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U.S. Urges Major Fixes for State's Power Market

Energy: Federal panel says electricity crisis is product of flaws in deregulation, but it stops short of ordering reductions in sky-high prices.


California's electricity crisis is the product of flaws in the deregulated market and a long-term shortage of power in the state, federal regulators said Wednesday, proposing sweeping changes to fix the $23-billion electricity trade.

But the Federal Energy Regulatory Commission stopped short of ordering retroactive reductions of the sky-high electricity prices paid since June, saying it lacked the legal authority.

The commission, which found no evidence of individual companies driving up electricity prices, left the door open for some sort of refund should it uncover specific instances of such market abuses. That leaves undetermined whether major utilities can pass on more than $5 billion in electricity costs to consumers across the state.

The technical changes proposed to fix California's flawed market include giving utilities freedom to buy power from sources other than the state-mandated exchange and imposing loose price caps on power purchases.

Still, California faces years of high prices and threatened blackouts, the commission said, unless legislators and regulators tackle problems beyond the federal body's scope, particularly the faster building of power plants and transmission lines.

"Ideally, some people would want us to round up the bad guys who manipulated this market without restraint or conscience and order disgorgement of all their ill-gotten gains. It's not as simple as that," Chairman James J. Hoecker said at a special meeting of the four-member commission. "If information that the market was or is being manipulated unlawfully comes to us through complaint or as product of our own investigation--we will act on that information, I guarantee you."

The commission's menu of proposed changes to the California market, which it hopes to enact by the end of the year after public comment, drew scalding criticism from consumer groups, tepid praise from utilities and power generators, and a mixture of hot and cold responses from politicians. Nonetheless, observers expect the proposals will be approved in their current form.

Some lauded the commission's proposed order for what it didn't do, mainly impose cost-based electric rates that would have represented a "re-regulation" of the industry. Generators breathed a sigh of relief that the commission--at least for the time being--did not judge the power merchants as having wielded illegal "market power," and therefore subject to refunds to the utilities and consumers they sold power to.

And even consumer advocates, angry as they are, were comforted by the commission's finding that electricity rates at times this summer were "unjust and unreasonable," legal language that could open the way for the California Public Utilities Commission or the California Legislature to go after any profits they consider excessive.

Gov. Gray Davis, during a news conference with U.S. Energy Secretary Bill Richardson to unveil initiatives to improve electricity supply and reliability, called the federal commission's proposal "a mixed blessing."

"They do recognize that we're operating in a dysfunctional market and they do agree that rates are not just and reasonable," Davis said. "However, they did not, as I encouraged, order rebates to the consumers and businesses in San Diego who were literally gouged for the profiteering and market manipulation San Diego had to suffer through."

Among the market changes proposed by the Federal Energy Regulatory Commission:

* A temporary reworking for the next two years of the way prices are set for electricity in the California Power Exchange, the primary market for electricity. Currently, the highest bid for each hour sets the price for all the bids during that hour. The commission would change that policy so that bids higher than $150 a megawatt hour could not set the "market clearing price" paid by all participants.

* Freeing the big utilities--Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric--from the requirement that they purchase most of their electricity from the Power Exchange. This would give the utilities greater freedom to shop for the best deals on electricity.

* Requiring all market participants to schedule 95% of their transactions the day before rather than--as happened repeatedly this summer--waiting until the day the power is needed, buying at the last minute in an emergency market operated by the California Independent System Operator. This nonprofit was formed to schedule and transmit electricity, but found itself this summer in the unexpected position of running a major market for electricity as generators sought the best price for their electrons.

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