New Price Caps Not a Deterrent, Power Firms Say

The expanded electricity price limits approved by federal regulators could squeeze big energy traders but will probably not discourage power plant construction in California, electricity producers said Tuesday.

Power plant owners and marketers said they had not had time to digest the 53-page order and thus could not say exactly how it would affect California and the 10 other Western states it covers.

But the companies generally asserted Tuesday that the order would not deter them from investing in the vast, power-starved Western region--though they have often raised such a prospect in arguing against price controls.

Whatever its long-term effects, Monday’s order by the Federal Energy Regulatory Commission appeared to have an immediate effect in dampening prices in California’s volatile daily, or spot, market.

The order does not take effect until today, but the prospect of new measures aimed at limiting prices appeared to tame markets Tuesday. Californians used more electricity at the late-afternoon peak than on any day this year, yet market prices hovered around $100 a megawatt-hour.

That is well below the average of $284 a megawatt-hour that the state paid for electricity from January through April, with prices soaring as high as $1,900 at times of tight supply.

“All the markets in the West have come down,” said Mike Wilczek, senior power markets reporter for Platts, the energy market information division of the McGraw-Hill Cos. “It’s bearish news.”

Nevertheless, several generators minimized the effects of the FERC order, contradicting earlier warnings from some industry sources and officials of the Bush administration who consider price limits to be impediments to future investment in power plants.

“Calpine will have no problem operating under this order,” said Joe Ronan, vice president of regulatory affairs for San Jose-based Calpine Corp., which has three power plants under construction in California and plans to build at least three others.

The federal order lasts only until September 2002, he said, and because it sets prices based on the cost of running the most expensive, inefficient power plant in the market, it should guarantee the owners of modern plants a profit.

Another company planning major investments in California, Duke Energy Corp. of North Carolina, said it will not be seriously affected by the federal order because it has sold the output of its four California plants well into the future.

“We’ve already forward-sold 90% of our generation for 2001 and 70% for 2002,” company spokesman Pat Mullen said.

Reliant Energy Inc. of Houston, which owns five power plants in California, was not so sanguine about the federal order, but it has not backed away from plans to install more generators.

“We remain committed to California, as hard as it is to do business here today,” spokesman Richard Wheatley said. “We have plans that are on the drawing boards for at least one, possibly two projects.”

On Monday, Reliant Chief Executive Joe Bob Perkins called the FERC action “more of a political response” than an acknowledgment of the gap between electricity supply and demand in California.

“Price caps don’t work,” Perkins said, and he warned California consumers against assuming that the energy crisis is over simply because wholesale electricity prices have recently dropped to their lowest levels in a year.

Prices are falling because of mild weather, not price controls, he said.

“Without sound economics that increase available supply and reduce peak demand . . . consumers can only hope for favorable weather and look forward to [rolling blackouts],” Perkins said.

Energy analyst Frederick Schultz of Raymond James & Associates in Houston called the FERC order “a nonevent to the California generators” because so much of their power is now being sold through long-term contracts.

However, every long-term deal reduces the size of the electricity market, which supplies about 20% of California’s needs. And that, in turn, limits trading opportunities for such firms as Enron Corp., which profit on the daily market’s ups and downs, Schultz said.

Enron representatives did not respond to calls for comment.

The federal order imposes round-the-clock price curbs on wholesale electricity sold in 11 Western states that are connected by transmission grids.

Under the order, traders say, market prices will probably hover around $100 a megawatt-hour, depending upon the price of the natural gas that fuels most of the state’s electric generating plants. Though that is well below recent market prices, it is higher than the average of about $32 a megawatt-hour that California utilities paid in 1999, before the state’s deregulated market spiraled out of control.

The FERC order dictates that the price for spot market electricity across the West will be based on the cost of producing one megawatt-hour of power at the least-efficient plant selling to California grid operators. May 31, when a previous FERC order based on a similar formula took effect, the price set was $127 a megawatt-hour.

Vogel reported from Sacramento, Mulligan from New York.