FERC Divided on Price Caps, Finds No Fault with Generators

The Federal Energy Regulatory Commission came out divided last week on whether regional price caps should be imposed on the wholesale power market in the West. FERC Chairman Curt Hebert and the Commission staff maintained opposition to price caps, while Commissioner William Massey came out strongly in favor of some form of temporary regional price caps until permanent solutions to the current crisis can be found.

Massey said to do otherwise would be "unlawful" because FERC is obligated to ensure just and reasonable rates for wholesale electricity. Commissioner Linda Breathitt, meanwhile, waffled on the issue, saying she was willing to consider all options. She noted the region needs a regional transmission organization to implement required changes on a broad scale.

Hebert said regional price caps are "somewhat of an impossibility." Much of the power in the West is sold by entities FERC doesn't regulate. There's no regional power exchange. And many wholesale transactions are bilateral, long-term agreements, he noted.

"Price caps also stifle competition," said Hebert, adding the market needs clear price signals right now to find a solution. He also said FERC, the Department of the Interior and the Energy Department need a "common vision on energy policy" to move in the right direction on this crisis.

Meanwhile the Commission staff released three reports in time for the Energy Policy Roundtable in Portland, OR (see related story this issue). One report is a response to questions posed at a Dec. 20 meeting of the Western Governors Association in Denver. Another lays out the numerous causes of the Fall price spikes in the Pacific Northwest and California. And a third involves an investigation into power plant outages last Summer and Fall in California, and it concludes they were not intentional attempts by wholesale generators to increase prices.

In a response to questions from the Western Governor's Association meeting, Commission staff laid out a host of reasons price caps should be avoided. Staff said that many who ask for spot market price caps really want spot prices to be set at levelized long-term rates. But capping spot prices would "exacerbate supply shortages."

"The danger as evidenced during the last year when California operated under price caps is that we turn a pricing problem into a reliability problem. In this regard, price caps cannot be enforced unless buyers are willing to go without electricity if supply is unavailable at the cap level." Caps also "reinforce any reluctance of California or other states to deal with long-term solutions."

In addition, capping spot prices would "unravel the economic decisions" of those who already have entered long term contracts, "rewarding those who did not exercise their choice to hedge."

Installing a regional cap also is no simple matter, staff said. Under Section 206 of the Federal Power Act, FERC would be required to initiate a separate proceeding with a notice and comment period, providing opportunity for all interested parties to express support or opposition. "This process would be time consuming and contentious."

Distancing himself from the Commission staff and Chairman Hebert, Commissioner Massey suggested that temporarily capping wholesale prices at variable operating costs plus a reasonable profit of $25 per MWh would be a smart solution. He said FERC should take under "serious consideration wholesale price relief."

Massey called the situation a "tragedy" and said FERC needs to take a "more aggressive role." A "hands off" approach would be "unlawful and politically unacceptable." The region needs more generation and transmission and greater conservation, he added.

Fundamental Factors Converge

The price of power in the West has reached astronomical levels for a large number of reasons, staff concluded in its report on Northwest power markets. There has been an inadequate amount of generation added in both the Pacific Northwest and California throughout the 1990s, which was one of the major contributing factors, staff said. However, a number of fundamental factors converged in November and December 2000 to help drive prices to record levels. They included "extreme cold, high natural gas prices and low storage levels, and low water, precipitation and stream flow levels," FERC staff said. "These conditions were made worse by an operating environment with a large number of outages and environmental constraints, and the general atmosphere of market uncertainty surrounding the extreme nature of these fundamental factors."

Although power plant outages were partially to blame for the short supply situation and price spikes in California last fall, a FERC staff investigation into the state's power plant outages found "no evidence suggesting that the audited companies were scheduling maintenance on incurring outages in an effort to influence prices. Rather the companies appeared to have taken whatever steps were necessary to bring the generation facilities back on line as soon as possible by accelerating maintenance and incurring additional expenses," staff said in its third report. "Also the outages did not necessarily correlate to the movement of prices on a given day."

The staff's investigation involved a review of 60% of the outages, including telephone interviews with operators, three on-site plant inspections and several meetings at the Houston headquarters of several wholesale generation companies.

The outages occurred at generating plants that were 30 to 40 years old and that were operated last year at a much higher rate than in the recent past, staff noted. Most of the outages occurred because of "tube leaks and casing problems, turbine seal leaks and turbine blade wear, valve failure, pump and pump motor failures."

Rocco Canonica

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