The Orange County Register

WASHINGTON: Federal energy regulators Wednesday capped wholesale electricity prices in California at $250 per megawatt hour and adopted other measures designed to permanently avert the price spikes, shortages and rolling blackouts of a summer ago.

And the Federal Energy Regulatory Commission also ordered the dismantling of the current California Independent System Operator board that manages the state’s electricity grid, saying the panel as constituted by Gov. Gray Davis has not been independent. Instead, FERC has will replace it with a new fully independent board with no stakeholders as members, a move ISO’s chairman Michael Kahn labeled as “an affront to Californians.”

FERC Chairman Pat Wood said it was with reluctance and “not with a whole lot of joy” that the commission maintained a price cap system in California. Wood and his fellow regulators would have much preferred to let market forces dictate electricity prices. But California has not added enough new power plants and imports too much power from other states to allow it to go on its own, they said.

“We’re not out of the woods here yet,” Wood said.

But the situation this summer is quite different from the crisis conditions of a year ago. So while FERC’s decision is important because it sets a clear set of ground rules for electricity pricing in California, it is not expected to have any appreciable impact on rates. And that’s because the vast majority of power now being used in California is purchased in advance through $43 billion worth of contacts negotiated last year by the Davis administration.

Roughly 12 percent of the power used in the state _ bought on the so-called spot market _ will be subject to the new approach. The power bought under contract averages about $79 per megawatt, or less than a third of the maximum allowed under FERC’s new decision. Before the electricity crisis gathered momentum in 2000, wholesale electricity sold for $25 to $35 a megawatt.

FERC also maintained what Wood called the jewel in their California strategy _ the requirement that generators offer all of their power for sale. This is important because it keeps companies from withholding power, thus creating artificial shortages that could drive up prices.

“The only silver lining is a request that energy generators must continue to offer electricity to California,” said Davis. “Of all the requests I made this is the only one FERC granted.”

Reaction to FERC’s move ranged from contentment by the generators to anger from some consumer groups and policymakers who accused FERC of giving in to the power companies.

The ISO board had asked FERC to set a $108 cap. The $250 ceiling FERC set is the lowest such in the nation. Comparable caps in the northeast and in Texas are set at $1,000 per megawatt. The $250 cap will apply to all the western states.

“To Senator Boxer this is huge disappointment,” said David Sandretti, spokesman for the California Democrat. “Raising the cap to two and a half times the current level doesn’t appear to be justified.”

“The price caps had actually restored some sanity and protections to California’s energy system,” said Doug Heller, senior advocate with the Foundation for Taxpayer and Consumer Rights.

But Sen. Dianne Feinstein, D-Calif., said the combination of the hard $250 cap and the $91.87 soft cap is positive.

“I think it’s the best we could have expected and that it’s workable,” Feinstein said after the FERC meeting. “I can tell you everybody will be watching,” to make sure that this new system works.

Generators said it will bring stability to the market.

“It does provide some near-term sanity to the market, and it’s certainly better than what we have now,” said Gary Ackerman of the Western Power Trading Forum, which represents merchants and power companies. “You’ve got to be crazy to believe that anybody is going to invest in California if you are going to cap the amount of money they make.”

The commission essentially adopted a two-tiered approach to guarding against runaway electricity prices.

Commissioner Nora Brownell described the system as a set of “speed bumps” or “circuit breakers” that kick in when something in the market is amiss.

The first test comes when a power company submits a bid to the ISO that is more than $91.87 a megawatt. That’s the cap FERC set last week that will remain in place until Sept. 30. This new scheme will take effect Oct. 1. Such a bid triggers the next test.

ISO will look at the bids this generator made in the past three months. If this latest bid is 200 percent or $100 higher than those other bids, the next look is triggered.

This final trigger is designed to determine if this company’s bid will have an impact on the electricity market as a whole. If the bid, when figured in with all the other generators’ bids, will mean an increase in the overall price of electricity of more than 200 percent or $50, then this high bid will be rejected.

The ISO manages about 85 percent of California’s electricity grid. Davis disbanded its original governing board in January 2001, saying it was compromised by its decisions involving energy interests whose representatives sat on the board.

FERC contends that the state buys and sells power and should not be on a board because it, too, makes decisions affecting the market and the electricity grid. Davis appoints the members.

But Kahn said FERC’s “reasoning is nonsense,” and consumer advocates throughout the state denounced the FERC decision. “This board is already independent.”

“In effect, FERC has turned the hen house over to the foxes again,” says state Sen. Joseph Dunn. “FERC had its chance when the market was established to create an ISO board to protect the California consumer, and failed miserably.”