FERC came under heavy attack on Capitol Hill yesterday fromstate energy officials for dragging its heels in issuing decisions,not aggressively monitoring bulk power markets for abuses, and fornot checking more thoroughly to see whether competition was presentin markets before it removed price regulation.

“One clearly unacceptable outcome” of wholesale powerderegulation for state regulators has been the elimination ofcost-of-service price regulation without competition in place yet,said Commissioner William Nugent of the Maine Public UtilitiesCommission (PUC) during a Senate hearing Wednesday on changingenergy trends in the United States. “A fair, well-functioningcompetitive wholesale market is a must. No amount of brilliance indesigning the retail market will correct defects at the wholesalelevel.”

In testifying before the Senate Energy and Natural ResourcesCommittee, Nugent noted that “truly competitive markets free ofmarket power and gaming [must] replace price regulation,” but hesaid he couldn’t assure lawmakers that such wholesale markets existtoday.

“Right now in my view, the FERC is overwhelmed by the taskbefore it,” he said, which has caused the agency to react slowly toevents in the wholesale markets nationwide. “In order to havecompetitive wholesale markets, FERC must give prompt decisions tomarket participants.” This failure to respond quickly has bred “toomuch uncertainty in the market,” which he says is responsible forthe unjust and unreasonable prices.

In the New England region, for example, Nugent urged FERC to”pay more attention” to the installed capacity issue, which he saidcould cost Maine ratepayers as much as $90 million a year and 10times that amount region-wide. In addition, the region is stillawaiting a FERC decision on complaints addressing the $6,000/MWhprice spike last May, which some sources estimate led to anadditional $90 million in overcharges to the spot market, he said.

The situation at FERC will probably improve once the two vacantcommissioner posts are filled, Nugent suggested. “I agree withyou,” said Committee Chairman Frank Murkowski (R-AK).

In the meantime, New England has asked FERC to allow it toestablish a regional market monitor to police abuses, and Maine hasgone a step further and requested authority to create a regionalorganization that would advise and make comments to the Commissionon critical market matters, he said. The latter “could ease FERC’sburden,” and aid in the development of competitive wholesalemarkets, Nugent believes. Both requests still are pending.

Frederick Hoover, director of the Maryland Energy Administrationin Annapolis, MD, also gave the Commission low marks for ensuringthe competitiveness of bulk power markets. “FERC must take a moreaggressive role in market monitoring and [give] strongconsideration to the cost-of-service pricing for wholesale sales”in troubled electric markets. “If generators think that FERC is notserious, excess profits will be made.” The Commission’s recentorders addressing potential refunds and price manipulation in theout-of-control California wholesale market “head in the rightdirection,” he said, “but do not go far enough.”

Murkowski asked Nugent, Hoover and the other energy analysts andspecialists who testified, what would be the one thing they woulddo to immediately alleviate the current energy crisis. Guy Carusoof the Center for Strategic International Studies in Washington,D.C. recommended actions to stimulate production. But “that maymean cutting temporarily some environmental oversights. Are peopleready to support that, or do they have to go in the dark for awhileto accept that?” asked Murkowski.

In the first instance, “about the only alternative isconservation,” said James Placke, director of Middle East Researchin Washington. But with retail power prices capped in California,what incentives do customers have to buy energy-conservingappliances, asked the senator. For conservation to work, Plackesaid wholesale costs would have to be passed through to the retaillevel. Without that, “the problem will drag on.”

Nugent agreed. “I think passing through the price signals is thevery appropriate response. We as regulators must give mechanisms tothe public [that] enable them to have the [price] information inreal time” and make decisions based on that. Nugent noted thatlarge industrial users in Maine responded to price signals bysuspending operations during peak hours.

Price caps on wholesale power transactions, which continue to bedebated on Capitol Hill and at FERC, can work if they’re doneright, the Maine regulator said. New England has a $1,000/MWh cap,which “I don’t think is an unreasonable one,” he said. It “keepsyou [the customer] from being mortally wounded,” while at the sametime, it allows the market to function.

Turning to western markets, Placke predicted that the Californiaelectricity market will be beset with problems for a few years tocome. “California will be with us. It’s going to be a difficultyear in California this year and probably next year.” It may returnto “something like normal” by 2003, he said.

“We anticipate…perhaps as early as this summer, powershortages in down-state New York,” which includes New York City andsurrounding counties, Placke said. This will occur because of theinability to transmit power from New England, where there’s asurplus, to the New York market. Few believe there’s much that canbe done in the short term to head this off.

One senator predicted that Arizona could face brownouts andblackouts this summer as well because of the state’s continuingpower exports to the troubled California market.

In the longer term (by 2020), the Energy InformationAdministration (EIA) forecasts there will be a need for largegeneration capacity increases in the Southeast, Texas, Californiaand parts of the Midwest. Nationwide, about 413 gigawatts ofadditional capacity will be required by 2020, which is equal toabout 1,400 new 300 MW-sized facilities, said Mary Hutzler,director of the EIA’s Office of Integrated Analysis andForecasting.

Natural gas demand from the generation market is expected totriple over the next two decades, resulting in about a 52% increasein total consumption, she noted.

On the gas side, Placke said this past winter “pressed thesystem very hard, so hard that gas prices tripled.” Prices have”now fallen into a range just about double what had been the norm,and they’re likely to stay there for the foreseeable future.” Thekey market issue, he believes, will be the permitting environmentfor construction of new pipelines and expansions.

On the topic of gas supply, Placke said less gas will come fromtraditional sources and more will come from “areas that are nowbeginning to appear on the horizon, such as Arctic gas…” Hebelieves that building a pipeline to transport the Arctic gas tothe Lower 48 states should be a priority of the U.S.

The Gulf of Mexico will continue to be the “primary…..frontierfor U.S. domestic gas production,” he said, and “will absorb largerand larger amounts of investment.” Murkowski indicated yesterdaythat maybe it’s time for Congress to consider lifting themoratoriums on offshore drilling off the East and West Coasts andthe Gulf Coast of Florida. “Where is this energy [that we need]going to come from if we have these moratoriums?” he asked.

In addition, imports of liquefied natural gas (LNG), which were”fashionable” back in the 1970s, “are back on the agenda,” Plackesaid. At current price levels, it has become “economicallyfeasible” to import gas in LNG form from supply points overseas, henoted.

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