GAO: FERC Study of CA Power Outages 'Not Thorough Enough'

A study done by FERC last February of California power generation plant outages was "not thorough enough" to support its finding that audited companies were not physically withholding power supply to drive up prices in the state, according to a new report by the General Accounting Office (GAO).

Based on this conclusion, Reps. Jay Inslee (D-WA) and Peter DeFazio (D-OR), who had asked the GAO to evaluate the Federal Energy Regulatory Commission study, have called on the House Energy and Commerce Committee and House Committee on Government Reform to conduct hearings into allegations of market manipulation in the western power market and "FERC's inept response."

"Despite FERC's claim to the contrary, it is clear that generating companies have not been exonerated from gaming the system," Inslee said Friday. "We are calling for hearings to learn why [the] FERC cops were not on the beat."

The GAO came very close to suggesting that FERC dropped the ball with its study. "...[T]he public and others were looking for clear answers as to whether sellers of electricity in California were withholding power in an effort to raise prices," the agency said, adding that the report was "important." The Commission's "views, opinions and orders clearly send important signals to the marketplace, it noted, and it reminded FERC that it had an "important responsibility to fully investigate potential market power" in California.

"FERC's study was largely focused on determining whether or not there were actual physical problems...in generating plants experiencing outages," the GAO said. But "industry experts we spoke with generally agree that it is practically impossible to accurately determine whether such physical outages are legitimate or not because plants frequently run with physical problems, and the timing of maintenance or repairs is often a judgment call on the part of plant owners or operators," it reported in its review. Even FERC officials conceded that "simply looking at outages and maintenance records of generators was not sufficient to determine whether generating companies are exercising power to increase prices."

As part of its investigation of California plant outages, the Commission conducted telephone interviews with generating companies to verify the reasons for their outages, visited the headquarters of two companies and performed on-site inspections at three generation facilities. "In every case, FERC found that legitimate repairs or maintenance was performed on the downed generating plants and on this basis, [it] found that there was no evidence these companies were using outages strategically to withhold power and influence prices," the GAO noted.

But FERC acknowledged that its report failed to explore whether companies may have been using other techniques to influence prices, such as "not offering bids to sell capacity at certain times, or bidding at prices high enough to practically ensure that their supply would be excluded from the market," the agency said.

Another "weakness" in the Commission study was "the lack of data for past outages to use as a benchmark with which to compare the number, type and duration of outages during the study period," the GAO report said. "Without a baseline comparison, it is not possible to conclude that observed outages are above normal in number, type and duration."

The GAO also reviewed two other studies --- one by Frank Wolak of the Market Surveillance Committee of the Cal-ISO, and a second by Paul Joskow of the Massachusetts Institute of Technology --- both of which found strong evidence to suggest that market power had been used to drive up energy prices in California. In contrast to FERC, which focused on physical plant outages, these two studies compared wholesale market prices with generators' costs to produce power to determine if prices were above the levels that would be expected in a competitive market.

With respect to the one by Wolak and associates, "we were told that while their study provides strong evidence of market power, it does not suggest any illegal activity on the part of the electricity-generating companies," the GAO said. "On the contrary, he [Wolak] believes that individual companies are sometimes able to exercise unilateral market power to raise prices without violating antitrust laws."

The Joskow study, which covered the summer 2000 period, concluded that the "level of outages experienced during June 2000 cannot be explained by reasonable expectations about repairs or maintenance requirements, or by the need to hold power in reserve for system reliability reasons," the agency reported.

In critiquing the FERC study, the GAO said it interviewed economists from Stanford University, the University of California at Berkeley, the University of California at Irvine, and reviewed studies of market power and related issues. In addition, it said it interviewed officials from state and federal agencies, including the California Public Utilities Commission, the California Independent System Operator and FERC.

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