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States Want to See Quicker, More Forceful FERC

March 26, 2001
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States Want to See Quicker, More Forceful FERC

FERC came under heavy attack on Capitol Hill last week from state energy officials for dragging its heels in issuing decisions, not aggressively monitoring bulk power markets for abuses, and for not checking more thoroughly to see whether competition was present in electric markets before it removed price regulation.

"One clearly unacceptable outcome" of wholesale power deregulation for state regulators has been the elimination of cost-of-service price regulation without competition in place yet, said Commissioner William Nugent of the Maine Public Utilities Commission (PUC) during a Senate hearing last Wednesday on changing energy trends in the United States. "A fair, well-functioning competitive wholesale market is a must. No amount of brilliance in designing the retail market will correct defects at the wholesale level."

In testifying before the Senate Energy and Natural Resources Committee, Nugent noted that "truly competitive markets free of market power and gaming [must] replace price regulation," but he said he couldn't assure lawmakers that such wholesale markets exist today.

"Right now in my view, the FERC is overwhelmed by the task before it," he said, which has caused the agency to react slowly to events in the wholesale markets nationwide. "In order to have competitive wholesale markets, FERC must give prompt decisions to market participants." This failure to respond quickly has bred "too much uncertainty in the market," which he says is responsible for the unjust and unreasonable prices.

In the New England region, for example, Nugent urged FERC to "pay more attention" to the installed capacity issue, which he said could cost Maine ratepayers as much as $90 million a year and 10 times that amount region-wide. In addition, the region is still awaiting a FERC decision on complaints addressing the $6,000/MWh price spike last May, which some sources estimate led to an additional $90 million in overcharges to the spot market, he said.

It would help matters if the White House would get around to filling the two vacant Commissioner posts at FERC, Nugent allowed. "I agree with you," said Committee Chairman Frank Murkowski (R-AK).

In the meantime, New England has asked FERC to allow it to establish a regional market monitor to police abuses, and Maine has gone a step further and requested authority to create a regional organization that would advise and make comments to the Commission on critical market matters, he said. The latter "could ease FERC's burden," and aid in the development of competitive wholesale markets, Nugent believes. Both requests still are pending.

Frederick Hoover, director of the Maryland Energy Administration in Annapolis, MD, also gave the Commission low marks for ensuring the competitiveness of bulk power markets. "FERC must take a more aggressive role in market monitoring and [give] strong consideration to the cost-of-service pricing for wholesale sales" in troubled electric markets. "If generators think that FERC is not serious, excess profits will be made." The Commission's recent orders addressing potential refunds and price manipulation in the out-of-control California wholesale market "head in the right direction," he said, "but do not go far enough."

Murkowski asked Nugent, Hoover and the other energy analysts and specialists who testified, what would be the one thing they would do to immediately alleviate the current energy crisis. Guy Caruso of the Center for Strategic International Studies in Washington, D.C. recommended actions to stimulate production. But "that may mean cutting temporarily some environmental oversights. Are people ready to support that, or do they have to go in the dark for awhile to accept that?" asked Murkowski.

In the first instance, "about the only alternative is conservation," said James Placke, director of Middle East Research in Washington. But with retail power prices capped in California, what incentives do customers have to buy energy-conserving appliances, asked the senator. For conservation to work, Placke said wholesale costs would have to be passed through to the retail level. Without that, "the problem will drag on."

Nugent agreed. "I think passing through the price signals is the very appropriate response. We as regulators must give mechanisms to the public [that] enable them to have the [price] information in real time" and make decisions based on that. Nugent noted that large industrial users in Maine responded to price signals by suspending operations during peak hours.

Price caps on wholesale power transactions, which continue to be debated on Capitol Hill and at FERC, can work if they're done right, the Maine regulator said. New England has a $1,000/MWh cap, which "I don't think is an unreasonable one," he said. It "keeps you [the customer] from being mortally wounded," while at the same time, it allows the market to function.

Turning to western markets, Placke predicted that the California electricity market will be beset with problems for a few years to come. "California will be with us. It's going to be a difficult year in California this year and probably next year." It may return to "something like normal" by 2003, he said.

"We anticipate...perhaps as early as this summer, power shortages in down-state New York," which includes New York City and surrounding counties, Placke said. This will occur because of the inability to transmit power from New England, where there's a surplus, to the New York market. Few believe there's much that can be done in the short term to head this off.

One senator predicted that Arizona could face brownouts and blackouts this summer as well because of the state's continuing power exports to the troubled California market.

In the longer term (by 2020), the Energy Information Administration (EIA) forecasts there will be a need for large generation capacity increases in the Southeast, Texas, California and parts of the Midwest. Nationwide, about 413 gigawatts of additional capacity will be required by then, which is equal to about 1,400 new 300 MW-sized facilities, said Mary Hutzler, director of the EIA's Office of Integrated Analysis and Forecasting.

Natural gas demand from the generation market is expected to triple over the next two decades, resulting in about a 52% increase in total consumption, she noted.

On the gas side, Placke said this past winter "pressed the system very hard, so hard that gas prices tripled." Prices have "now fallen into a range just about double what had been the norm, and they're likely to stay there for the foreseeable future." The key market issue, he believes, will be the permitting environment for construction of new pipelines and expansions.

On the topic of gas supply, Placke said less gas will come from traditional sources and more will come from "areas that are now beginning to appear on the horizon, such as Arctic gas..." He believes that building a pipeline to transport the Arctic gas to the Lower 48 states should be a priority of the U.S.

The Gulf of Mexico will continue to be the "primary.....frontier for U.S. domestic gas production," he said, and "will absorb larger and larger amounts of investment." Murkowski indicated last week that maybe it's time for Congress to consider lifting the moratoriums on offshore drilling off the East and West Coasts and the Gulf Coast of Florida. "Where is this energy [that we need] going to come from if we have these moratoriums?" he asked.

In addition, imports of liquefied natural gas (LNG), which were "fashionable" back in the 1970s, "are back on the agenda," Placke said. At current price levels, it has become "economically feasible" to import gas in LNG form from supply points overseas, he noted. Susan Parker

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