Regulators OK power price mitigation plan for West

WASHINGTON -- Federal energy regulators Monday adopted a price "mitigation" plan designed to reduce spikes in wholesale electric prices in California and other Western states.

However, the Federal Energy Regulatory Commission plan stops short of imposing fixed price limits, an idea pushed by political leaders in energy-strapped California. who accuse the commission of not doing enough to stop price gouging by power suppliers.

The plan, approved unanimously, covers California and 10 other Western states. It will limit power prices based on a formula tied to the efficiency of power generation. It prohibits power suppliers from withholding power from the market to drive up market prices.

The announcement came as temperatures soared and Californians were warned that generating capacity was again running short.

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So far, however, the state has dodged rolling blackouts. The California Independent System Operator, which controls most of the state's power grid, canceled its warning of potential interruptions in electric service for Monday and Tuesday.

The warnings issued Monday were the first time that the ISO had given Californians advance notice that blackouts were possible. California Gov. Gray Davis issued an executive order June 1 that requires the warnings, which are intended to lessen the impact of sudden outages.

Davis said that FERC "has finally taken a step in the right direction, but there is much more that they should do. Californians have been overcharged billions of dollars for electricity. To date, we have not received one cent in refunds."

Curt L. Hebert Jr., FERC's chairman, said the mitigation plan relies on "market-oriented principles" that will restrain prices, rather than setting prices by "bureaucratic fiat." He also said that tying the price structure to the efficiency of production will encourage power generators to invest in new facilities.

"It is time to stop blaming and start solving problems," Hebert said. "It is a balanced plan that respects market forces and that attempts to restrain prices while offering an inducement for new supply and delivery capability."

However, the mitigation scheme may go further toward price regulation than some free-market advocates want.

In a letter to Hebert, House Majority Whip Tom DeLay warned against the plan, saying it would diminish energy supplies. He denounced price caps as "an invitation to a radically dysfunctional electricity market and economic chaos."

Speaking before FERC's vote, President Bush said that while he was interested to see "what FERC comes up with," the commission knows "full well my administration's belief that price controls will not solve the problem."

The power crunch -- affecting several Western states -- has been particularly severe in California, where soaring utility rates and intermittent blackouts have frustrated residents and businesses.

FERC included the other states that share a power grid with California in the plan in an effort to prevent suppliers from shifting electricity to avoid mitigated prices directed at California alone. The price limits will be in effect through September 2002.

FERC has the ability to regulate markets when it deems that wholesale prices are not fair and reasonable. The agency has previously found $124 million in possible overcharges in California this year.

In May, FERC instituted a mitigation plan to control prices during power emergencies in California. Monday's vote extends that plan to nonemergency hours as well.

Hebert said that the original mitigation plan has caused spot prices on the wholesale market to drop from $400 per megawatt hour in May to around $100 per megawatt hour in June.

Wholesale prices have skyrocketed to more than 10 times what they were a year ago, and many observers blame the state's 1996 deregulation of the electricity market as the root of the problem.

The other states in the Western power grid are Washington, Oregon, Montana, Idaho, Wyoming, Utah, Arizona, Nevada, New Mexico and Colorado.

The Western electricity crunch has become a rallying cry for Congressional Democrats, who have accused utility executives of price-gouging.

Rising utility rates and scattered blackouts have frustrated residents and businesses in California in particular. Wholesale costs have skyrocketed more than 10 times what they were a year ago, and many observers point to the state's 1996 deregulation of the electricity market as the root of the problem.

Sen. Barbara Boxer, D-California, has said she doesn't understand how "electric generator executives can sleep at night." House Minority Leader Richard Gephardt, D-Missouri, said FERC has come up with "less than optimal solutions that don't really solve the problem."

The state's attorney general, Bill Lockyer, announced last week that a criminal grand jury will be convened in early July "to get at the truth about energy pricing practices for electricity and natural gas that hit California pocketbooks hard."

Over the last year, California has gone from paying peak prices for a relatively small amount of time to paying those high prices for hundreds, if not thousands, of hours per month from out-of-state suppliers. In April, the peak price was an average of $372 per kilowatt hour compared with $26 per kilowatt hour last year.

FERC already reviewed wholesale power transactions in California for the first couple months of this year and found $124 million in possible overcharges. The suppliers defended the increases, blaming them on a shortage of power and uncertain finances of the state's two major utilities, Pacific Gas and Electric Co. and Southern California Edison.

FERC has the ability to regulate when it deems the wholesale prices currently determined by the open market are not fair and reasonable.