The Federal Energy Regulatory Commission by a 5-0 vote Monday extended its power market mitigation program across the western states 24 hours a day, seven days a week through September, 2002, with a two part cost-based formula addressing prices during emergency and non-emergency periods. The new mitigation program begins the day after the issuance of the order.

All five commissioners enthusiastically endorsed the measure, although Commissioners William Massey and Linda Breathitt had reservations on certain items. The FERC action addressed the super-high power prices being paid in California since last summer. It came amid a months-long campaign of recriminations and threats by California politicians who have declared an all-out war on power generators, the Commission and the Bush administration, claiming they are responsible for California’s high prices.

The price limits, based on calculations in the California Independent System Operator (Cal-ISO) market, will extend through the 11 states of the Western Systems Coordinating Council (WSCC). The mitigation program during emergency or “reserve deficiency (less than 7% reserves in California) periods calls for a market clearing price on contracts in the day-of and day-prior-to delivery markets based on the bid of the highest cost gas-fired unit needed to serve the ISO on that day. Sellers in other spot markets in the WSCC will receive up to the clearing price without further justification. Sellers other than marketers will have the opportunity to justify prices above the market clearing price during the reserve deficiency periods. During non-emergency periods the price limit will be based on 85% of the highest hourly clearing price during the last Stage I emergency.

Cost calculations will include a formula gas cost, operating and maintenance expenses and a 10% creditworthiness charge, but will not include fuel start-up or Nox emission costs. Those costs will be billed to the ISO and spread to all in-state load on the ISO system. The price limit will apply to all non-hydro generators and all public and non-public utilities. “Marketers who sell in spot markets in the WSCC will be price takers, and cannot sell above the mitigated price,” the Commission said.

The Commission’s action on rehearing was an extension of its April 26 order (EL00-95-012), which had installed price mitigation only for California during emergency periods (see Daily GPI, April 26). It “will ensure that wholesale rates in spot markets in California and the rest of the WSCC will fall within a zone of reasonableness.” Chairman Curt Hebert said the measures were aimed at “getting the California market under control. It’s time to stop blaming and start solving problems.” The commissioners noted that extending the price limits across the western states would address the “megawatt laundering” accusations that claimed in-state generators were selling power out of state, so it could be brought back in without being subject to price controls.

Responding to questions at a press briefing after FERC’s meeting, Hebert stuck to his guns in insisting that FERC’s latest action should not be labeled a price cap. “People are welcome to think they want to think, but I would invite them to explain to me, why they think it’s a price cap and I’ll explain to you why it’s not.” He also said he hasn’t seen any evidence of megawatt laundering, “but since they [generators] no longer have the ability to trade out and back in, we don’t have to worry about that anymore.”

FERC also directed parties involved in disputes over prices paid in the past and amounts owed conclude settlement discussions in 15 days of the start of those discussions before an administrative law judge later this month or be subject to FERC action.

Hebert cited lower power prices since FERC’s original mitigation program kicked in at the end of May, pointing to May 29 when spot prices hit $300/MWh. After the mitigation formula was applied prices dropped to $120/MWh. “Prices continued to fall in subsequent days and remained low,” he said.

Massey, however, disputed the chairman’s logic, pointing to “a confluence of circumstances” that mitigated prices recently, including better hydro conditions, liberalization of emissions restrictions and the expiration of the large transportation capacity contract on El Paso Natural Gas “that could have affected gas prices.” Massey applauded the Commission’s action, saying he has been pushing for this type of extensive mitigation for the last eight months.

Commissioner Patrick Wood said he was very interested in the Commission’s natural gas price investigation going forward and was glad to see the price cap formula would include an average of a generator’s gas prices. The order states that any justification for prices above the benchmark price would be viewed in connection with the power supplier’s total portfolio of gas prices. “I think what happens in a desperation market like we’re seeing on the West Coast where the customer will pay anything, is that there is very little incentive to manage risk since you can pass it all the way through to the customer.” Monday’s order should provide “sufficient disincentive to the spatial spiral of gas prices,” Wood said, although he would be willing to investigate the issue of gas prices further.

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