FERC needs to take a second look at a recent order in which the federal agency modified its previously instituted West-wide price mitigation methodology for electricity during the winter months, the California Electricity Oversight Board (CEOB) told the Commission last Thursday. The CEOB, among other things, worries that the move could have the unintended consequence of stoking anti-competitive market behavior.

The Federal Energy Regulatory Commission (FERC) last month modified its previously instituted West-wide price mitigation methodology for electricity during the winter months (see NGI, Dec. 24, 2001). FERC established a mitigated price starting point of $108, but required a recalculation of this price according to a formula tied to fluctuations in gas prices.

The Commission issued the order to address the seasonal divergence between the Pacific Northwest, a winter peaking region, and California, a summer peaking region. But the board noted that FERC acknowledges in the same order that the Western energy markets are currently stable and expected to remain so.

“Indeed, current natural gas prices are less than half the price used to calculate the West-wide mitigated market clearing price,” the CEOB said. And natural gas prices are not expected to rise during this winter season, let alone rise sharply. “Thus, the record refutes the Commission’s conclusion that changes in the West-wide pricing methodology are needed to accommodate the seasonal diversity.”

More troubling, the CEOB said, is that the order actually encourages anti-competitive market behavior. Specifically, the order discontinues reliance on a reserve deficiency in California to recalculate the West-wide mitigated market clearing price. Instead, that price is now reset at $108, with the possibility of only upward adjustment to reflect rising natural gas prices.

No longer will certain suppliers be exposed to the risk of triggering a reserve deficiency and the consequent downward recalculation of the West-wide mitigated market clearing price under current market conditions, the CEOB noted. FERC’s order therefore has created an incentive for Northwest suppliers to undermine a must-offer requirement by withholding generation “or to otherwise exploit a supply shortage in California in order to inflate market prices.”

The board asked the Commission to allow for rehearing of the order and rescind the changes to the West-wide mitigation methodology articulated in that decision.

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