California’s electricity problems were an accident waiting to happen, with the first telltale signs of trouble emerging in 1998, Paul Jaskow, director of the Massachusetts Institute of Technology Center for Energy and Environmental and Policy Research told the US Senate Governmental Affairs Committee.
He attributed the state’s problems to bad market design worsened by “supplier behavior” in testimony Wednesday. Committee Chairman Joseph Lieberman (D-Conn.) called the hearings to look into whether the Federal Energy Regulatory Commission is doing enough to insure power prices in the western markets are “just and reasonable” under the Federal Power Act. Among the solutions proposed are price caps on power produced by generators subject to FERC jurisdiction.
FERC instituted cost-based pricing during electric emergencies in an Apr. 26 order that became effective May 29. Most witnesses seemed to think federal regulators could do more to restrain prices in the West, including extending a current order to subject the market to price controls during power emergencies, but at least one witness recommended jettisoning the “just and reasonable” language from the law on the grounds that “markets by their nature are not just and reasonable.”
Pointing to the history of the utility industry economist Alfred Kahn, father of airline deregulation, said there is no reason to think investment in new generation will be discouraged, if electricity rates are set high enough. He said uncertainty is the biggest deterrent to investment in new power plants.
Frank Wolak, chairman of the California Independent System Operator market surveillance committee and a Stanford University economist, said FERC’s existing price mitigation plan is inadequate because it permits suppliers to sell power outside California and then import it back into the state to sell to the ISO in the real time market at a higher price. FERC price controls do not apply to imported electricity.
“Cost of service regulation without a prudency review is worse than no mitigation at all,” Wolak said. He said the existing FERC rule encourages suppliers to take their most efficient generators out of service and allow their most inefficient generators to set the market clearing price for power.
Larry Makovich, senior director of electric power for Cambridge Energy Research Associates (CERA), said many things short of price caps could be done to help California in the short-term, including bringing in barge-mounted electric power plants.
“Price controls create unintended consequences and shift activity into unproductive directions,” Makovich said. “The bureaucracy to administer price caps always becomes many times more complicated than originally expected.”
He noted only about half the power produced in the West is subject to FERC jurisdiction and FERC price caps will only create incentives to run controlled power through uncontrolled sellers to end-run a patchwork of controls.
CERA studies showed the California market was in relative balance in 1998 and 1999 when power prices averaged $14-$30/Mw-hr. What changed in 2000 was the supply/demand balance, Makowich said. California ran out of power because it did not set up a capacity market to pay for new power plants and buyers bid up prices.
“The energy market did not provide timely price signals to build new supply,” he said. Faulting the state’s “dismal record,” Makowich said half the utilities’ stranded costs were the result of high-priced long-term contracts California state regulators forced utilities to sign with independent suppliers under the Public Utility Regulatory Policies Act of 1978 (PURPA).