Pressure on FERC to Expand CA Price Mitigation

From the White House to Congress to the California governor's office to the boardrooms of the nation's top power marketers and generators, all eyes will be on the Federal Energy Regulatory Commission today as it convenes a specially meeting to address a multitude of requests for rehearing of its much-maligned market monitoring and price mitigation plan that went into effect in late May for the California power market.

The meeting, which undoubtedly will be the most widely watched session of the Commission ever, will take place against a backdrop of a number of intertwining plot lines that have developed in recent weeks in the nation's ongoing energy drama. Here are a few of the issues that are likely to be raised today, and in the aftermath of FERC's decision:

  • Will FERC heed the advice of leading House Republicans and expand its mitigation plan to 24 hours a day across the West this summer?
  • If FERC widens its mitigation plan to 24 hours a day, seven days a week, will that step be enough to satiate leading Democrats in the House and Senate and California Gov. Gray Davis, who have been pushing the Commission to place price caps on wholesale electricity prices out West?
  • What implications would a broadened mitigation plan have for pending legislation in the House and Senate that would direct the Commission to establish cost-of-service based rates for electric energy sold at wholesale in western energy markets?
  • How pivotal a role will FERC's two newest Commissioners, Pat Wood III and Nora Mead Brownell, play in today's deliberations and how will the former state regulators ultimately come down on the contentious issue of price caps?
  • Should the Commission decide to expand its mitigation plan, will that change any minds at the White House over whether current Chairman Curt Hebert retains his job as chairman, or will the Bush administration move ahead with unofficial plans to name Wood as his replacement?

FERC's existing mitigation plan, which was intended to provide some price relief to the ailing Golden State market, has come under increasing attack from all sides in the ongoing drama. Lawmakers in Washington, D.C., and California have assailed FERC's decision to provide the price-mitigation relief only during times of energy reserve deficiencies. They further contend the Commission's plan is chock full of holes, enabling power companies to easily circumvent it. Power generators and marketers, on the other hand, argue that the mitigation plan's biggest downfall is that it doesn't allow them to recover their capital and fixed costs. Moreover, they claim that the California Independent System Operator (Cal-ISO), which is charged with establishing a proxy power price during emergencies under the mitigation plan, has been improperly carrying out FERC's directives.

The current mitigation plan, which replaced the soft price cap that was in effect in California, calls for the Cal-ISO to establish a single-market clearing price for real-time transactions in its market during times of reserve deficiencies (Stage I, II and III emergencies) in the state. During these periods, the Cal-ISO's market price is to be limited to the marginal cost of the highest-cost generator called upon to run during an emergency. FERC directed the Cal-ISO to calculate the marginal cost for each generator, based on a unit's heat rate and proxy gas and emissions costs, plus $2 added for operational and maintenance expenses.

In the wake of criticism leveled at the plan, speculation has mounted in recent weeks that FERC will expand the plan to 24 hours a day, seven days a week across the West this summer. Indeed, in a remarkable political turnabout, House Republican energy leaders pushed FERC in that direction last week. Led by Energy and Commerce Committee Chairman Billy Tauzin (R-LA) and Energy and Air Quality Subcommittee Chairman Joe Barton (R-TX), the House delegation's letter to FERC cited "the second worst drought in a century" and the threat of blackouts and price spikes in California. "To ensure that prices are just and reasonable during the critical months ahead, we believe the Commission can and should do more to mitigate wholesale electricity prices in western markets." The Republicans called for a "comprehensive plan to mitigate wholesale prices and aggressively monitor wholesale sales of electric energy... If the Commission finds that a rate charged does not comply with the price mitigation plan, it should strictly enforce the plan and require refunds and penalties to the full extent allowed by law."

Meanwhile, generators appear to be bracing themselves for some type of price cap to come out of this week's FERC meeting. Jim Donnell, CEO of Duke Energy North America, last Friday said that he expects the Commission to impose market price caps in California. "We've not seen [the] FERC plan," said Donnell, "but my reading of it is there's a market base not a cost base (on price caps that) they are pursuing, and given that we know little, we're not yet in a position to respond." However, he said that no matter what FERC decides, "we are 90% hedged for this year and hedged in subsequent years, so the decision would have little to no impact on Duke's earnings."

It remains to be seen whether a FERC move to expand its mitigation plan will have enough meat on its bones to satisfy Democrats on Capitol Hill. Democrats in the Senate and House have raised the decibel level in recent months over the Commission's response to the energy crisis. Sen. Dianne Feinstein (D-CA) last week questioned whether a Commission decision to broaden its market mitigation plan to 24 hours a day, seven days a week would eliminate what she asserted was a gaming of the system by generators to boost power prices. "I am concerned that this order will continue to provide energy generators the opportunity to manipulate prices, as I believe they have been doing." Feinstein has co-sponsored legislation with Sen. Gordon Smith (R-OR) that would reinforce FERC's responsibility related to maintaining just and reasonable energy prices.

There will be plenty of opportunities this week to gauge the response of Democrats to whatever plan emerges from the FERC meeting. On Tuesday, FERC Commissioners are slated to appear before a Senate Energy and Natural Resources Committee related to the Feinstein-Smith legislation. And, on Wednesday, Sen. Joseph Lieberman (D-CT), newly-installed chairman of the Senate Governmental Affairs Committee, will preside over a hearing that will examine the role of FERC as it relates to the restructuring of energy industries. Feinstein, in a recent letter sent to Lieberman, asked that the committee investigate the possibility of an improper relationship between the energy industry and FERC based on an exchange between Hebert and Enron Chairman Ken Lay that was first reported by The New York Times (see NGI, June 4).

On the House side, Democrats remain as feisty as ever on the price cap issue. The House Appropriations Committee, in a vote that split closely along party lines, last week rejected an amendment forwarded by Rep. Nancy Pelosi (D-CA) that would have instituted cost-of-service rates for electricity sold at wholesale in the Western region. The amendment, which was offered to the FY 2001 Supplemental Appropriations bill, was rejected by the Appropriations Committee last Thursday by a vote of 34-27. "With this vote, the House Republicans supported the energy suppliers who withheld power, drove up prices, and gouged consumers," Pelosi said after her amendment was defeated. House Democratic Minority Leader Richard Gephardt (D-MO) also assiled Republicans over last week's vote. "The Republicans on the Committee refused to put temporary caps on wholesale electric prices on the West Coast, turning their backs on consumers, seniors and small businesses."

House Democrats last week introduced a resolution urging the House Republican leadership to consider legislation designed to stabilize the wholesale power market in the West. The bill, referred to as the "Energy Price and Economic Stability Act of 2001" and sponsored by a group of western Democrats, as well as Gephardt, would direct FERC to issue an order establishing cost-of-service based rates for electric energy sold at wholesale in Western energy markets. The rates would run through March 1, 2003. Democrats were expected to file a discharge petition as early as this week to get the bill on to the floor of the House for a vote.

©Copyright 2001 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.