Federal regulators Monday unanimously extended price controls to spot market wholesale electricity transactions 24 hr/day, 7 days a week in California, and for the first time instituted similar controls on spot transactions throughout the West.
With congressional pressure mounting, the action by the Federal Energy Regulatory Commission was widely anticipated. The special meeting was also the first for new commissioners Pat Wood and Nora Mead Brownell.
Earlier, FERC instituted price controls on wholesale power prices only during emergency power shortages in California. The agency set a target price based on the costs of the least efficient producer, and energy producers had to explain in writing if they exceeded the target.
Because the Apr. 26 order did not apply to transactions outside the state, the California Independent System Operator (ISO) and Gov. Gray Davis complained it allowed producers to launder megawatts by selling power to marketers for delivery outside the state, only to be reimported in transactions not subject to price controls. FERC commissioners said Monday’s order will eliminate that loophole.
Under the Monday order, bidders will be allowed to invoice the California ISO for the costs of complying with nitrogen oxide and other emission standards and for fuel use for start up.
It also includes a 10% premium for producers to cover the risk of doing business in California and orders California and producers to try to reach a negotiated agreement on the state’s demand for refunds from generators.
The price controls will now apply to all 11 states in the Western System Coordinating Council, including municipal and other public power utilities that use transmission lines under FERC’s jurisdiction. The order will remain in effect until September 2002.
FERC Chairman Curtis Hebert called the order a “great product” that will get the California and western power markets “under control” without discouraging new generation. He noted power prices have come down since FERC’s Apr. 26 order became effective May 29. Spot market prices are under $100/Mw-hr, while forward prices in 2002 have dropped to $68/Mw-hr from $127/Mw-hr and to $41/Mw-hr from $60/Mw-hr in 2003, he said.
Gov. Davis had called for a hard price cap and some economists recommended a return to cost-based regulations. But Hebert said a return to cost-based prices wouldn’t be in the best interests of consumers because it would entail months of administrative hearings and litigation resulting in price uncertainty that “would be unacceptable at this juncture.” Moreover, he said, cost-based prices would not provide generators with incentives to become more efficient and reduce their costs.
Commissioner William Massey said it was “generally a good order,” but “I’ll whine over a couple of things.” He said he had “strong reservations” about the 10% premium on transactions in California.
Wood said the commission could not do much to limit the pain of anticipated blackouts this summer, but it can ensure they are not “accompanied by a big old bill.” He added he is “perplexed” about high gas prices in California and is concerned “something is going on there.”
Responding to the agency’s action, House Energy and Commerce Committee Chairman Billy Tauzin (R-La.) said the order provides incentives for suppliers to reduce their costs, instead of choking off resources from those areas in desperate need of outside energy supplies.
“In short, this decision ensures that in the critical months ahead, consumers in California and the West will pay a fair price for their energy needs,” he said.
During a press briefing before the FERC meeting, White House spokesman Ari Fleischer said President George W. Bush opposed price controls because they “lead to great inefficiencies, that do not increase supply, that do not reduce demand and, therefore, make the problem worse.”
The president supports market-based programs and market-based incentives, he said. Fleischer said controls set prices at an arbitrary level, while a market-based response gives suppliers and producers an incentive to keep developing their supplies.