Debate Over Price Caps Continues on Capitol Hill

As California suffered through two consecutive days of daytime darkness last week, FERC regulators remained as divided as ever over whether to impose price caps on wholesale power sales in the West to help alleviate the continuing crisis.

In testimony during a House Energy and Air Quality Subcommittee hearing last Tuesday on the California power markets, Commission Chairman Curt Hebert toed the Bush administration line in opposing price caps as a short-term remedy, while Commissioner William Massey drove home the need for temporary caps to avoid a catastrophe in western power markets this summer. Commissioner Linda Breathitt remained non-committal on the issue.

She conceded, however, that she has become "increasingly concerned" about problems facing the western energy markets in the short term (summer), and believes the Bush administration, Congress and regulators should begin "exploring shorter-term options" to resolve the dilemma. President Bush said last week his administration's focus would be long-range solutions to the energy problems facing the nation.

As the second summer of a "wildly dysfunctional market" in California approaches, "we stand at the edge of an abyss," Massey warned. "We have reason to believe market power is present in the market," he noted, adding that the withholding of generation capacity has become a "highly profitable strategy." California's bulk power markets already have been declared "highly dysfunctional" by FERC, and the problems have been so well publicized that even elementary school children in Maryland know that the state is capacity short, Massey said.

Without some form of effective price mitigation in the West, "I fear a disaster" will occur in the western electricity markets this summer, he said. Massey believes temporary price caps would provide a much-needed respite for the West from the crisis. Under his proposal, new generation facilities would be exempted from the caps so as not to hamper investment in the market, and the caps would have a specific sunset date. "I don't support a long-term price cap," he told Subcommittee Chairman Joe Barton (R-TX).

If FERC can rein in wholesale power prices, Massey suggested that California might be more willing to pass through the costs to retail residents. He said he thinks state regulators have been unwilling to do this so far because they think the wholesale costs are a "rip-off."

"FERC must take more forceful action to fulfill our statutory obligation," Massey noted. In addition to temporary price caps, he said California and other western markets must establish a regional transmission organization, end their overreliance on the spot markets, and replicate the rules of the PJM (Pennsylvania-New Jersey-Maryland) market. As another potential remedy, Breathitt said Congress may need to give FERC a "greater role" in the siting of transmission facilities.

Also, the Commission needs to look into the reasons for the "sometimes exorbitant" transportation differential for natural gas - as high as $30 - into the Southern California market, Massey noted. "We've got to get a handle on that problem as well" since gas is increasingly being used to fuel power generation plants.

In contrast, Hebert touted supply and load-reduction measures to resolve the current "state of stress" that has engulfed California and other western power markets. "Price caps are not a long-term solution," he told the subcommittee. In the end, he said he was confident that the problems "can be and will be solved" in the troubled markets.

Going forward, the question of price caps will not be up to these three alone. President Bush is expected to name two new commissioners in the near future to bring FERC up to the five-member limit. Susan Parker

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