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IssueAlert for  March 30, 2001 

FERC Chairman Curt HSbert Will Block Western Price Caps

by Will McNamara 
Director, Electric Industry Analysis

[News item from Energy Info Source] Reuters is reporting that Curt HSbert, 
FERC Chairman, said he would block a move by fellow commissioners to impose a 
temporary price cap on wholesale electricity prices in the western United 
States. HSbert reportedly said that even if a majority of the three member 
commission favored price caps, he would prevent a vote from being taken 
because he does not believe price curbs would increase electricity supplies 
or reduce demand in the region. "Absent someone proving to me that price caps 
would bring more supply and less demand in California and the West, my answer 
is yes," HSbert said, when asked by reporters if he would block a FERC vote 
on western price caps. A FERC spokesman later downplayed HSbert's remarks. 
"He did not say he would block any vote," said FERC spokesman Hedley Burrell. 
"He said he would need to be shown that price caps would bring more supply or 
less demand to the West." 

Analysis: Just last week, I discussed the growing dissension with the FERC 
over the price cap issue (see 3/21 IssueAlert). The dissension appears to be 
coming to a head, just as FERC grows from a three-member commission to its 
standard five members. As the philosophical complexion of the new FERC is 
unknown, it remains questionable whether or not HSbert's adamant stand 
against price caps will be sufficient to keep the commission from moving in 
this direction. HSbert's hard line against price caps was espoused during the 
same week that the FERC chairman appeared at a Santa Fe, N.M. conference and 
spoke about high wholesale prices in California and the fact that the state's 
utilities could have saved about $5 billion had they accepted proposals for 
long-term contracts six months ago. 

First, let's look at how the structure of FERC is presently changing and how 
this might impact the commission's divided position on price caps. On March 
27, President Bush announced his intention to nominate state utility 
officials Nora Mead Brownell of Pennsylvania and Patrick Wood III of Texas to 
serve on FERC. Word on the nomination of Wood was expected, although rumors 
had indicated that Wood might be named to replace HSbert as chairman. 
Brownell, a commissioner with the Pennsylvania Public Utility Commission, 
will be appointed to the remainder of a five-year term that expires June 30 
of this year and an additional term expiring in 2006. Wood, who formerly 
served on FERC from 1991 to 1993, will be appointed to the remainder of a 
five-year term that expires in 2005.  

As I mentioned in the 3/21 IssueAlert, the FERC is presently divided on the 
issue of price caps. Obviously, HSbert has expressed strong opposition to any 
kind of restriction on pricing. However, Commissioner William Massey has said 
that he will continue to push for price caps to help calm the volatility of 
the California market. Linda Key Breathitt, the third commissioner presently 
at FERC, has remained undecided on the issue. What could change the balance 
of power at FERC with the two new appointments is the fact that both Brownell 
and Wood come from states in which some form of wholesale price caps are 
presently in place.  

Consequently, there is a real possibility that HSbert, despite his role as 
chairman, could soon find himself in the minority position with regard to the 
price cap issue. HSbert seems unconcerned about this possibility and has made 
reference to "like-minded friends" in Washington who would side with him on 
the issue.  

The rationale behind HSbert's opposition to price caps has been well 
documented. The FERC chairman has not been fully convinced that price caps 
would do anything to increase supply or reduce demand in the Western region, 
or anywhere else for that matter. Rather, HSbert believes that price caps 
have the potential to cause serious damage and actually cause supply to 
decrease further as power generators will opt to build plants in other 
regions that do not place restrictions on prices.  

The fact that HSbert opposes price caps but yet supports FERC's investigation 
into the "unjust and unreasonable" prices charged by power suppliers may seem 
like somewhat of a contradiction to some observers. Earlier this month, FERC 
put 13 California power sellers on notice that they must either make refunds 
for certain power sales or provide further justification of their prices. 
Total potential refunds or offsets in the ISO and PX markets are 
approximately $69 million for January 2001 transactions. Further, FERC 
established a price screen of $273/MWh that would be justified during periods 
of a Stage 3 alert, and that anything above this price would be considered 
excessive. In addition, the commission will determine a top wholesale power 
price for each month through April, and then formulate a permanent plan for 
monitoring prices in California for transactions taking place after May 1. 
FERC is utilizing a methodology to determine the price screen, and scarcity 
pricing is a very important factor in the equation. The commission uses a 
model that takes different factors into account (for instance, weighted gas, 
weighted NOX, etc.) to determine a price of electricity when the lights are 
about to go out (Stage 3 alert time). That is the price that FERC uses to 
determine scarcity  prices. Therefore, it can and will change month to month. 

One may wonder how HSbert can reconcile the use of a market price screen and 
yet remain so opposed to price caps. However, it is important to realize 
that, for the most part, FERC is not prohibiting that power generators sell 
power above the price screen. Rather, FERC will simply demand that any 
company selling power above this price report to the commission and justify 
the higher-than-average price. That is an important but subtle difference 
between a price screen and a price cap, which prohibits generators from 
exceeding a certain price. 

As noted, HSbert spoke earlier this week at a conference in Santa Fe entitled 
"Current Issues Challenging the Utility Industry" sponsored by the Center for 
Public Utilities. HSbert spoke about a variety of topics, including the 
current status of RTO applications and new technologies related to pipelines 
and generation. However, one thing that HSbert said related to the wholesale 
market in California struck me as particularly interesting. HSbert said that 
last fall wholesale power suppliers offered California utilities long-term 
power contracts in the range of $55/MWh. The general consensus among the 
utilities and Gov. Gray Davis was that the price was excessive and that they 
should wait to sign long-term deals until wholesale prices decreased (or 
until the state could negotiate lower prices on behalf of the utilities). 
HSbert's point was that California utilities could have saved approximately 
$5 billion had they signed on for long-term deals at that time. Most of the 
contracts that the California Department of Water Resources is now signing 
with power suppliers are confidential and thus we do not know how the fixed 
prices of the contracts compare to the average $55/MWh that was offered last 
fall. However, most reports indicate that the state of California already has 
spent $4 billion to procure power and is expected to pay $14 billion for 
power over the course of this year.  

Meanwhile, California and other western lawmakers continue to urge the Bush 
administration and FERC to enact temporary price caps in the West. In fact, 
bipartisan lawmakers from California, Oregon and Washington met with Vice 
President Dick Cheney, head of the Bush administration's energy task force, 
to assert that soaring electricity prices in the West could lead the entire 
country into a recession. Cheney responded that the White House opposes any 
price controls on energy as they would discourage new power plants from being 
built.  

At the Santa Fe conference HSbert said that, "Washington doesn't do temporary 
very well." What he meant by this statement was that, although lawmakers are 
putting pressure on the federal government to put a temporary price cap into 
place, if one were to be enacted it would most likely remain in place for 
some time. Clearly, HSbert will continue to oppose wholesale price caps in 
the West (unless someone can make the case to him that price restrictions 
will lower demand or increase supply). Yet, at the same time, just this week 
HSbert said that he was "open" to a request from New York City Mayor Rudolph 
Giuliani to enact wholesale power prices in the Northeast. Giuliani asked 
FERC to impose a temporary $250/MWh cap on wholesale electricity prices to 
ensure that New York City gets through tight summer power supplies without 
large price spikes. How FERC as a whole will rule on the larger issue of 
price caps across the country (and particularly in California) once the new 
commissioners come on board remains to be seen. In any event, FERC (along 
with state regulators) still faces the challenge of finding some long-term 
solution that will stabilize the market in California and the Pacific 
Northwest. 

An archive list of previous IssueAlerts is available at
www.ConsultRCI.com




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