Western senators, who have been the sternest critics of FERC for its refusal to install power price caps in the state and elsewhere in the western region, extended an uncharacteristically warm welcome to commissioners when they appeared before the Senate Energy and Natural Resources Committee yesterday.

At a hearing on Capitol Hill, senators gave the federal regulatory agency a passing mark for its action on rehearing this week to extend its monitoring and price mitigation plan across 11 western states on a 24-hour, seven-days-a-week basis for the next 15 months. It wasn’t the hard price cap or cost-based rates that they had been seeking for bulk power transactions in the West, but they said it was close enough.

The Commission “may not call it cost-based rates, but it is very similar to what Sen. Gordon Smith (R-OR) and I asked for in our bill,” said Sen. Dianne Feinstein (D-CA). She and Smith co-sponsored bipartisan legislation that sought to pressure FERC into providing price relief for the West.

Commissioner Pat Wood agreed with that assessment. In comparing cost-based rate regulation to the Commission’s expanded price-mitigation plan, he said, “I don’t think that there’s a dramatically different outcome as far as…how many dollars are going out” of electric customers’ pockets.

“I want to join Sen. Feinstein in saying ‘I believe this order goes a long way'” and renders “substantially moot [the] legislative effort we were pursuing,” noted Smith, who added that the Commission’s price relief was long overdue. “[Y]our intervention has been needed for some time” in the “broken” energy markets in the West.

FERC’s action this week built on its April 26 order, which offered price-mitigation relief only for power sold in California during Stage I, II and III emergency reserve shortages. The initial order did not apply to imported power, which prompted charges that some in-state suppliers were selling their power out of state and then importing it back into California to avoid being subject to the price controls.

Commissioner William Massey sharply criticized his colleagues for being slow to respond. “Until yesterday [Monday], the Commission had stubbornly refused to implement full-time price constraints, despite rather clear evidence that prices were not just and reasonable. We could have avoided much of the economic carnage out West.”

Although the committee members generally favored the Commission’s expanded mitigation plan, they cited a few concerns: 1) the close link between the extended West-wide mitigation effort and volatile natural gas prices; the 10% creditworthiness surcharge that FERC levied on power sales to California; a provision calling for California, utilities and generators to reach a negotiated comprehensive settlement on back refunds and past debts; and a provision that gives energy suppliers the opportunity to justify to FERC prices that are higher than the market-clearing price established by the California Independent System Operator (Cal-ISO).

“[H]igh transportation differentials, high spot [gas] market prices and high gray market prices, if those continue, this [mitigation] plan will not dampen prices” for bulk electricity. “So I think my agency has a lot of work to do with respect to the natural gas market in California,” Massey said. Its first order of business is to get its new order issued. At press time last night, no notice had appeared regarding the action on the FERC bulletin board. The order approved by the commissioners Monday called for it to go into effect at midnight on the day it was issued.

In California, natural gas costs can account for as much as 85% of the overall costs of the highest-cost gas generation unit needed to serve the ISO during an emergency reserve shortage, Massey estimated. The bid of the generation unit would set the market-clearing price for that day. Therefore, the success of FERC’s mitigation of power prices will depend in “substantial part” on how reasonable gas prices are, he said.

The rehearing order will permit suppliers who don’t think they’ve been adequately reimbursed for their gas costs to argue their case before FERC, said Wood, but he noted the requests will be closely reviewed. “We’re going to look at their total portfolio of gas purchases, which…was very important to me in this order to make sure there is a dampening effect on relying heavily on the gas spot market.”

Sen. Barbara Boxer (D-CA) called yesterday a “very important day” in light of the Commission’s action to extend price mitigation to all spot deals in the 11-state Western Systems Coordinating Council. “I believe they [FERC] have a new tone.” But she expressed reservations about FERC’s decision to punt issues involving refunds and past utility debts to California, the state utilities and generators to settle. Boxer said she believes it’s up to the Commission to order refunds for any overcharges by generators and utilities. If the parties fail to settle the matter, she said Congress then should take it up.

But FERC Chairman Curt Hebert was confident that the Commission could get the parties to sit down and resolve the disputes over refunds and back debts of up to $15 billion. The Commission has allotted them 15 days to settle the case. If they fail to do so, then Chief Administrative Law Judge Curtis L. Wagner will make a recommendation in seven days, he said.

“Now that’s fast. But our belief is that the issues are known, the numbers are known and they have to come to some type of agreement…I believe that this will be settled,” he told the committee.

Commissioner Nora M. Brownell and Massey suggested that FERC should have given the State of California, the generators and utilities more “guidance” on these issues. FERC is sending the parties to a “vague settlement conference,” Massey said, adding that this leaves “too much uncertainty.” Brownell agreed that “perhaps we [needed] to give more guidance” on the issue.

Smith was disappointed that the settlement talks were limited to power sales to California. He asked Hebert to consider expanding any future settlement negotiations to include the Pacific Northwest.

Massey, Commissioner Linda Breathitt and Feinstein also opposed FERC’s decision to impose a 10% creditworthiness surcharge on sales to California. “I object to this. I don’t see the need for it. The Commission has issued orders in the past few months instructing the ISO to abide by the creditworthiness requirements of its tariffs,” said Massey.

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