Bush Says 'No' to Price Caps; CA Files RTO Plan

Capping a week that featured a face-to-face meeting between President George W. Bush and California Gov. Gray Davis in which the president delivered a public and unmistakable 'no' to price caps as a way out of the western energy crisis, the Cal-ISO, Southern California Edison and San Diego Gas and Electric (SDG&E) filed --- under protest --- their plan to form a single, state regional transmission organization (RTO).

Bush had called for an end to finger-pointing. "Blame shifting is not action," Bush said. "It is distraction." But after a private meeting Tuesday in Los Angeles between the federal and state chief executives, the governor said the president had expressed concern that Texas natural gas prices delivered to California are sometimes ten times what they are in New York. Davis said the president had pledged to send his latest appointee to the Federal Energy Regulatory Commission, Pat Wood, to California for a first-hand review of the situation.

Meanwhile, the California parties were clearly unhappy with the Commission's April 26 decision that offered price-mitigation to the California electricity market, but only on the condition that the Cal-ISO and its three investor-owned utilities (IOU) submitted an RTO proposal by June 1. If the state missed the deadline, FERC threatened to deny the relief.

"We have filed this [RTO] proposal or plan under protest because we believe that what FERC has ordered us to do is illegal," said Charles Robinson, vice president and chief counsel for the Cal-ISO.

"We do not believe it [was] legal or appropriate" for the Commission to withhold price mitigation from the California public until an RTO filing was made, agreed Michael Kahn, chairman of the Cal-ISO board of governors during a teleconference with reporters late Friday. "We hope we don't see this tactic again" from FERC. Although the Cal-ISO and utilities complied with FERC's demand, Robinson said they reserved all rights to pursue legal remedies against the Commission in the future. He noted that the Cal-ISO already has filed a petition for rehearing of the April 26 order at FERC.

Pacific Gas and Electric, the largest IOU in the state, reportedly filed a separate RTO plan. "The reason that PG&E felt it was unable to join...us was that they want to protect their rights in the bankruptcy," Kahn noted. Whether FERC will accept two RTOs for the state -- one essentially for Southern California and the other for Northern California (PG&E territory) -- remains to be seen.

In the joint proposal, the Cal-ISO clearly noted that it believed that "in many ways [it already] meets nearly all of the requirements that FERC set forth for RTO organizations" in Order 2000. California is "ahead of its time in many ways," said Robinson. Both Kahn and Robinson defended the Cal-ISO's and utilities' decision to limit the RTO to California, but they noted that California is seriously committed to working with adjoining states "to find ways of further bringing benefits to California" and its neighbors.

They oppose the creation of a western-wide RTO organization at this stage. "We believe it would be inappropriate for FERC at this point to compel a western-wide...RTO until a number of issues are resolved," Robinson noted, referring to the current market crisis facing California.

In fact, Kahn said that grid regionalization wasn't uppermost in the minds of most Californians. "I don't think that anybody in California is concentrating on what we will do in two years, three years or four years" with respect to regionalization of the transmission market, he said, adding that the immediate concern in the state was power prices.

Kahn bristled at the suggestion that FERC might reject the RTO proposal, given that the current Cal-ISO board, whose members were handpicked by Gov. Gray Davis, might not be considered independent of the electricity market there. "It's my feeling that we have a very independent board," he said.

When asked if he thought the Commission might challenge the make-up of the Cal-ISO board, Kahn said it's "not apparent to me that FERC's going to do that," although he conceded "I am not going to pick a fight" with the Commission over this issue. "Hopefully, FERC will leave [the board] be."

In other major developments last week, the never-say-die Gov. Davis quickly turned his attention to the two soon-to-be members of the Federal Energy Regulatory Commission to win their support for price caps on bulk power after he failed to get President Bush to budge on the issue during their meeting last Tuesday.

He sent letters to both Patrick Henry Wood III and Nora Mead Brownell, inviting them to travel to the Golden State to be briefed on the energy challenges facing it. With new blood at the Commission, Davis said he was "optimistic" that FERC might take a "fresh look" at its "essential role in controlling wholesale [power] prices in the West."

While both Wood and Brownell, former state regulators, have been confirmed by the Senate, they have not yet been sworn in as commissioners at FERC. Wood is expected to be sworn in Tuesday in Austin, TX, and then will head for Washington D.C., but Brownell's office did not know when her swearing-in would take place.

"As you are well aware, I have been calling on the FERC for some time to provide meaningful relief from unjust and unreasonable wholesale electricity prices in the West...Unfortunately, FERC has resisted our requests to provide a temporary 'time-out' from a market that the Commission itself has found to be dysfunction," Davis wrote to both Wood and Brownell, adding that he was seeking their help in areas that fall "solely and squarely on the FERC's shoulders."

If Wood and Brownell should support price caps, they would join Commissioner William Massey -- the sole member of the current Commission who favors price controls. While this would put them in a three-to-one majority at FERC (Chairman Curt Hebert opposes price caps; Commissioner Linda Breathitt is undecided), this would not necessarily signal a green light for price caps at the Commission. Hebert, as chairman, controls what's placed on the agenda for FERC meetings, and he could see to it that price caps don't come up for a vote.

As part of his outreach to Wood and Brownell, the governor said he would hold off at least 30 days before taking his already committed legal action to force FERC to regulate prices pursuant to the Federal Power Act. "We'll give FERC 30 days at least and then file a lawsuit because I'm sure they won't do as much as we need."

Although Bush stood firm on the issue of price caps, the president last week reiterated that he was committed to providing Californians with rate relief via refunds in the event of price gouging in the market. Bush and senior White House officials have incorrectly noted on several occasions that FERC already has begun to order refunds to California electric customers. But if the truth be known, while the Commission has targeted a number of California power generators and marketers for "potential" refunds, it has only ordered one marketer -- Williams Energy Marketing & Trading -- to pay refunds ($8 million) to the California Independent System Operator.

During their meeting in California, Bush agreed -- at Davis' request -- to ask Wood to come to California to open a "steady line of communications" between the state and federal government on energy issues, a move that caused some concern since FERC is an independent agency. Other observers, however, saw it as a further sign that the president plans to name Wood to replace Hebert as chairman of FERC.

In fact, Vice President Dick Cheney said as much during a PBS "Frontline"-New York Times program addressing the California energy crisis, which will be aired on "Frontline" June 5. "Pat Wood's got to be the new chairman of the FERC, and he'll have to address" energy problems in the West and elsewhere, the Times quoted him as saying. Wood, a close friend of the president, was appointed to the Texas Public Utility Commission in 1995 by then-Gov. Bush, and later named chairman. Brownell has been a member of the Pennsylvania Public Utility Commission since April 1997.

While Davis and Bush remained far apart on "the big enchilada" issue of power price controls, the governor publicly praised Bush for vowing to look into disparity in prices for delivered natural gas to the California border compared to other receipt points in the United States. Prices for natural gas transported to Southern California have been three times higher than the delivery prices for gas to other major markets during the past year. Some contend that FERC's decision to uncap transportation rates for short-term service has been to blame for the abnormally high gas prices in California. They further insist the skyrocketing prices for gas, which is in big demand by power generators, are largely responsible for the state's out-of-control power market.

Davis said Bush was "deeply concerned" about the natural gas price aberrations that began about a year ago. "Even if there isn't (market manipulation), the President is open to reviewing the wisdom of FERC's action two years when it suspended a tariff that controlled the transportation element of natural gas."

In other developments last week, the consumer branch of the California Public Utilities Commission (CPUC), the Office of Ratepayer Advocates, appealed to President Bush to take a broader look at price caps, arguing that they don't have to necessarily discourage new power production being built if they are applied regionally throughout the western states, on a 24-7 basis and at levels that are "generous, but not extortionate profits."

The state utility consumer organization said that caps can be set high enough to allow for sufficient profits and incentives to produce and build new plants.

"California's economic future is at risk right now, and it is likely those problems will spread far beyond California's borders," said Regina Birdsell, ORA director. "Other western states are feeling the pain from high electricity rates, which the federal government has the power to temporarily correct."

As he has done numerous times over the past year, the governor went on high profile national talk shows and wrote an opinion piece in last Thursday's The New York Times, "Bush's Mistake in California." He underscored the theme of the week that the President was sending the state and the nation on a "perilous" economic course, if he didn't change his position on wholesale price relief.

"I don't think it is a matter of ideology, it is a matter of law," said Davis, noting he has a "fundamental difference" with the President on this issue, which the governor keeps arguing is legally owed to the state by FERC once it declared in its famed Dec. 15 order that prices were not "just and reasonable." However, the Dec. 15 never found bulk electric prices in the state to be "unjust and unreasonable." Rather, the order stated that circumstances existed in the California energy market that could lead to "unjust and unreasonable" prices later on.

While thanking the President for the meeting and his visit to California, Gov. Davis stressed that he eventually will pursue every legal avenue open to him to win price-cap relief . "Since 1935, it [FERC] has had the obligation to ensure that markets are functional and rates are just and reasonable."

Princeton University economist Alan Blinder, former vice chairman of the Federal Reserve's Board of Governors, said California's energy crisis could create an "economic shock" in the state that would be the equivalent of the 1973 Arab Oil Embargo's economic impact on the entire nation.

Blinder said he agreed with the Bush administration that wholesale price caps were not a good long-term solution, however, he believes they are viable for a six- to 18-month period because adequate new supply cannot be brought into the market in this short-term period. He said it was incorrect to apply the long-term reasoning against price controls to short-term, emergencies situations such as the one that California now faces.

Davis early last week released a letter sent to Bush and congressional leaders from ten top economists, expressing "deep concern over the failure of the Federal Energy Regulatory Commission (FERC) to act effectively to enforce the provisions of the Federal Power Act that require it to set just and reasonable wholesale prices for electricity in California." The economists warn that "FERC's failure to act now will have dire consequences for California.

"This letter is a very significant validation of what we've been saying," Davis said. "The marketplace is not working and FERC has an obligation to act. We're not pleading for relief, we're entitled to it."

Underscoring that California's power markets are broken, the economists, including Alfred Kahn, father of airline deregulation, wrote:

"We strongly advocate that FERC be directed to fulfill its responsibilities and take the actions necessary to alleviate the market-performance problems that have led to unreasonable prices. We are mindful of the potential dangers of applying a simple price cap, the maximum price that all sellers can receive, to a truly competitive market where the interplay of supply and demand happens to yield prices higher than some might like. But California's electricity markets are not characterized by effective competition. In this case, cost-of-service prices are an obvious remedy that satisfies the just and reasonable rate standard."

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