FERC Raises Energy Price Caps

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.

Unlike the current price limits, the new system will continue indefinitely, with no expiration date. The FERC ruling also contained measures geared to prevent generators from withholding supply. It also called for a conference to address a continued shortfall in California’s production of energy.

FERC’s second ruling Wednesday dealt with the politically charged issue of who controls the ISO.

The commission determined that the current board, composed of five Davis appointees, was not independent, and therefore is in violation of basic organizing principles for such entities.

Davis controls both the board that oversees the transmission system and one of that system’s largest clients, the state Department of Water Resources, which is purchasing power for cash-strapped utilities.

“Not only does the ISO have to be independent in reality, but it must be independent in perception,” said FERC Commissioner Massey. “In my view, as presently constituted, the California ISO fails both tests.”

FERC ordered that the present board be replaced by a new board chosen in consultation with a range of parties involved in California energy policy, including generators, utilities, consumer groups and state officials. It set a deadline of January 2003 for revamping the board.

The dispute over control could lead to a pitched battle between FERC and the Davis administration.

“I think we may have the state police and the federal marshals both showing up at the first board meeting in 2003, figuring out who gets to sit and who doesn’t,” said Mike Florio, a senior attorney with the Utility Reform Network and one of Davis’ appointees to the ISO board.

“I don’t see how we can legally surrender our authority until we have an appellate court decision,” he added. “FERC is going out on a legal limb, saying that their authority allows them to change the governing board.”

When California launched its deregulated electricity market in April 1998, the ISO was overseen by a 26-member board structured along the lines that FERC is now calling for. After wholesale prices began to soar, the board debated acrimoniously for days over whether to impose price caps.

Davis accused the board of being dominated by private power-plant owners, and in January 2001 he signed a bill that created a new board composed of his appointees. Since then, “we’ve been in a showdown [with FERC],” said ISO Chairman Michael Kahn.

Rep. Doug Ose (R-Sacramento), a leading critic of Davis, welcomed the FERC ruling. “When Gov. Davis controls the marketplace and simultaneously controls the largest market participant, it sends a chilling signal that the state will put Gov. Davis’ political fate before that of the consumers and suppliers,” Ose said.