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FERC Raises Energy Price Caps

Power: Limit jumps to $250 per megawatt-hour under plan. Panel moves to cut Davis' authority over state electricity grid.

July 18, 2002|RICARDO ALONSO-ZALDIVAR and NANCY VOGEL | TIMES STAFF WRITERS

WASHINGTON — Federal regulators Wednesday more than doubled the top price at which energy generators can sell electricity in California and moved to sharply reduce Gov. Gray Davis' authority over the state's power grid.

At the same time, however, they voted to create a computer-controlled system designed to block attempts to manipulate power prices.

Members of the Federal Energy Regulatory Commission said their actions, taken together, would curb price spikes and thwart market manipulation while laying the groundwork for increased power supplies.

"This is an attempt, as surgically as we can, to make sure that market power [abuses] are in fact squelched," said FERC Chairman Patrick H. Wood III. He said the new system would allow prices to rise in genuine shortages, while stopping abusive price manipulation.

Davis, however, immediately criticized the FERC actions, as did consumer activists.

"Clearly, FERC views its constituency as energy generators, not consumers," said the governor. "FERC has acted with lightning speed to benefit energy generators, but we've yet to see a penny for California consumers."

Michael Shames, executive director of the Utility Consumers' Action Network in San Diego, predicted that California consumers would pay more under the new rules. "This emboldens generators to overreach," he said.

Sen. Dianne Feinstein (D-Calif.) called the new price limits a "workable solution" that "should prevent what happened in 2000 from happening again." Feinstein added, however, that she would have preferred FERC to leave existing price caps in place.

And California's staunchest ally on FERC's governing board urged state officials not to rush to judgment. "I would ask of those in California who might be concerned ... to take a close look at the [new system] and the protections from the exercise of market power it affords," said William Massey, a Democrat who last year led the drive for price controls.

The key FERC ruling would replace the current electricity price cap of $91.87 per megawatt-hour with a higher limit of $250.

Generators that offer power for more than $91.87 would have their bids scrutinized by a computer program, and the bids would be automatically reduced if indicators of potential abuse are detected.

Peak power prices in California are now in the range of $40 per megawatt-hour.

FERC's governing board said its two unanimous rulings were intended to chart a course for the state that would eventually revive deregulated electricity markets under tight, independent supervision.

California's electricity markets have changed greatly since last year. Now, nearly 90% of the state's power needs are met through long-term, fixed-price contracts. The FERC ruling affects the remaining power purchases needed to balance the electric grid and keep the lights on from day to day.

The new price-limitation system is based on a model recommended by experts in California and already used in New York. It is designed to replace a temporary price limit on wholesale electricity enacted in the midst of last summer's crisis. That temporary limit is set to expire Sept. 30.

FERC officials said the new system, scheduled to take effect Oct. 1, is designed to stabilize prices for California consumers.

Wood said the new $250 price limit was not a signal to encourage generators to charge more, but a "safety net" in case of problems with the computer-based monitoring system.

Elsewhere in the country, such upper limits on bids are set at $1,000 per megawatt-hour. California consumers should not face more price spikes, he said.

By and large, FERC approved a package of market rules proposed by CAL-ISO, the independent system operator that operates the state's power grid.

The price-limitation scheme is designed to eliminate the need for protracted litigation over refunds by limiting the amount that an energy generator can bid for power. California is currently embroiled in a case before FERC, seeking $9 billion in refunds for alleged overcharges.

The computer-driven system looks for two main indicators of possible abuse: prices far in excess of previous bids submitted from each generating plant, and bids that could drive up the overall market price by $50 or more. If the program detects indications of abuse, the bid is automatically reduced to a predetermined level based on the plant's cost of production.

Consumer groups remained highly skeptical. Doug Heller, of the Foundation for Taxpayer and Consumer Rights in Santa Monica, called the new price-control regime "utterly senseless."

"Despite all the talk about restraining out-of-control corporations, the Bush administration is turning the power system over to the Enrons and others who stole billions from California," he said.

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