The Washington Post

Even before President Bush took office, he and his staff were trying keep California’s energy crisis a long arm’s length away, saying it was primarily California’s problem to solve.

But the Bush White House inherited an unavoidable link to California: the Federal Energy Regulatory Commission, a relatively small Washington agency with a large mandate to see that wholesale electricity rates remain “just and reasonable.”

California’s calamity is defined in part by a battle between FERC and state officials over what “just and reasonable” means.

On Wednesday, FERC made a new effort to hold down California’s electricity prices without forsaking its commitment to energy deregulation, earning another round of sharp criticism from California officials. “FERC had a chance to bring meaningful relief to California’s outrageous wholesale prices and they blew it,” California Gov. Gray Davis (D) said yesterday.

The spotlight is bright and unsought for an agency with a modest $ 175 million budget, born in 1920 as the Federal Power Commission — a weak, understaffed agency that promoted and supervised hydropower dams.

Fifteen years later, during President Franklin D. Roosevelt’s New Deal battle against powerful utility holding companies, the commission was armed with the authority to regulate rates for wholesale electricity bought by utilities, and for power transmission. States regulate retail rates.

Today FERC makes rules for the nation’s transition away from regulated utility electric service to a market-based hybrid. In California and many major states, powerful generating companies compete to sell electricity to utilities, which act as distributors.

The responsibilities have taxed FERC’s staff of 1,200, which is about 10 percent less than peak levels during the mid-1990s.

A backlog of 2,000 pending cases includes not just conflicts over power prices, but also critical issues of reorganizing the nation’s power transmission network into large regional pools strong enough to make urgently needed investments in new lines.

When Congress set electricity deregulation in motion in 1992, FERC’s goal became seeing that it succeeded. Gradually, it redefined the “just and reasonable” standard, saying that as long as electricity markets were competitive, the prices negotiated by generators and distributors met the standard.

In hewing to that doctrine, the agency turned down an increasingly angry flood of demands from Davis and a host of California officials to clamp down on the state’s wholesale electricity prices when they suddenly shot upward last summer.

Although FERC concluded in November that California’s power market was badly flawed and that the potential for unfair and unjust pricing existed, it did not impose hard price restraints, opting for a “soft” partial price ceiling.

FERC ordered California to try to fix its broken power purchasing system by buying the bulk of its electricity through long-term supply contracts with generators, rather than through last-minute purchases that forced the state to pay generators’ and marketers’ top prices. But FERC’s plan was not implemented.

“They have the ability to resolve it and they are not following through with what we asked them to,” FERC Chairman Curt Hebert Jr. said three months ago, just after being named chairman by Bush.

But under growing political pressure to restrain California’s extraordinary wholesale electricity charges and respond to complaints of overcharging, FERC has moved deeper into the morass.

Since March, it has ordered power suppliers to refund $ 124.5 million or prove that their charges were justified. The generators say their prices have been based on high costs of natural gas and air pollution permits.

“We’re very confident that FERC . . . will see that these issues and transactions were just and reasonable,” said Randy Harrison, chief executive for western operations of Mirant, a major California generator.

On Wednesday, the commission went further, directing California to establish maximum rates that generators could charge during power shortage emergencies through a formula linked to plant operating costs. All generators would be entitled to get the highest approved price, but suppliers that exceeded the price benchmark would have to justify their prices or face refund orders.

The decision, on a 2 to 1 vote, reflects a compromise between the agency’s desire to defend the troubled experiment with deregulation while protecting consumers against overcharging, said energy consultant Peter Fox-Penner of the Brattle Group.

“They’re searching for middle ground here. It’s not what we think of as price caps,” he said. “It’s flexible. It’s related to costs, and that’s very innovative.”

But FERC’s many critics in California rebuked the agency again yesterday, saying its actions were too little and too late.

Because the new FERC rules would apply only during power emergencies, there would be no price restraint at other times, some said.

And by pegging approved rates to the costs of plants burning costly natural gas, FERC’s order would confront California with continuing costs of $ 300 per megawatt-hour for large quantities of electricity this summer, eight to 10 times what the state was paying before the crisis, critics said.

“What they did do is virtually irrelevant,” said Harvey Rosenfield of the Foundation for Taxpayer & Consumer Rights. “It’s like offering someone who’s been hit by a car an aspirin.”

“FERC has failed its responsibilities at every point in the crisis,” said Adam Goldberg, a policy analyst with Consumers Union.

Hebert responds that slapping hard price regulations on California’s energy market is the wrong course for at least three reasons: It does not encourage generators to build more plants, it doesn’t prompt consumers to conserve energy and it will prompt power suppliers to sell electricity to neighboring states where prices aren’t controlled — unless California blocks power exports.

What lessons the public will draw from California’s plight this summer and the deregulation debate remains to be seen, but FERC — and perhaps the Bush administration too — has been pulled more closely than ever into that drama.