Energy Price Ceiling Jumps

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Sacramento Bee

WASHINGTON: Re-igniting a debate that burned during last year’s energy crisis, federal regulators nearly tripled the price ceiling on electricity in California on Wednesday, saying it’s needed to ensure the flow of power into the state.

Consumer advocates and Gov. Gray Davis blasted the decision, saying it will reopen the door to the price gouging and market manipulation they say occurred during the energy crisis.

At the same time the regulators raised the cap to $250 a megawatt-hour, from the current $91.87, they set up another potential showdown with California by ordering the dismantling of the Davis-controlled board that governs the Independent System Operator, which runs the state’s power grid. Among other things, the ISO purchases spot-market electricity to keep the grid running smoothly. The price-cap issue dates to the peak of the energy crisis, when wholesale prices often topped $300 a megawatt-hour and state government had to step in and buy electricity on behalf of the hemorrhaging public utilities. A megawatt-hour supplies power to 750 homes for an hour.

In June 2001, responding to protests from California and congressional Democrats, the Federal Energy Regulatory Commission instituted a price ceiling that floated according to generating costs and other factors.

Creating the ceiling, which covered the western United States, was designed to prevent “megawatt laundering” and other market strategies that would let sellers charge prices that exceeded the cap by moving power from state to state before selling it in California.

Many experts believe the ceiling helped tame the runaway market that had drained billions from California’s treasury and left Pacific Gas and Electric Co. in bankruptcy court.

Yet even though California has avoided rolling blackouts for well over a year, the FERC has said it believed the state’s supply situation was precariously thin. Last week it raised the price cap by two-thirds, to $91.87 a megawatt-hour. And on Wednesday it voted 4-0 to raise the cap to $250 a megawatt-hour starting Oct. 1.

FERC officials said spot market prices aren’t as important as they were a year ago because most of the state’s power has been purchased under long-term contracts. But critics of the decision said the higher-priced cap still would lead to inflated prices for power purchased on the spot market.

The FERC said raising the cap “benefits consumers” by spurring the construction of more power plants, transmission lines and natural gas pipelines. It said it was “striking a balance between the need for investor confidence in the markets to bring necessary generation and infrastructure on line and the need to protect against market abuse.”

FERC policy analyst Collin Mount added: “I expect prices to continue as they have been.”

Prices have been running at about $35 to $40 a megawatt-hour lately.

The FERC also maintained that a key part of the decision is a requirement that generators must offer all of their power for sale, preventing them from withholding power and driving up prices.

Power sellers had called for a cap as high as $1,000 – the same level found in the Northeast. Still, the sellers said the $250 cap was a good step that will encourage generators to begin building new power plants again. Last year’s high prices had sparked a spurt of new construction, but that’s dried up lately.

“People are delaying and canceling plants left and right,” said Gary Ackerman of the Western Power Trading Forum, who said the existing price ceiling was discouraging new construction. “People can’t do business here.”

Arthur O’Donnell, editor of the California Energy Markets newsletter, said lower price caps sometimes can inhibit power generation. Traders told him last week, when temperatures soared past 100 degrees, that they had trouble finding supplies.

The state last week declared its first Stage 2 power alert of the year – essentially a warning of possible blackouts.

But Davis, who has feuded with the FERC and the generators since the energy crisis reached full flower, called the decision a sellout to power generators.

“There is no justification for tripling the amount of money energy generators can siphon out of the pockets of California consumers,” the governor said in a statement. “This order just invites more mischief by energy generators.”

The ISO had advocated raising the cap slightly, to $108 a megawatt-hour.

Consumer advocate Doug Heller said the FERC decision was misguided, particularly in light of disclosures of alleged market manipulation by disgraced energy trader Enron Corp.

“This will allow the power companies to go back to the profiteering behavior that … created economic disaster,” said Heller, of the Foundation for Taxpayer and Consumer Rights.

As for the makeup of the Independent System Operator’s governing board, Davis cashiered the old board in January 2001 with the Legislature’s approval, saying it was too cozy with the power generators.

Now the FERC, saying the new board isn’t sufficiently independent, is saying Davis’ appointees must be replaced by Jan. 1 with a group to be named later.

Michael Kahn, the ISO board chairman and an adviser to Davis, denounced the FERC decision and said state officials may fight the ruling.

Ousting the Davis appointees “was the position of Enron – this was the position of the generators,” Kahn said. “This is already an independent board.”

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The Bee’s Dale Kasler can be reached at (916) 321-1066 or dkasler@

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