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U.S. Overrules State, Raises Power Cost Cap

Utilities: Regulators restore old limit, a 66% hike from price set by California this week, saying move is needed to avoid blackouts.


WASHINGTON — Saying action was needed to stave off blackouts, federal energy regulators stepped into California's latest energy crunch Thursday and allowed power generators to raise short-term prices this summer.

The Federal Energy Regulatory Commission action came as milder weather in parts of the state and appeals for conservation enabled California to avoid a third consecutive day of energy alerts Thursday.

But the move was sharply criticized--for different reasons--by Gov. Gray Davis' office, consumer groups and the power industry.

An energy analyst with the Consumer Federation of America predicted that prices--which have averaged less than $45 per megawatt-hour for the last month--would soon rise to meet the new FERC cap of $91.87.

"The [price] ceiling is going to become a floor," said the federation's Mark Cooper. "They better get the market police out there to make sure the generators don't withhold power to drive it up higher. The problem is that the generators' business model is complaining to FERC and manipulating prices."

FERC's governing board said it was acting only to ensure continued supplies of electricity to the entire Western region. Sen. Dianne Feinstein (D-Calif.) agreed, terming the move prudent.

Federal regulators invalidated a price limit of $55.26 per megawatt-hour that California officials put into effect Wednesday. The state action was permitted under the complex price mitigation formula that FERC devised last year.

In its place, FERC reinstituted the $91.87 price cap that had been in place since last summer. The new price cap is about 66% higher, and will be in effect through September.

"We act now because we cannot expose customers in California and other Western states to the risk of a low price cap," the FERC governing board said in its unanimous ruling. "A low energy price cap

FERC functions like a national utilities commission, and is charged with ensuring just and reasonable rates for wholesale electricity.

Davis spokesman Steven Maviglio called the agency's action puzzling.

"Neither the state nor [California's power grid operator] asked for a near doubling of the price cap," Maviglio said. "California hasn't had any trouble securing the power it needs at the current cap of $55. In fact, energy purchases today are in the $20-$30 range. At first glance, it seems like another gift by FERC to the generators."

Industry Not Pleased

Industry officials called FERC's action an example of government interference with markets, and said it proves their contention that the price limits imposed last summer by the agency are unworkable.

"We are back to 'OK, we are just going to pick a price out of a hat,' " said Mark Stultz, a spokesman for the Electric Power Supply Assn., which represents marketers and generators. "If the [price limit] formula doesn't work, then let's come up with a new one and live by it. Or let's let the markets reach their own efficiency in terms of allocation of resources."

Only a small portion of the market is subject to the FERC ruling: the short-term purchases needed to balance the state's day-to-day electricity needs. Since last year, California has shifted to long-term, fixed-price contracts for the bulk of its power. For example, 88% of the power California needed Tuesday had been purchased in advance.

Richard Katz, energy advisor to Davis, said the impact of the FERC order will be limited because the state gets so much of its power through long-term contracts.

But short-term purchases remain important because they can mean the difference between blackouts and keeping the lights on. And prices in the short-term market can also affect long-term deals for power.

FERC officials said the commission acted because some short-term prices were already higher than $55 when the price cap was lowered to that level Wednesday evening. Platts Energy Trader, which tracks the industry, reported that power prices at the benchmark Palo Verde plant in Arizona on Wednesday ranged between $57 and $70 per megawatt-hour.

"The $90 cap seemed to be getting all the supply that was needed," said one FERC official, who spoke on condition of anonymity. "We were getting more reports of people saying that they wouldn't sell to California [at the lower price]. That is certainly something we didn't want to have happen."

Another agency staffer said the commission acted out of its own concern, and not as a result of pressure from generators. "I think it was a fear that California wasn't going to get enough power. When you have a shortage, you've got to expect the price is going to be higher than $50."

Move Called Prudent

Feinstein, a leader on energy issues in California's congressional delegation, said the FERC action appeared justified.

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