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Smith Pursues Cap on West's Power Prices by Tom Detzel & Jim Barnett Guest column, Spokesman Review, March 16, 2001

The Oregon senator, drawing White House opposition, seeks to limit wholesale costs amid crisis

WASHINGTON -- Hoping to head off a "catastrophe" of skyrocketing electricity prices, blackouts and job losses, Sens. Gordon Smith, R-Ore., and Dianne Feinstein, D-Calif., on Thursday proposed a two-year cap on wholesale power prices in the West.

The senators' plan marks a new chapter in the West Coast energy crisis and puts Smith at odds with the Bush administration and Energy Secretary Spencer Abraham, who stood firm in his opposition to caps under grilling by the two senators at a hearing.

"In my judgment, there could be immediate economic consequences if a price cap regime is put in place that in effect makes the summer's shortages even worse," Abraham told the Senate Energy and Natural Resources Committee, arguing that caps could turn power providers away from the region.

Instead, he said the administration's goal is to do everything possible to get more power into California and the West, insisting that the fundamental problem is one of economics: too much demand for electricity and not enough supply.

Abraham predicted the problem would get worse this summer and cited one estimate that California could suffer 200 hours of blackouts as energy demand rises with the heat.

Smith, who before Thursday had been critical of price caps, said a lecture on economics would be thin gruel for ratepayers in the drought-saddled Northwest.

"I'm afraid that somewhere we're going to be in the middle of a dry lake bed explaining to very angry farmers and homeowners and former factory workers the lessons of supply and demand," he said, "and I don't think they're going to listen to us."

The Feinstein-Smith bill arrives amid concerns that rising energy prices are adding to the national economic problems, as suggested by Federal Reserve Chairman Alan Greenspan in a recent appearance before Congress.

Among those endorsing the caps Thursday was Democratic Gov. Gary Locke of Washington, who testified rate increases have caused the shutdown of much of the region's aluminum industry, put 850 Georgia-Pacific workers out of work in Bellingham, forced layoffs at small businesses and required cuts in government programs and schools.

"The Pacific Northwest is losing as much as $1.4 billion a month due to high wholesale power costs," Locke said. "That's $1.4 billion that was not extracted a year ago . . . This situation is untenable and simply cannot continue."

The Feinstein-Smith bill, still being drafted, would order the Federal Energy Regulatory Commission to impose a wholesale cap until March 2003 or until the commission finds that wholesale rates are "just and reasonable" as required by law.

The legislation applies to 11 states in the western power generation and transmission grid: Oregon, Washington, Arizona, California, Idaho, Montana, Nevada, Colorado, New Mexico, Utah and Wyoming. To varying degrees, all have seen rising prices escalate in recent months.

The capped rate would be high enough to cover the cost of generating and providing power, plus a reasonable profit. Whether states would apply to the regulatory commission to get a cap, or be allowed to opt out of a regionwide cap set by the commission, was still being discussed.

As the California power crisis developed, Smith and other Republicans lined up as philosophically opposed to caps, arguing that market forces -- supply and demand -- should dominate and that consumers would not conserve if prices were artificially low.

In particular, they criticized California's deregulation law for capping retail rates while allowing wholesale power prices to fluctuate. As wholesale prices rose, the state's two biggest private utilities racked up billions in debt and now teeter on bankruptcy.

But Smith said Thursday that although he had resisted price caps, his bill would ensure that ratepayers, including Californians, would feel the price "signals" from shortages. That's because the caps would require all costs of service to be passed on to ratepayers.

"I don't want to send the wrong signals to the marketplace. But I'll tell you, the wrong signal is a recession," he told Abraham. "I think we need to give you more authority, and I think you need to use it to mitigate catastrophe."

Abraham, however, said that the regulatory commission and the administration have taken a number of steps to help with the power crisis. He cited a regulatory commission order issued last Friday requiring power providers to refund $69 million in overcharges to California ratepayers in January.

The commission also is reviewing possible overcharges from December and February, both Abraham and regulatory commission Chairman Curt Hebert said. The refunds "will send a very strong signal to those who want to exploit or take advantage of a situation that they aren't going to be able to get away with it," Abraham said.

After the hearing, Locke sharply criticized the administration and the regulatory commission, saying they've acted too slowly. Under punishing rate increases, he said, the region can't wait five years or longer for new generation to come online to balance the West's power shortage.

He also blasted the regulatory commission's refund order as "minuscule" and said it "indicates they're content to allow those high prices to continue."

Feinstein conceded to Abraham that it was up to California to fix problems with its deregulation law. Echoing Locke, she said the price caps would give the West a time out to deal with escalating prices. She said wholesale rates had gone up 700 percent last year from 1999.

"I agree with you that the market should be able to fluctuate freely," she said. "All we're trying to do is prevent price gouging -- and it is taking place."

At the White House, Bush spokesman Ari Fleischer reiterated that the president "thinks price controls have not worked, will not work and do not work."

Sen. Maria Cantwell, D-Wash., also endorsed the bill Thursday, and an aide to Oregon Gov. John Kitzhaber also commended Smith for embracing caps after initially resisting them.

"But there's a more effective way to do this, and that is to get on the phone to the White House and tell them this not just a blip on the radar screen, this is a major economic problem," said Kitzhaber spokesman Bob Applegate.

An aide said Sen. Ron Wyden, D-Ore., wants to see the detailed language of the bill before endorsing price caps.

Among other issues, Wyden wants to make certain the legislation would allow California's financially troubled utilities to pay a $100 million debt to the Bonneville Power Administration for wholesale power bought last year.

That's also been a priority for Smith, and aides said the bill would help achieve that goal by requiring retail rates to cover all utility costs if California opts for a rate cap.

Price caps likely would keep rate increases in check for consumers across the Northwest, but the effect could be uneven, industry participants said.

Portland General Electric, for example, has held off on retail rate increases by selling some excess power at high wholesale prices. At the same time, the BPA and Pacific Power have had to buy on the wholesale market.