California power markets get caps But federal order falls short of what state officials wanted

Los Angeles Times

WASHINGTON -- Federal energy regulators agreed Wednesday to limited, temporary price constraints on wholesale electricity in California, a carefully measured ruling intended to help the state get through what is expected to be a difficult, power-short summer.

The plan, announced by an ideologically divided Federal Energy Regulatory Commission, was more far-reaching than had been expected, but fell far short of a return to the regulated prices sought by Gov. Gray Davis and other California leaders.

It evoked a cautious response from California utility executives, power producers and government officials, who questioned whether it would be effective -- and doubted whether it would stave off what are now seen as inevitable power shortages and blackouts this summer.

After months of refusing the state's demands for price caps, the commission voted 2-1 to put a lid on California's wholesale electricity prices starting May 1 -- but only when the state's supplies slip low enough to trigger an energy emergency.

The ruling would lower the price of electricity during energy emergencies to roughly $300 per megawatt hour, about $200 lower than the state had expected, according to Gary Stern, director of market monitoring for Southern California Edison. A megawatt hour of electricity is enough to serve about 800 average homes for an hour.

Other analysts, however, said the plan would allow higher prices. The full text of the commission's ruling was not expected to be made public until today, making analysis difficult.

"This is about as free market as you can get when it comes to mitigating prices," FERC Chairman Curt Hebert -- a strong advocate of energy deregulation -- told reporters after the meeting. During the session, he said that the agency was trying to carry out a "balancing act" to limit price gouging while maintaining an economic incentive for producers to build new plants to supply California.

Dissenting Commissioner William Massey said the plan was too narrow to be effective. Massey said evidence compiled by California's power grid operator shows that abusive pricing is taking place around the clock, not just during shortages.

"This agency is required to ensure just and reasonable prices during all hours," Massey said. "We are now 11 months into the California calamity. Now is not the time for half-a-loaf solutions."

The FERC plan sets up a complex scheme in which California regulators would use confidential data from power producers, in addition to fuel costs and other factors, to establish a target price for each generator.

Under emergency conditions, all the generators would be required to offer electricity to California's independent grid operator. The suppliers would be paid based on the price of the least-efficient _ and therefore costliest _ generator called on to supply electricity.

Proponents said the arrangement preserves market principles such as economically rewarding efficient producers. But critics said it would only pile on more costs for California consumers.

"It is amazing to me that FERC set the market based on the least efficient, most costly plant," said Sen. Dianne Feinstein, D-Calif., in a statement. " (That) will necessitate that the highest possible charge prevails." She called the FERC action "a small step forward," but added that it is not enough.

A spokesman for Gov. Gray Davis, also a proponent of strong, region-wide price caps, said the governor would not comment until he had seen the full FERC order.

But the spokesman added: "It doesn't bode well that the one commissioner who knows California best _ Commissioner Massey _ voted against this proposal."

California had demanded caps on wholesale prices since last year, when a confluence of events squeezed electricity prices up by 10, 20, even 50 times from the year before.

Under California's energy deregulation plan, which went into effect in 1998, wholesale prices were allowed to float free of regulation, while retail rates charged by utilities were kept under a state blanket. The result, by the end of last year, was that the state's two largest utilities, Pacific Gas & Electric and Edison, were tottering on the edge of bankruptcy. Eventually, PG&E did file for reorganization in federal bankruptcy court.

The plan approved late Wednesday night would limit the amount that power producers could charge during shortages, beginning with Stage 1 emergencies in which reserves fall below 7.5 percent of anticipated demand. However, the limits did not amount to a fixed price cap, and some producers, especially the most efficient, would still be able to reap a generous profit.

"If this is effective, it could reduce by maybe 40 percent the price of power this summer," Stern said. However, he warned, "If it's not effective, prices could be even higher than people are projecting."

-- Anonymous, April 26, 2001

Answers

They still don't get it. Untill the CUSTOMERS pay market price for the product that is in short supply, there will be shortages.

I lived through the gas lines of the 70's, they were a direct result of a cap on fuel prices coupled with a 10% shortfall in gas supplies.

You will not see gas lines this summer. No price caps on what the consumer pays, so prices will continue to increase till supply = demand. In economic terms, the demand is not inelastic. Demand WILL drop once the price gets high enough.

Same deal with sparks in Kali. Once the consumers start paying the real price for a scarce product, they will figure a way to conserve.

The power company here has equipment that can remotely turn off non-essential loads during peak loading, I am sure this stuff is available in Kali too. Why isn't this stuff mandatory in the state that will not permit new power plants to be built? At least it would be a "finger in the dike" at this point in time.

I have friends who paid over $900 / month to stay warm in Ohio this past winter, maybe it is time for some to pay $900 / month to keep their hot tub hot this summer.

-- Anonymous, April 26, 2001