U.S Nudges State Over Energy Prices

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Changes proposed in deregulation plan

San Francisco Chronicle

The Federal Energy Regulatory Commission waded into California’s problem-plagued electricity market yesterday, proposing major changes that would redraw the state’s deregulation blueprint.

The proposals to stabilize electricity prices include giving utilities the freedom to buy power from additional sources as well as replacing the leaders of two agencies that control California’s wholesale energy market.

However, consumer groups dismissed these moves as a “whitewash.” They lashed out at the commission for not ordering ratepayer refunds despite regulators concluding that California electricity costs are “unjust and unreasonable.”

For consumers, the proposed changes would not necessarily result in lower bills, although they probably would ease price swings in what the commission called a “seriously flawed” wholesale market. This could lead to more consistent bills on a year-round basis.

Commission investigators said they have yet to find evidence of illegal price manipulation by power generators. Gov. Gray Davis and others have accused power companies of gouging consumers amid a shortage of electricity last summer.

“We are prepared to roll up our sleeves and do everything necessary to nurse this market back to health,” said commission Chairman James Hoecker.


The problems, the commission found, resulted in part from legislative rules that permitted power generators to legally influence prices during periods of peak demand.

Still, the commission, commonly known as FERC, laid much of the blame for sky-high wholesale prices on unusually hot summer weather and a lack of sufficient electricity supply to meet California’s increasing thirst for juice.

It said the rules for how electricity is bought and sold in the state must change to reflect market conditions that were not anticipated when legislators first mapped out a strategy to deregulate the marketplace.

But consumer activists criticized the commission for not going far enough. They said federal investigators should have been more aggressive in probing the actions of power generators and that the commission should have ordered refunds for ratepayers.

“I’m very disappointed,” said Nettie Hoge, executive director of the Utility Reform Network in San Francisco. “FERC is fiddling while consumers are burning.”


PG&E, meanwhile, embraced the commission’s report as a step in the right direction. On Tuesday, the utility noted, it paid out $790 million to cover its wholesale electricity purchases in August — well above the $128 million paid just three months earlier.

The commission did not address PG&E‘s request to state regulators that it be allowed to pass along about $3 billion in unexpected costs resulting from the surge in wholesale prices. It has been unable to do so because of a rate freeze that will remain in place until early 2002.

“The wholesale electric market in California is clearly broken,” said PG&E‘s chief executive, Gordon Smith.

Federal regulators have jurisdiction over California’s wholesale market because it involves generators selling into a multistate power grid.

The commission’s proposed changes will be open to public comment through Nov. 22. A final order is expected by the end of the year.


One of the most important proposals is for utilities to be able to bypass the central wholesale market created by the 1996 deregulation plan and instead cut one-on-one deals with individual power generators.

The commission hopes this would encourage utilities to purchase a greater amount of electricity in the form of fixed-price, long-term contracts, thus preventing the wide price swings seen in San Diego this past summer.

San Diego was the first California city to feel the impact of an end to the rate freeze. Average power bills subsequently tripled as the local utility passed along its daily costs to customers.

Loretta Lynch, president of the California Public Utilities Commission, called the FERC report “a mixed bag” and said she was surprised the federal commissioners had not sought ratepayer refunds.

The federal commission also proposed a loosening of the $250-per- megawatt price cap now in place for wholesale power, saying such caps deter power companies from building new plants.

Although the commission said it favored a “soft cap” of $150 per megawatt, it said utilities should be able to bid higher if they so choose.

The commission said new governing boards should be installed at the Independent System Operator, which oversees California’s power grid, and the Power Exchange, where electricity deals are made.

The present ISO board “has exhibited increasing difficulty in reaching decisions on the complex issues confronting it,” the FERC report said.

Terry Winter, chief executive of the ISO, did not challenge this finding. In fact, he said the board already has accepted its shortcomings and has brought in an outside consultant to guide restructuring efforts.

“FERC just gave us a push,” Winter said.


Douglas Heller, consumer advocate for the Foundation for Taxpayer and Consumer Rights in Los Angeles, called the commission’s report a “bureaucratic whitewash” and said the governor and Legislature need to re-regulate California’s electricity market.

“Without effective regulation, Californians and ratepayers throughout the country will continue to be victims of price gouging and market manipulation,” he said.

At a Sacramento press conference with Energy Secretary Bill Richardson, the governor insisted that “deregulation can work, but only if all parties act responsibly and if the market is competitive, which it is not.”

However, Davis agreed with consumer groups that the commission should have ordered refunds for San Diego ratepayers. “We’re going to continue our fight to have them order it,” he said.

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