FERC boosts cap for wholesale electricity pricesFERC boosts cap for wholesale electricity prices

By Mark Sherman, The Assocaited Press
Friday July 12, 2002

WASHINGTON — Federal energy regulators on Thursday increased by 65 percent the price cap for wholesale electricity in California and neighboring states, where a heat wave and drought are straining energy supplies. 

The Federal Energy Regulatory Commission boosted the maximum price from $55.26 per megawatt hour to $91.87. One megawatt is enough to power about 750 homes. 

“We act now because we cannot expose customers in California and other Western states to the risks of a low price cap,” FERC said in its order. “A low energy price cap could cause severe supply disruptions.” 

FERC requires companies to offer all their available power for sale. But as the cap declines, “in reality, firms are going to balk at being required to offer the power at a price that is below their cost, megawatt by megawatt,” said Severin Borenstein, director of the University of California Energy Institute. 

The higher cap followed two days during which California power authorities warned that soaring temperatures and power plant breakdowns were thinning energy supplies. 

“This order is in the customers’ interest because it encourages adequate supplies and promotes market stability,” reducing the risk of summertime blackouts, FERC said. 

Little more than a year ago, in California’s newly deregulated electricity market, consumers faced rolling blackouts and hefty power bill increases. Utilities flirted with financial ruin struggling to meet demand amid wholesale power costs that reached $300 per megawatt hour. 

FERC also is investigating whether Enron Corp. and other companies engaged in sham power trades and other pricing schemes to manipulate western power markets. 

Federal energy regulators imposed a floating price cap in California and 10 other states last year that has been widely credited with calming the volatile energy market. 

The latest FERC order effectively scraps the formula, which used natural gas prices, the maximum price in effect during the previous power emergency and other factors to determine the top price. The price cap imposed Thursday is the formula-based maximum price that held throughout last summer, when power markets operated smoothly. 

“We welcome the stability this is bringing, not necessarily the higher price cap,” said Gregg Fishman, spokesman for the California Independent System Operator, which manages most of the state’s electricity grid. 

But Gov. Gray Davis said “there was no need for FERC to act,” because the state could buy all the power it needed between $20 and $30 a megawatt hour. “If FERC believes nearly $92 per megawatt hour is a just and reasonable rate, it is way out of line. Once again, FERC is protecting generators, not consumers.” 

Borenstein said FERC’s approach is arbitrary and no better than the floating cap. “It just doesn’t seem to be much like economic reasoning,” he said. 

Fishman said power prices had only rarely bumped up against the cap. Electricity prices generally have been closer to $40 a megawatt hour, he said. 

FERC also noted that prices generally have been below the cap during the past year. “We do not expect this to change,” regulators said. 

Limits on power prices are set expire at the end of September, although elected officials and consumer groups throughout the West want them continued. FERC Chairman Pat Wood has said regulators almost certainly will impose a new plan, but has yet to provide details.