FERC Divided on Price Caps, Finds No Fault with Generators
The Federal Energy Regulatory Commission came out divided last
week on whether regional price caps should be imposed on the
wholesale power market in the West. FERC Chairman Curt Hebert and
the Commission staff maintained opposition to price caps, while
Commissioner William Massey came out strongly in favor of some form
of temporary regional price caps until permanent solutions to the
current crisis can be found.
Massey said to do otherwise would be "unlawful" because FERC is
obligated to ensure just and reasonable rates for wholesale
electricity. Commissioner Linda Breathitt, meanwhile, waffled on
the issue, saying she was willing to consider all options. She
noted the region needs a regional transmission organization to
implement required changes on a broad scale.
Hebert said regional price caps are "somewhat of an
impossibility." Much of the power in the West is sold by entities
FERC doesn't regulate. There's no regional power exchange. And many
wholesale transactions are bilateral, long-term agreements, he
"Price caps also stifle competition," said Hebert, adding the
market needs clear price signals right now to find a solution. He
also said FERC, the Department of the Interior and the Energy
Department need a "common vision on energy policy" to move in the
right direction on this crisis.
Meanwhile the Commission staff released three reports in time
for the Energy Policy Roundtable in Portland, OR (see related story
this issue). One report is a response to questions posed at a Dec.
20 meeting of the Western Governors Association in Denver. Another
lays out the numerous causes of the Fall price spikes in the
Pacific Northwest and California. And a third involves an
investigation into power plant outages last Summer and Fall in
California, and it concludes they were not intentional attempts by
wholesale generators to increase prices.
In a response to questions from the Western Governor's
Association meeting, Commission staff laid out a host of reasons
price caps should be avoided. Staff said that many who ask for spot
market price caps really want spot prices to be set at levelized
long-term rates. But capping spot prices would "exacerbate supply
"The danger as evidenced during the last year when California
operated under price caps is that we turn a pricing problem into a
reliability problem. In this regard, price caps cannot be enforced
unless buyers are willing to go without electricity if supply is
unavailable at the cap level." Caps also "reinforce any reluctance
of California or other states to deal with long-term solutions."
In addition, capping spot prices would "unravel the economic
decisions" of those who already have entered long term contracts,
"rewarding those who did not exercise their choice to hedge."
Installing a regional cap also is no simple matter, staff said.
Under Section 206 of the Federal Power Act, FERC would be required
to initiate a separate proceeding with a notice and comment period,
providing opportunity for all interested parties to express support
or opposition. "This process would be time consuming and
Distancing himself from the Commission staff and Chairman
Hebert, Commissioner Massey suggested that temporarily capping
wholesale prices at variable operating costs plus a reasonable
profit of $25 per MWh would be a smart solution. He said FERC
should take under "serious consideration wholesale price relief."
Massey called the situation a "tragedy" and said FERC needs to
take a "more aggressive role." A "hands off" approach would be
"unlawful and politically unacceptable." The region needs more
generation and transmission and greater conservation, he added.
Fundamental Factors Converge
The price of power in the West has reached astronomical levels
for a large number of reasons, staff concluded in its report on
Northwest power markets. There has been an inadequate amount of
generation added in both the Pacific Northwest and California
throughout the 1990s, which was one of the major contributing
factors, staff said. However, a number of fundamental factors
converged in November and December 2000 to help drive prices to
record levels. They included "extreme cold, high natural gas prices
and low storage levels, and low water, precipitation and stream
flow levels," FERC staff said. "These conditions were made worse by
an operating environment with a large number of outages and
environmental constraints, and the general atmosphere of market
uncertainty surrounding the extreme nature of these fundamental
Although power plant outages were partially to blame for the
short supply situation and price spikes in California last fall, a
FERC staff investigation into the state's power plant outages found
"no evidence suggesting that the audited companies were scheduling
maintenance on incurring outages in an effort to influence prices.
Rather the companies appeared to have taken whatever steps were
necessary to bring the generation facilities back on line as soon
as possible by accelerating maintenance and incurring additional
expenses," staff said in its third report. "Also the outages did
not necessarily correlate to the movement of prices on a given
The staff's investigation involved a review of 60% of the
outages, including telephone interviews with operators, three
on-site plant inspections and several meetings at the Houston
headquarters of several wholesale generation companies.
The outages occurred at generating plants that were 30 to 40
years old and that were operated last year at a much higher rate
than in the recent past, staff noted. Most of the outages occurred
because of "tube leaks and casing problems, turbine seal leaks and
turbine blade wear, valve failure, pump and pump motor failures."