NGI The Weekly Gas Market Report / NGI All News Access

FERC Should Expand CA-Specific Actions to Markets Nationwide

The series of actions taken by FERC last month to boost supply and encourage construction of electric and natural gas transmission facilities in California and the West in the short term are "bold" and should be implemented, but the Commission also should consider expanding the scope of the actions to apply to wholesale power markets nationwide, said the Edison Electric Institute (EEI).

"...[T]he problems of the West could quickly emerge in other regions of the country within the next few months. For this reason alone, the Commission must be prepared to apply many of the proposals in the [March 14] order nationwide," the EEI told FERC [EL01-47].

The Commission's actions are "good first steps" to alleviate supply shortages in the West, but "we are persuaded that the problem is deeper, wider and of longer duration than the remedies proposed by the Commission suggest," said the EEI, which represents investor-owned utilities.

"As industry observers have cautioned, [the] transmission infrastructure shortfall is a national problem not isolated to the western markets..." In light of the potential for problems elsewhere, particularly in the Northeast and Southeast bulk power markets, "the Commission needs to demonstrate strong policy leadership in this area, above and beyond the western-oriented proposals outlined in the order."

EEI's comments were in response to a March 14 order announcing a series of actions to offer customers short-term relief from the effects of the out-of-control wholesale power market that has engulfed California and spilled over to the entire western region. The actions included economic incentives to encourage construction of new power and natural gas transmission facilities in the near term; waivers of Commission regulations to boost supply; a proposal to shorten the depreciation to encourage investment in power transmission; and measures to reduce demand for electricity (See NGI, March 19).

In addition to expanding the scope of the Commission's actions, the EEI called on FERC to develop similar actions for the long term to stabilize power markets. For instance, to encourage investment in new investment facilities, the group urged FERC to adopt over the next five to ten years a "substantial" return on equity (ROE) incentive across the board equal to at least the Commission's proposed 11.5% provided for all jurisdictional transmission providers in the Western Systems Coordinating Council (WSCC), or to a current state-approved rate. It also suggested that the Commission "substantially shorten the depreciable life" to ten years for all new transmission facilities throughout the nation.

"Long-term measures need to be developed and implemented quickly nationwide not only to restore safe, reliable and economic power to the consumers in the West, but also to ensure that other similar crises do not emerge or prolong themselves elsewhere."

The California Energy Commission (CEC) made clear that it wasn't happy with FERC's failure to initiate price controls on wholesale power transactions in the West as part of the order. Not one to give up easily, it called on the Commission "to either establish, or authorize the western states, working in cooperation with FERC staff, to prepare and submit a detailed and implementable price-control plan" as soon as possible to take effect this summer.

The CEC suggested that the Commission consider three options: 1) directly control prices in the Western Interconnection; 2) require all generators and others sellers in the region that have excess supply to enter into long-term contracts with load-serving entities that are short on meeting the demand of their customers; or 3) institute cost-based bidding in all regional markets.

"Each is an intrusion into the free market, but the western electricity markets are currently neither free nor competitive," the CEC told FERC. "Imposing temporary caps or contracting requirements while the market becomes functional and competitive is a reasonable thing to do for a limited period of time."

The California Electricity Oversight Board gave FERC high marks for its efforts, but it urged the Commission "to be cautious in its approach to providing transmission owners with economic incentives to construct" new facilities or upgrade existing facilities, given that some of the transmission owners already may be "obligated [by the state] to undertake the same [projects] absent such economic incentives."

The California Public Utilities Commission (CPUC) raised similar concerns. "In California, the transmission companies are moving as quickly as possible, prodded by new state law and by the CPUC. A higher rate of return on projects...is unlikely to speed transmission construction up much," the CPUC said. As Commissioner William Massey observed in his dissent on the March 14 order, "this proposal would result in an ROE of 14.5% for such projects, with no particular rationale, and no relationship to risk."

The Electric Power Supply Association (EPSA) applauded FERC's actions as well, but it called on the Commission to consider some additional measures: 1) allowing qualifying facilities (QFs) to sell power at negotiated rates to third-party buyers under existing interconnection arrangements; 2) streamlining the process so QFs can interconnect to the grid more quickly; 3) confirm that existing power purchase agreements (PPAs) for sales to western markets "will remain in full force and effect" in the wake of FERC's emergency order; and 4) confirm that any revenues a QF receives as a result of a third-party sale will not reduce a utility's obligation to that QF under existing PPAs.

Although the issue was not addressed in the March 14 order, the EPSA also called on the Commission "to take all possible steps to ensure that all suppliers are paid in full for energy sold in California."

©Copyright 2006 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.