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Governors are Divided on Power Price Caps by Tom Detzel, The Oregonian staff The Oregonian, January 31, 2001

A meeting in Portland starting Thursday will include top U.S. officials
and explore ways to curb the region's spiraling costs

WASHINGTON -- Western governors head into this week's summit on the California energy crisis with no consensus about one of the fastest ways to curb escalating power costs: slapping price controls on wholesale electricity.

The 11/2-day meeting that opens Thursday night in Portland features two administration power players -- new energy Secretary Spencer Abraham and Curt Hebert Jr., recently appointed chairman of the Federal Energy Regulatory Commission, both of whom frown on price caps.

At the summit they will be face-to-face with Republican and Democratic governors who have said some form of short-term price regulation should be part of a comprehensive response to the power crisis.

A debate about price caps, and a possible recommendation to Hebert and federal regulators, will provide at least part of the drama at the meeting led by Idaho Gov. Dirk Kempthorne, chairman of the Western Governors' Association.

Billed as an "Energy Policy Roundtable," the gathering comes in the wake of California's rolling power blackouts and mounting fears that high energy prices could prove devastating to the region's ratepayers and economy.

Kempthorne, a Republican, said there remains a sense of crisis in the region although California is taking legislative action to stem both the blackouts and a financial emergency that threatened the solvency of the state's two leading deregulated utilities, Southern California Edison and Pacific Gas & Electric.

Oregon Gov. John Kitzhaber, who is tentatively scheduled to lead a Friday morning session on short-term solutions, said it's important to cast the problem as a regional emergency and not to pit other states against California.

"It's a Western problem, and if we act, both at the state and the federal level, we can avoid it becoming a national problem," said Kitzhaber, a Democrat. "You can't simply let the state of California go down the tubes for a number of reasons, not the least of which is that it's the sixth-largest economy in the world."

Besides nine governors, more than a dozen representatives from utility and power generating companies are scheduled to participate, as is Rep. Peter DeFazio, D-Ore., Commissioner William Massey of the Federal Energy Regulatory Commission, and tribal officials. California Gov. Gray Davis is not on the confirmed list of participants, but his office said he hoped to attend.

It will be Abraham's first trip to the Northwest since his confirmation by the Senate last week, and his most visible foray into a situation that's being watched as the first test of the Bush administration's crisis management.

Abraham last week agreed to extend an emergency order that required electric utilities in the region to sell excess power to California, and President Bush on Monday appointed Vice President Dick Cheney to lead an energy task force to address both California's situation and long-term energy policy.

Bush has said price caps aren't the answer to rising energy costs, which have rocked the West as wholesale electricity prices rose to more than 20 times their average of a year ago, in part because of California's woes.

Utilities are asking for double-digit increases in Oregon, Washington, Idaho and Utah. In Montana, where commercial sales are deregulated, increases to some industrial customers have caused them to lay off hundreds of workers.

Meanwhile, the federal Bonneville Power Administration, which sells wholesale electricity from dams in the Northwest, predicts a 60 percent boost in wholesale rates for its utility customers over five years. The agency spent $50 million in a single week this month to buy power on the open market.

<-RT>The debate about price caps has been a subplot since wholesale prices started to rise last summer in California.

Davis has the been the most urgent advocate, asking the Clinton administration last year for a federally imposed "hard" cap that would set regional ceiling for wholesale power until energy markets could stabilize.

In mid-December, however, the energy commission rejected a hard cap and instead opted for a system requiring sellers to report when prices exceeded $150 per megawatt hour. Critics said the move had no real teeth, and prices continued to spike, reaching as much as $1,000 per megawatt hour on the spot market.

Also meeting in December, the Western governors asked the energy panel to "prepare an immediate report on the implications and potential consequences of regional price caps" and to investigate high prices and who is benefiting.

Then, two weeks ago, Utah Gov. Mike Leavitt and four other Republican governors wrote Davis suggesting they jointly request "cost-plus" price caps from the energy commission as an "immediate solution to protect our customers from skyrocketing prices."

Davis, Kitzhaber and fellow Democrat Gary Locke of Washington back such caps on a temporary basis, saying they would stabilize prices and provide breathing room for California and the region to work on the problem.

Meantime, power producers such as Houston companies Enron and Dynergy, which have been attacked for profiteering, could cover their costs and still earn a fair return.

Kitzhaber said he hoped the summit produced a "framework" for attacking the region's energy problem that stresses conservation and renewable energy sources as well as new power plants. But he said part and parcel of that framework should be cost-based caps on prices.

"We need a bit of regulatory stability here, so we aren't simply reacting to the spot market," he said. "You've got to do it in a way that it's clear it's short term. And you've got to do it so that you don't create disincentives for new generating capacity."

Energy suppliers oppose price caps, saying they take away financial incentives to build new power plants needed to meet rising consumer demand, and that they can hamper conservation by keeping prices artificially low.

And although Republicans have endorsed the "cost-plus" approach, Leavitt said it was better achieved by contract than regulatory decree.

"I'd be surprised if we see the federal government impose that kind of requirement," said Leavitt, who was among four Republican governors who met with Bush and Cheney last week in Washington and discussed energy.

Although price controls came up, Leavitt said, it was clear "that wasn't part of their strategy. I think their strategy is to get increased (energy) production. . . . They want to work with the problems of the West in the context of a national energy policy."

That would be consistent with Bush's campaign platform on energy. It stressed oil and gas exploration on federal lands, including the Arctic National Wildlife Refuge, and incentives to build or improve coal and nuclear power plants while encouraging conservation and exploring alternative energy.

Abraham was unavailable for comment, but spokesman Joe Davis said that given Bush's opposition to price caps, "that's our position."

Asked about the temporary cost-plus caps that GOP governors endorsed, he said, "It's something we're going to have to learn more about."

Kempthorne said price caps, besides being a disincentive for developing new power, can be tricky to manage.

"Once you do it, what's the duration? What are the conditions and when do you take them back off?" he said.

Kempthorne said he hoped a number of alternate options for addressing the energy situation would be considered at the summit, including conservation, maximizing output from existing power plants, tax incentives for new plants and transmission lines and steps to accelerate the licensing and siting process.

Kitzhaber said he was wary of placing too much emphasis on finding new energy supplies and not enough on conservation and renewables.

"If there's going to be an effort to essentially try to build our way or generate our way out of this problem with no consideration for the environmental implications, that's just not acceptable to a lot of people," he said.