Government Acts to Calm California’s Energy Market

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The New York Times

The Federal Energy Regulatory Commission took action today to protect Californians against the recent volatility in the wholesale electricity market that has brought soaring power prices, threats of blackouts and perils of insolvency for the state’s largest utilities.

But the commission’s steps were of little comfort to California officials and consumer groups, who said the commission did not go far enough.

Gov. Gray Davis said the situation remained sufficiently critical and that he would call a special session of the California Legislature to consider re-establishing state authority to inspect private power plants as well as replacing board members of the group that runs the power grid.

The federal commission, which oversees wholesale electricity prices, ordered that utility companies would not be required to buy or sell electricity through the California Power Exchange, but instead be encouraged to enter into long-term contracts of two years or more with power generators as a way to avoid the high prices now being paid in the market.

As a result of the deregulation of California’s energy market two years ago, public utilities, like Southern California Edison and Pacific Gas and Electric, were instructed to buy and sell power through the exchange, in part, to block sweetheart deals with power generators.

But in recent weeks, the California Independent System Operator, the nonprofit group that manages the state’s power grid, has been forced to scramble daily for as much as one-third of the electricity the utility companies need to keep lights on in the state.

Electricity prices for peak hours have soared to $1,400 per megawatt per hour, a more than 20-fold increase from last year. The Independent System Operator has been spending an additional $50 million to $100 million a day for electricity, costs that are passed onto utility companies and ultimately consumers.

Long-term contracts would allow utilities to plan spending instead of being subject to the whims of a daily market. But they may not be the best solution, consumer activists said.

“These contracts will not ensure fair and appropriate energy prices,” said Douglas Heller, a consumer advocate with the Foundation for Taxpayer and Consumer Rights. “Rather they will only lock California consumers into whatever private deals the utilities arrange with the private power generators.”

Such contracts would take the pressure off the Independent System Operator, which is run largely by engineers who have been reduced, in part, to commodities traders forced to haggle over prices.

The commission also ordered a price cap in California of $150 per megawatt per hour through April 2001. That amount is higher than Governor Davis had sought from the commission two weeks ago but lower than the $250 price cap it set previously. On Dec. 8 the Independent System Operator appealed to the commission to lift that price cap, fearing it would be forced to shut off consumer’s lights if something was not done to ensure a steady supply of electricity. The price cap can be changed if conditions warrant it.

In an interview after the meeting, the commission’s chairman, James J. Hoecker, said that it was now up to California’s Public Utilities Commission to set reasonable power rates for power controlled by the utilities.

“California officials and even this commission are kind of on the hot seat,” he said. “The time for finger pointing is past.”

But Governor Davis did not agree, saying the commission “abdicated its responsibility to the people in the West.” In particular, he pointed out that the commission failed to impose a regional price cap on electricity prices, though it has the authority to do so. He also criticized the commission’s failure to give California officials authority over the Independent System Operator, something Mr. Davis has agitated for.

The commission’s “failure to act in the interest of our consumers and businesses literally invites California to act to regain control over the energy market,” the governor said.

Two weeks ago, consumers began to face possible blackouts because of an unusually large number of power plants in California that were not operating either because of maintenance or for fear of violating air quality standards. The situation worsened this week, as prices for wholesale energy continued to soar and Wall Street analysts downgraded the stocks of some California utility companies out of concern that the energy problems would threaten earnings.

In addition to that, utility executives themselves have complained that the high prices being paid for electricity could leave them bankrupt. As a result, some power generators in the Northwest have balked at selling power to California fearing the they would never get paid by utilities.

Consumer groups and utility companies were no more pleased with the commission’s order than Governor Davis. A news release from Pacific Gas and Electric said the commission’s order, “leaves California electric customers exposed to price gouging and future electric supply reliability uncertainty.”

Consumer Watchdog
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