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Electricity Price Limits Expand by Tom Detzel, The Oregonian staff The Oregonian, June 19, 2001

Federal regulators vote to apply California price restrictions
to 10 other states, including Oregon

WASHINGTON -- Under heavy pressure from members of Congress, the Federal Energy Regulatory Commission on Monday extended restraints on California's electricity prices to include Oregon, Washington and other Western states.

The move did not entirely dim complaints that the commission has done too little to protect ratepayers from alleged price gouging by electricity suppliers, but even some critics called the revised order a step in the right direction.

"After months of stonewalling, it seems that the FERC has finally opened the door to admitting that prices have been outrageous," said Rep. Peter DeFazio, D-Ore.

He said the order "obviously will potentially help Oregon and the Northwest this winter" if the region's drought continues and a shortage of hydropower helps elevate prices, which recently have been falling.

Sen. Gordon Smith, R-Ore., sponsor of a bill to require the energy commission to set firm price caps on wholesale power, said through an aide that "at first blush, it looks like FERC took some much-needed action, and we're cautiously optimistic."

But the aide, chief of staff Kurt Pfotenauer, said Smith was reserving judgment until a hearing on the bill scheduled for today by the Senate energy committee. All five FERC members are scheduled to testify.

The commission's unanimous decision to broaden its reach into the West's dysfunctional electricity markets came as President Bush reiterated his opposition to firm price caps -- but left the door open for more flexible restraints.

"They're talking about a mechanism . . . to mitigate any severe price spike that may occur, which is completely different from price controls," Bush said, quickly adding that he hadn't had a chance to review the commission's order in detail.

"They know full well my administration's belief that price controls will not solve the problem, and a lot of folks in California understand that, as well."

Other states included
The commission's order applies price restrictions the panel first adopted in late April for California to 10 other states in the Western power grid, and coverage expands to 24 hours each day instead of only during power emergencies.

During severe shortages, defined as whenever electricity reserves fall below 7 percent in California, the order sets a "market clearing price" throughout the West based on the bid of the highest-cost gas-fired plant needed to meet electricity demand.

Sellers would also receive a 10 percent risk premium for electricity shipped into California, where the state's largest private utility has declared bankruptcy and the government is spending billions to buy power.

At other times, the order sets a ceiling price of 85 percent of the highest market price allowed during the most recent shortage. Generators can seek higher prices if they can justify the costs to the FERC, but companies such as Enron, which sell but don't produce electricity, must take the market clearing price.

Unlike the commission's April order, the expanded version applies to the Bonneville Power Administration, municipal utilities, cooperatives and public utility districts over which the commission has typically had only limited jurisdiction.

Officials said they had little choice but to include publicly owned utilities, because they provide about half the electricity in the West. Under the order, price restrictions will remain in effect until October 2002.

The energy panel has been under increasing pressure to deal aggressively with the run-up in wholesale power prices in the West brought on by California's failed electricity deregulation program and to investigate charges of price gouging from generators and power marketers who have earned huge profits in the past year.

Besides today's session on the Smith bill, which is co-sponsored by Sen. Dianne Feinstein, D-Calif., commission members are to appear Wednesday before the Governmental Affairs Committee, led by Sen. Joe Lieberman, D-Conn. California Gov. Gray Davis will also testify.

Davis has called on the commission to cap rates based on the cost of providing power, plus a reasonable profit, as sought in the Smith-Feinstein measure. That approach is similar to the way electricity rates were set before deregulation.

"We will continue to demand that the federal government finally do its job by requiring reasonable prices for electricity," Davis said after Monday's commission action.

Despite some reservations, Feinstein called the order "a giant step forward" for the FERC.

"They may not call it cost-based rates, but it is very similar to what Gordon Smith and I asked for in our bill," she said.

But Curt Hebert, the panel's chairman, insisted that the commission's plan did not amount to a price cap, because it did not set an arbitrary, inflexible ceiling. "People are welcome to think what they want to think," he said.

Utility officials in Oregon hadn't reviewed the order and declined to comment. A spokesman for the Bonneville Power Administration, which supplies about half the Northwest's wholesale electricity, said it was too early to say whether the restraints would affect a pending rate increase.

The BPA has said it may have to raise the rates it charges its utility and industrial customers by 75 percent or more next fall, partly because it must buy some of its power on the open market.

Roy Hemmingway, chairman of the Oregon Public Utility Commission, said the order fell short. "This will not prevent generators from making enormous profits at consumers' expense," said Hemmingway, the former energy adviser to Gov. John Kitzhaber, who supports cost-based caps.

But Hebert said the commission's earlier order had been successful at bringing down wholesale prices in California and argued that the commission's approach, because it is market-based, works better than cost-based caps.

Spot prices down
He said spot prices for electricity that averaged $400 per megawatt hour in California during May "now rest comfortably at about $100," while prices under long-term contracts have fallen to about $68 in 2002 and $41 in 2003.

"This is a plan that is good for California, good for the Pacific Northwest and good for the entire West," Hebert said. "It represents an effort to provide some relief now, while making sure that mitigation is short-lived."

DeFazio said that even if FERC's order has made a difference, prices remain historically high.

"Mr. Hebert says, 'Hey, look, prices are only 100 a megawatt hour -- that's great,' " DeFazio said. "It's only 400 percent more than it was two years ago. . . . I think we've lost sight of the objective."

Other critics said that the order rewards inefficiency by pegging price ceilings to the costliest California gas plants.

"If you favored reducing the price of cars, would you design a plan that sets the price of all cars equal to the price of a Rolls-Royce Silver Cloud?" said Rep. Jay Inslee, D-Wash., sponsor of a price-cap bill in the House.

"Your price reduction plan wouldn't do much to help car buyers, and this FERC plan won't do much to help electricity consumers," he said.

Hebert, however, argued that the commission's approach provides a profit incentive to draw cleaner and more efficient plants into the market, thus increasing supplies and helping consumers in the long run.