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IssueAlert for  March 21, 2001 

Dissension at FERC: 
Commission Divided On Price Caps, Future Leadership

by Will McNamara 
Director, Electric Industry Analysis

[News item from Reuters, March 20] The Federal Energy Regulatory Commission 
(FERC) said it remained divided on whether it should impose a temporary cap 
on wholesale prices in the western United States to prevent summer blackouts 
and price spikes. The three FERC commissioners, who regulate interstate 
electricity markets, testified at a House of Representatives Energy and Air 
Quality subcommittee hearing as California braced for another day of 
blackouts. 

Analysis: Since the start of deregulation in the early 1990s, FERC's various 
positions on how competition should unfold across the country have been 
fairly consistent. Despite its changing members, as a whole the five-member 
commission (with two positions currently open) has taken a "hands-off" 
approach to its regulatory role, preferring instead to allow free market 
forces to drive competition in the energy industry. In fact, Curt H,bert, 
appointed as FERC chairman in January by President Bush, told me in an 
interview during his tenure as a commissioner that he envisioned a time when 
FERC would step out of its regulatory role altogether. However, significant 
structural and philosophical changes within the FERC have surfaced since 
January, dovetailing with the departure of former chairman James Hoecker. As 
the federal regulatory body for the energy industry, FERC has the 
responsibility for setting price caps in all regions across the country. The 
debate over whether or not to take this controversial step seems to have 
exposed some inherent dissension within FERC at the very time when the future 
leadership of the commission has been cast in doubt.  

At the House of Representatives meeting on March 20, H,bert, a Republican, 
reiterated his objections to price caps. Chairman H,bert has maintained his 
long-standing opinion that wholesale price caps have done and can do 
"long-term damage." In January, H,bert told me, "I have seen no evidence that 
price caps will have any positive impact in creating a balanced market." 
Although still generally opposed to wholesale price caps on a federal or 
regional level, H,bert is willing to consider them as one possibility among 
other short-term resolutions to the ongoing market problems in California. 
Reuters reported that H,bert said at the hearings that "such controls are not 
a long-term solution and would discourage the industry from building more 
power plants to supply the West." Rather, H,bert believes that power 
generators need the financial incentive to build new power plants, both in 
California and elsewhere. H,bert was quoted at the subcommittee hearings as 
saying, "Market prices will increase supply and reduce demand, thus 
correcting the current imbalance. Capping prices through regulation or 
legislation will have exactly the opposite effect." 

Despite H,bert's opposition to wholesale price caps, fellow Commissioner 
William Massey, a Democrat, asserted that California and the western region 
were in such a state of disrepair that a temporary "time out" or price cap 
was needed to let the market stabilize. "The commission must act forcefully 
and decisively to reassure market participants, policymakers and consumers 
that jurisdictional wholesale markets will produce consumer benefits and just 
and reasonable rates," Massey said. In addition, Massey reportedly also said 
that "such a price cap could be calculated on a generator-by-generator basis 
at each generator's variable operating cost, plus a reasonable capacity 
adder, perhaps in the range of $25 per megawatt hour." Massey reiterated the 
severity of the crisis in California, noting that whereas wholesale power in 
the state cost $7 billion in 1999 it increased to $27 billion in 2000 and 
could exceed $70 billion for 2001.  

Rounding out the commission's divided opinion was Commissioner Linda Key 
Breathitt, a Democrat, who said that all possible options should be analyzed 
and debated. Breathitt did not specifically mention any preference for price 
controls. 

Chairman H,bert's stand against price caps is shared by Energy Secretary 
Spencer Abraham and seemingly the entire Bush administration. In fact, 
Abraham said that price caps on wholesale energy will "discourage investment 
in new generation at a time when it is most needed" and drive power producers 
to other regions of the country (and further away from California). The 
Energy Secretary reportedly issued an even stronger statement against price 
caps during a Senate hearing on the electricity crisis in California. "The 
only action the administration will not take is the implementation of price 
caps," Abraham said.  

Another House of Representatives Energy and Air Quality subcommittee hearing 
is scheduled for later this week. Subcommittee Chairman Joe Barton, a Texas 
Republican, noted that the subcommittee will work toward deciding whether or 
not legislation regarding wholesale price caps should be developed over the 
next few weeks.  

This is not the first time that clear schisms have become visible within FERC 
over major issues facing the energy industry. The commission also became 
divided regarding the scope of regulation regarding regional transmission 
organizations (RTOs). FERC's December 1999 vote on the Alliance RTO 
illustrated dissension within the commission and the divergent philosophies 
that the FERC commissioners hold regarding how the industry should be 
regulated. Then-Commissioner H,bert was of the opinion that the Alliance RTO 
met FERC guidelines for RTO formation, and was the sole member who 
successfully pushed for voluntary rather than mandatory participation in an 
RTO. However, H,bert stood as a minority. The other three commissioners at 
FERC at the time (Hoecker, Massey and Breathitt) preferred to wield a tighter 
regulatory hand and monitor how transmission owners comply with current 
transmission policy. While H,bert supports the ownership of RTOs by utilities 
and letting free market principles rule, the other commissioners at FERC 
appeared to support only passive ownership of RTOs by utilities. 

Meanwhile, speculation continues that President Bush will soon appoint Pat 
Wood III, chairman of the Public Utility Commission of Texas (PUCT), to the 
position of FERC chairman. H,bert was named chairman in February by President 
Bush after James Hoecker resigned shortly before the new Republican 
administration took office Jan. 20. At that time, the president did not 
indicate that H,bert's appointment as chair was temporary. Wood was appointed 
by then Texas Governor Bush to the PUCT in 1995 and played a primary role in 
the development of that state's restructuring plan. (Electric choice begins 
in Texas on June 1, 2001, with the start of a pilot program and then the 
market opens fully to competition on Jan. 1, 2002).  

The possible shift in leadership at FERC appears to be politically motivated. 
There are two "Republican" openings to be filled at FERC by President Bush. 
As noted, presently H,bert is the only Republican among the current three 
members. Wood, reportedly a close ally and advisor to the former Texas 
governor, has been repeatedly named as a strong candidate for one of the 
Republican openings on FERC for some time. However, the Washington Post and 
Reuters have reported that Wood will be appointed as FERC chairman, forcing 
H,bert to step back into a role as commissioner. The report in Reuters 
indicated that H,bert, a friend and prot,g, of Senate Majority Leader Trent 
Lott (R-Miss.), is personally "fighting the planned move." The nomination 
would require Senate confirmation. 

Moreover, as political drivers continue to impact the structure of FERC, the 
issue of price caps remains unresolved. The debate over price caps also has 
divided others involved, strictly along party lines. Generally speaking, 
Democrats believe that the federal government should step in to prevent what 
has been called "price gouging" on the part of  energy companies. Republicans 
believe that the government (including FERC and the Bush administration) 
should maintain a "hands-off" approach and allow the marketplace to determine 
prices. Speaking from a non-partisan point of view, some economists now 
question whether*and not just how*deregulation of electricity markets should 
occur at all. For instance, Alfred E. Kahn, the Cornell University economist 
who helped deregulate other industries, says that electricity markets may not 
lend themselves to full competition and that there may be a value in 
retaining vertical integration among utilities (allowing a single regulated 
power company to produce, transmit and distribute electricity). The movement 
toward re-regulation certainly throws an additional wrinkle into the debate 
over wholesale price caps.  

Yet, in any event, once again California remains the catalyst for 
decision-making on this issue. As rolling blackouts threaten to continue into 
a third day in the state, federal lawmakers may be pressured to issue a 
definitive position on wholesale price caps for California, which of course 
would set a precedent for the rest of the country. As the industry's top 
agency in charge of wholesale markets, FERC's ultimate position on price caps 
carries tremendous influence. Despite the apparent dissension within the 
commission and possible changes in its leadership, FERC is presently 
challenged to formulate a solid policy on how wholesale transactions will be 
conducted, or once and for all absolve itself from jurisdiction in this 
area.  

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