr. said the plan preserved free market principles by allowing prices to move within a range. Hebert said that will continue to provide an incentive for investment in new power plants. "Consumers are better off if supply and prices are based on market mechanisms rather than on bureaucratic fiat," Hebert said.

Although political sentiment has clearly shifted in favor of stronger federal intervention, Hebert said the commission arrived at the new plan on its own. "I had no conversations with the White House," said Hebert, whose agency is supposed to be independent of the administration. A spokeswoman said the White House wants to study the order before making a statement.

In Washington state, Gov. Gary Locke, a Democrat, said he was encouraged by the "apparently positive steps" taken by FERC.

"Without price regulation, we can expect that in the coming months we'll once again see unjustified high prices at the expense of our nation's prosperity," Locke added in a statement.

The FERC plan covers sales of electricity for immediate delivery--the "spot market" that supplies about 20% of California's needs. It is the market the state turns to when it is desperately trying to keep the lights on.

FERC's original plan limited prices that generators could charge only during power emergencies called by California's grid operator, Cal-ISO.

The limit was set as the cost of producing electricity at the least efficient plant called on to run in a given hour. The idea was to continue to reward newer, more efficient plants, thereby increasing supply.

The old plan enjoyed some success during power emergencies last month. The new plan extends its reach and closes several loopholes. It also introduces some controversial elements that consumer groups disagree with.

Under the new plan:

* The formula for calculating the price limit will be simplified in a way that experts predict will save the state money. The new formula will be based on the cost of fuel, plus an allowance for operations and maintenance. Emission costs and plant start-up charges, included in the previous formula, will now be treated differently.

* In another formula change, generators will receive a 10% add-on to the maximum price that can be charged during power emergencies. Cooper said this add-on will restore some--but not all--of the money the generators would lose because of the more fundamental changes in the formula. Sen. Dianne Feinstein (D-Calif.) called it a "fundamental weakness" of the order.

* The price limits will remain in effect during times when there is no power emergency. During such times, the maximum price will be 85% of the highest hourly price in effect during Stage 1 of the previous emergency. Stage 1, the onset of a power emergency, occurs when reserves fall below 7% of anticipated need.

* Energy marketers--freewheeling traders who have come to the fore in the era of deregulation--will not be allowed to charge more than the maximum price set by Cal-ISO.

To expand the reach of the plan beyond California, FERC ordered that power sellers throughout the West cannot be paid more than the maximum price in effect in California at any given time.

In effect, the spot market price for electricity applied across the West will be set in California. This should eliminate any incentive for generators to hold back from selling power to California to avoid price limits.

However, it may create unintended consequences that send FERC back to the drawing board.

Gary Ackerman, executive director of the Western Power Trading Forum, said the federal order hurts the Pacific Northwest while benefiting California.

In the winter, when demand for electricity drops in California but rises in Washington and Oregon, the California price could be too low to encourage power plant owners to supply the Pacific Northwest.

"My concern is that when the market bifurcates between California and the Pacific Northwest, as sometimes happens, the price signal isn't there and you'll get weird results," said Ackerman.

"I suspect this order will be revisited several times before September 2002," he said.

At least two FERC commissioners said they are open to taking more aggressive action, particularly to ensure that California natural gas prices return to levels more in line with the rest of the country. Natural gas is the main fuel used by electric power plants, and until recently, prices in California have been much higher than elsewhere.

Commissioner Patrick H. Wood III, a new Bush appointee, said he saw no reason why prices for California delivery should be many times higher than the cost of gas at producing basins in Texas, New Mexico and Canada. "I would be willing to revisit this key issue," said Wood, with Massey concurring.

FERC has launched a major investigation of natural gas prices after allegations that a Texas company, El Paso Corp., manipulated the Southern California natural gas market last year.

Several FERC officials also say they expect that the agency will take a much closer look at standards for granting giant energy companies the right to sell power at market rates. California is opposing the renewal of the privilege for five large marketers. Internal critics, including Massey, say FERC's current standards are not strong enough to prevent a company from being able to game the market.

California Republicans--caught between the state's needs and the Bush administration's support of free markets--were relieved to see FERC taking a more aggressive stance.

"Today's decision to expand the FERC market mitigation order is the most significant step the federal government has taken to bring immediate relief to California consumers," said Rep. Doug Ose (R-Sacramento). "I continue to maintain that today's action is the middle-ground solution between those who call for cost-based price caps and those who want a free market."

*

Alonso-Zaldivar reported from Washington and Vogel from Sacramento. Staff writer James Gerstenzang in Washington contributed.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

FERC Plan at a Glance

* The plan applies to wholesale purchases of electricity for immediate delivery, also known as the spot market.

* California's grid operator, or Cal-ISO, administers the federal plan in the state.

* Using information on fuel costs and other data, Cal-ISO calculates each plant's cost of producing power.

* All generators that transmit power through the California grid must sell what they have available when Cal-ISO requests power.

* During a power emergency, Cal-ISO sets a top price that generators can charge.

* This price is based on Cal-ISO's calculation of the cost of producing power at the least efficient generator called on to run. More efficient plants can still earn a profit.

* Power marketers--companies that trade electricity contracts--have to accept the top price set by Cal-ISO.

* Generators across the West can be paid no more than the price set by Cal-ISO. This is intended to prevent generators from selling power out of state to get around controls in California.

* The price limits remain in effect until Sept. 30, 2002.

*

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