The Federal Energy Regulatory Commission came out divided lastweek on whether regional price caps should be imposed on thewholesale power market in the West. FERC Chairman Curt Hebert andthe Commission staff maintained opposition to price caps, whileCommissioner William Massey came out strongly in favor of some formof temporary regional price caps until permanent solutions to thecurrent crisis can be found.
Massey said to do otherwise would be “unlawful” because FERC isobligated to ensure just and reasonable rates for wholesaleelectricity. Commissioner Linda Breathitt, meanwhile, waffled onthe issue, saying she was willing to consider all options. Shenoted the region needs a regional transmission organization toimplement required changes on a broad scale.
Hebert said regional price caps are “somewhat of animpossibility.” Much of the power in the West is sold by entitiesFERC doesn’t regulate. There’s no regional power exchange. And manywholesale transactions are bilateral, long-term agreements, henoted.
“Price caps also stifle competition,” said Hebert, adding themarket needs clear price signals right now to find a solution. Healso said FERC, the Department of the Interior and the EnergyDepartment need a “common vision on energy policy” to move in theright direction on this crisis.
Meanwhile the Commission staff released three reports in timefor the Energy Policy Roundtable in Portland, OR (see related storythis issue). One report is a response to questions posed at a Dec.20 meeting of the Western Governors Association in Denver. Anotherlays out the numerous causes of the Fall price spikes in thePacific Northwest and California. And a third involves aninvestigation into power plant outages last Summer and Fall inCalifornia, and it concludes they were not intentional attempts bywholesale generators to increase prices.
In a response to questions from the Western Governor’sAssociation meeting, Commission staff laid out a host of reasonsprice caps should be avoided. Staff said that many who ask for spotmarket price caps really want spot prices to be set at levelizedlong-term rates. But capping spot prices would “exacerbate supplyshortages.”
“The danger as evidenced during the last year when Californiaoperated under price caps is that we turn a pricing problem into areliability problem. In this regard, price caps cannot be enforcedunless buyers are willing to go without electricity if supply isunavailable at the cap level.” Caps also “reinforce any reluctanceof California or other states to deal with long-term solutions.”
In addition, capping spot prices would “unravel the economicdecisions” 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 requiredto initiate a separate proceeding with a notice and comment period,providing opportunity for all interested parties to express supportor opposition. “This process would be time consuming andcontentious.”
Distancing himself from the Commission staff and ChairmanHebert, Commissioner Massey suggested that temporarily cappingwholesale prices at variable operating costs plus a reasonableprofit of $25 per MWh would be a smart solution. He said FERCshould take under “serious consideration wholesale price relief.”
Massey called the situation a “tragedy” and said FERC needs totake a “more aggressive role.” A “hands off” approach would be”unlawful and politically unacceptable.” The region needs moregeneration and transmission and greater conservation, he added.
Fundamental Factors Converge
The price of power in the West has reached astronomical levelsfor a large number of reasons, staff concluded in its report onNorthwest power markets. There has been an inadequate amount ofgeneration added in both the Pacific Northwest and Californiathroughout the 1990s, which was one of the major contributingfactors, staff said. However, a number of fundamental factorsconverged in November and December 2000 to help drive prices torecord levels. They included “extreme cold, high natural gas pricesand low storage levels, and low water, precipitation and streamflow levels,” FERC staff said. “These conditions were made worse byan operating environment with a large number of outages andenvironmental constraints, and the general atmosphere of marketuncertainty surrounding the extreme nature of these fundamentalfactors.”
Although power plant outages were partially to blame for theshort supply situation and price spikes in California last fall, aFERC staff investigation into the state’s power plant outages found”no evidence suggesting that the audited companies were schedulingmaintenance on incurring outages in an effort to influence prices.Rather the companies appeared to have taken whatever steps werenecessary to bring the generation facilities back on line as soonas possible by accelerating maintenance and incurring additionalexpenses,” staff said in its third report. “Also the outages didnot necessarily correlate to the movement of prices on a givenday.”
The staff’s investigation involved a review of 60% of theoutages, including telephone interviews with operators, threeon-site plant inspections and several meetings at the Houstonheadquarters of several wholesale generation companies.
The outages occurred at generating plants that were 30 to 40years old and that were operated last year at a much higher ratethan in the recent past, staff noted. Most of the outages occurredbecause of “tube leaks and casing problems, turbine seal leaks andturbine blade wear, valve failure, pump and pump motor failures.”
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