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Measures Aim to Fix Power Market by Gail Kinsey Hill & Liz Skinner The Oregonian, November 2, 2000

The Federal Energy Regulatory Commission takes several steps
to remedy severe problems in California's electricity market

WASHINGTON -- U.S. regulators moved Wednesday to intervene in a California electricity market that saw prices soar 10 times above normal during the summer, rejecting price caps and proposing to end requirements that utilities buy power through a state-sanctioned exchange.

The report also found no evidence of specific instances of abuse by generators.

Calling the state's power market "seriously flawed," the Federal Energy Regulatory Commission voted 4-0 to eliminate a requirement that California's three investor-owned utilities -- operated by PG&E Corp., Edison International and Sempra Energy -- buy and sell electric power through the California Power Exchange.

FERC wants to give the utilities the opportunity to lock in prices for power through long-term contracts known as forwards, a market that was lost earlier this year as part of the state's deregulation plan. Arranging to purchase power in advance would reduce the amount of power that utilities buy during peak consumption periods when prices can soar, commissioners reasoned.

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

The commission also rejected price cap proposals by the power exchange and the California Independent System Operator, which operates the state's power grid and manages 75 percent of the electricity transmitted on it. The commission said caps would discourage construction of power plants for the state's market. Allowing forward electricity trading would stabilize prices and encourage power plant construction, commissioners said.

Electric utilities and regulators throughout the West have been watching California's situation closely. Not only has California been at the forefront of deregulation, but the high summer prices have affected other states, including Oregon.

Roger Hamilton -- a member of the Oregon Public Utility Commission, which regulates utilities -- said the FERC recommendations appear to correct the worst of California's pricing policies. For months, energy experts have been pointing the finger at provisions that force utilities to buy short-term, without long-term hedges.

"It fixes things up to a point," Hamilton said. "It should help suppress volatility."

Oregon has begun to deregulate the electric industry, but in a different, more incremental way than California, Hamilton said. Oregon has neither a central power exchange nor pricing caps. When deregulation begins in the fall of 2001, industrial and commercial customers will be allowed to buy power competitively on wholesale markets, but residential customers will remain under regulated rates.

Hamilton said he hoped California's troubles won't stall restructuring efforts in Oregon.

"I'd hate to see the Oregon Legislature get cold feet and rescind the measures we've taken toward restructuring," he said. "If California gets things working, I think we're all better off."

A spokesman for a California utilities association said they were pleased the commission recognized California's market flaws, "particularly the limitations of companies to hedge their risk by buying forward," said Jim Owen of the Edison Electric Institute, which represents investor-owned utilities. "This will give companies more flexibility to manage their market risk."

The three California utilities had no independent comment.

FERC also proposed a temporary change in how much the ISO or the exchange, which runs a competitive auction for electricity, pays wholesale electricity suppliers.

Electricity sellers could receive a price higher than $150 a megawatt-hour only if the exchange or ISO decided the power was particularly needed and the sellers agreed to submit weekly reports to the FERC providing certain cost information. One megawatt-hour is enough power to light 1,000 U.S. homes for an hour.

Curt Hebert, the commission's only Republican, said creating different requirements for prices higher and lower than $150 a megawatt-hour would be a "de facto" price cap. He opposes price caps and has voted against price cap orders for several states, though he voted for Wednesday's order.

The FERC will take comments on its proposals for three weeks before issuing a final order by the end of the year.

California's power market has been called "broken" by utilities and regulators. FERC's order was based on a staff report that examined whether power producers in the state abused their market power by charging exorbitant rates when demand was highest.

The report said "unjust" price surges were caused by limitations of the market structure, such as constraints on utilities' ability to buy power for delivery days and weeks ahead of time. Critics have accused generators of waiting until the last minute to sell at higher prices during peak demand during the summer. High prices were also blamed on an imbalance of supply and demand.

The commission has scheduled a public conference on Nov. 9 in Washington, D.C., to hear comments about its proposed remedies for straightening out California's power market.