After delaying its meeting for nearly a full day, the Federal Energy Regulatory Commission Wednesday capped California wholesale power prices at cost for one year during emergencies.

The order is contingent on the California Independent System Operator submitting a plan to form a regional transmission organization by June 1.

The price cap will vary depending on the individual costs of generators to run the their plants. The cap will be applied to in-state generators by the ISO when reserves fall below 7.5% during Stage 1 electric emergencies.

During nonemergency times, price will be set by the highest price bid by generators in an auction. Bids must be close to generators’ marginal costs or be justified in writing to FERC and the ISO.

“California consumers can rest assured that the commission has been attentive to their problems, and has worked to ensure that they receive necessary relief,” said FERC Chairman Curt Hebert.

The ISO will calculate marginal costs for each generator with which it has a participating generator agreement. When there is a power shortage, the ISO’s market price or as the FERC calls it “market clearing auction”, will be limited to the marginal cost of the highest cost generator called on by the ISO to run in that market time frame.

Last summer, when demand escalated above 40,000 Mw, the ISO called Stage 1 alerts 32 times and Stage 2 alerts 17 times. Sources close to the ISO said an unplanned outage rate of 2,500 Mw or less is considered average for the California size fleet.

But with higher outages, higher demand, and critically low supplies of hydroelectric power compared to last summer, the ISO is expecting to call more Stage 1s this summer that may quickly deteriorate to Stage 3 and even blackouts.

When the state is not in an electrical emergency, FERC will allow a market-clearing price to be set by the highest bid into the real-time market. But those bids will be subject to FERC and ISO scrutiny to determine if they are higher than the generators’ marginal costs.

Each generator will file with the commission and the ISO on a confidential basis, heat and emission rates for each generating unit. The ISO will use the data to calculate the marginal costs for each unit. When a generator bids higher than a “proxy price” calculated by the ISO, the generator must file a report with FERC and the ISO justifying the price.

Generators that have already sold power under contracts would not be impacted by the order. But power not covered by contract must be sold to the ISO in the real time market. Generators responded with mixed reactions to the order, while Raymond Niles, a financial analyst with Salomon Smith Barney Inc., called it a “near term negative” for energy merchants and power producers.

“Dynegy has a long term supply agreement in place with the Department of Water Resources. For other generating capacity not included in that agreement, we have short term agreements with creditworthy entities,” said John Sousa, spokesman for Dynegy Inc.

Studying the order
A Reliant Energy Inc. spokesman Thursday said the company is still “studying” the order. Wednesday prior to the order, El Paso Corp. CEO Bill Wise said the company expected FERC to impose price caps during Stage 3 electricity emergencies.

Also prior to Wednesday’s order Williams CEO Keith Bailey said the company supported short-term price controls as the “right thing to do” given the circumstances. He said most of Williams’s 4000 Mw is already sold forward under short and long-term contracts.

Bailey also said any order establishing price caps should be accompanied by guarantees generators will be paid for past deliveries of electricity. The commission said it will seek comment on whether the ISO should impose a surcharge on power sales to cover generators’ unpaid bills.

It remains unclear what impact the FERC order will have on sales by out-of-state generators into the real time market in California. A FERC official said the impact on out-of-state generators was “not clear.”

But the order appears to subject publicly owned utilities such as the Los Angeles Department of Water and Power that are not normally under FERC jurisdiction to its terms if they ship power on transmission lines controlled by the ISO.

“Even those generators not subject to commission price regulation, are required to sell into the ISO’s real time market as a condition for their use of ISO’s interstate transmission lines. Hydroelectric facilities are exempted because of their particular generation limitations,” the FERC release said.

FERC further warned public utilities that any anticompetitive behavior would be subject to scrutiny and subject to refund.

A FERC official said a previous order requiring the ISO to supply creditworthy buyers still stands. But whether the state of California will fund and require the Department of Water Resources to buy all the power not provided by the near bankrupt Southern California Edison Co. and Pacific Gas & Electric Co. which has filed for bankruptcy protection is still unclear. Without DWR backing, those two buyers of ISO’s purchased power are not creditworthy.