State Renews Demand for Power Price Relief
California officials launched a full-scale formal effort Friday to persuade the federal government to act more forcefully to push down wholesale electricity prices, saying that existing plans have “utterly failed.”
At the same time, Vice President Dick Cheney strongly reiterated the Bush administration’s opposition to any price caps. Price controls are “a mistake,” he told a Washington audience. “It’s not a solution; it’s adding to the problem,” he said. “There isn’t anything that can be done short term to produce more kilowatts this summer.”
State officials have repeatedly demanded price controls, only to be rebuffed, and Cheney’s remarks illustrate the depth of the administration’s opposition to the idea.
But the politics of the energy crisis have changed since the last time the Federal Energy Regulatory Commission rejected broad price caps. The Senate is about to move from Republican to Democratic control, giving opponents of the administration’s energy policies a much more potent platform; the Senate has confirmed two new members to the five-member FERC; and the existing members of the commission have shown doubts about whether deregulation of energy prices is working.
Gov. Gray Davis described the state’s actions--detailed in a set of filings delivered Friday to FERC--as a “full frontal attack” on what he terms the commission’s industry-friendly policies.
“This agency has failed its duties miserably,” he said. “It’s time for FERC to wake [up] and take action on a crisis that threatens our nation’s economy.”
With the governor’s backing, the California Public Utilities Commission, California Independent System Operator and Electricity Oversight Board said FERC’s actions to date have failed “to extinguish the fire that is rapidly consuming California’s economy.” They petitioned the commission to reconsider its April 25 order to limit prices during power shortages in California.
A second petition asks the federal government to revoke the rights of Oklahoma-based Williams Cos. and Virginia-based AES Corp. to sell electricity at whatever price the market will bear.
The companies’ right to do so was granted by FERC three years ago, when California opened its $28-billion electricity industry to competition, but that right has come up for renewal. State officials said they will similarly challenge other power sellers, arguing that it is illegal for FERC to allow the companies to sell at whatever price the market will bear when the market is obviously broken.
The state’s filings and the evidence about wholesale prices they contain are sure to be fodder for Davis’ scheduled meeting Tuesday with President Bush in Los Angeles.
California’s petitions also come the day that Bush won Senate confirmation of his two appointees to FERC. With the current members split 2 to 1 on last month’s FERC order, the new commissioners--Pat Wood III of Texas and Nora Mead Brownell of Pennsylvania--would cast the deciding votes on California’s request for a rehearing. In their confirmation hearings, both Wood and Brownell expressed support for more aggressive federal efforts to protect California consumers.
Since last June, after prices began to soar in California’s partly deregulated electricity market, Davis has beseeched the federal agency to take swift action, including imposing price caps. The agency is charged by federal law with ensuring that prices for wholesale electricity are just and reasonable.
But its commissioners have declined to cap prices across the West’s interconnected electrical transmission system. Instead, they have attempted to stabilize wholesale power costs through its April 25 order that would limit how much power sellers can earn whenever California’s reserves have slipped to 7% or less, which triggers what is known as a Stage 1 emergency.
But some economists have concluded that California’s market is so flawed that sellers are able to boost prices even when electricity demand is not particularly high, such as at night or on weekends.
State officials have also faulted the federal plan for exempting marketers--companies that trade electricity but do not generate it--from the limited price caps. Such a loophole, they say, would allow power producers to escape the caps by making arrangements with marketers--a process called “megawatt laundering.”
“FERC’s pricing plan is laced with loopholes,” Davis said in a written statement. “It’s simply a fig leaf that does nothing to address the impact of the energy crisis on California and our nation.”
The state’s filings homed in on wholesale electricity prices charged in April, when electricity usage was down compared with that of a year earlier. Prices averaged $370 per megawatt-hour last month, significantly higher than those of January and February. (That’s enough to supply 750 typical homes for an hour.)
Officials with the California Independent System Operator, which manages three-quarters of the state’s electricity transmission grid, said they measured greater manipulation of prices by power sellers in April than in any month since June 2000.
In 1999, the first full year of deregulation in California, wholesale electricity prices averaged $31 per megawatt-hour. By February of this year, the average price had risen more than 700%, to $258 per megawatt-hour, according to the state’s filings.
Such prices have contributed to extraordinary profits for some companies, including Williams, the state noted in its filings.
Williams reported first-quarter profit of $484 million in 2001, compared with $77.8 million for the same period last year.
“Frankly,” the state charges, “it does not and should not require detailed analysis by economists to recognize that the phenomenal transfer of wealth is the product of supplier exploitation of the current market situation.”
Williams, which markets electricity produced by AES, was ordered April 30 by FERC to refund $8 million in connection with allegations that power plants in Huntington Beach and Long Beach were improperly shut down to create scarcity that would boost prices.
The state filing asks FERC to set the prices Williams and AES can charge based on what it costs to produce the power.
Representatives of Williams could not be reached for comment late Friday, but AES spokesman Aaron Thomas said that stripping companies of the right to sell at whatever price the market bears would result in tremendous upheaval in California’s power market.
In Washington, at a U.S. Chamber of Commerce energy conference, Cheney suggested that California officials were largely to blame for the state’s energy problems.
“They didn’t address it soon enough,” he said, referring to the power shortages. “They knew a year ago they had problems; they postponed taking action because all of the action was potentially unpleasant--[it] would have involved price increases, and so forth.
“The net result is, though, having postponed action and delayed, we’re now in a situation where the prices [consumers pay] have to go up anyway; where, in effect, you’re going to have blackouts this summer because even as we had this flawed regulatory scheme, we’ve had demand grow in California with the economy, but no increase in power because nobody built a new plant out there for 10 years.
“Long term, the answer is build more power plants, and that’s exactly what they’re doing,” Cheney added. “But they’re not going to have enough new capacity online this summer to be able to avoid blackouts.”
Soaring market prices since May 2000 have financially crippled Pacific Gas & Electric and Southern California Edison, the state’s two biggest electricity utilities, which were forbidden by the state’s deregulation plan to pass on their higher costs to customers.
By mid-January, the utilities were so close to bankruptcy that power sellers refused to deal with them for fear of not getting paid. The state stepped in to buy electricity on their behalf and has so far committed $7 billion from the general fund for such spending.
Even if it can’t persuade FERC to reconsider its plan, the state could, in effect, kill it outright.
Implementation of the plan is contingent upon the state submitting by June 1 a plan for joining a so-called regional transmission organization. FERC has made it a top priority to make the country’s electricity system work more efficiently and smoothly by linking operations through such regional organizations.
State officials said Friday they will decide next week whether to submit such a plan to FERC.
