Federal price limits backfire ,
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Federal price limits backfire 
Some generators withhold power rather than abide by rate caps 
David Lazarus, Chronicle Staff Writer
Wednesday, July 4, 2001 
,2001 San Francisco Chronicle 

URL: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2001/07/04/MN186091.DTL 


Officials in California and Nevada, after months of lobbying for federal 
regulators to cap Western power prices, warned yesterday that the newly 
imposed limits have had the unintended consequence of increasing a threat of 
blackouts in the two states. 

The warnings were issued as California came within minutes of rolling 
blackouts yesterday afternoon, and one day after the first-ever rolling 
blackouts in Las Vegas forced energy-hungry casinos to shut off fountains and 
reduce air conditioning. 

The two states are asking the Federal Energy Regulatory Commission to take a 
closer look at the so-called price mitigation plan and come up with revisions 
that would deter power companies from withholding electricity during 
shortages. 

"We need some clarity to this order," said Oscar Hidalgo, a spokesman for the 
California Department of Water Resources, which is spending billions of 
dollars to keep the state's lights on. 

"Generators need to be held accountable," he said. 

The crux of the problem is that price limits kick in during shortages, yet 
power companies say these caps force them to sell power at below-market rates 
during periods of high demand. 

Some companies have responded by holding back power rather than face the 
expense of shipping electricity from state to state. Each mile that 
electricity must be transmitted adds to the overall cost. 

"No one's going to pay for transmission if the cost is near the caps," said 
Gary Ackerman, executive director of the Western Power Trading Forum, an 
energy-industry association in Menlo Park. 

Ackerman said several companies in his organization decided that there was no 
economic advantage to offering power in regional markets when price controls 
are in effect. 

"This means individual regions like California or Las Vegas could end up not 
having enough," Ackerman said. "It increases the threat of blackouts." 


BLACKOUT ALERT CANCELED
California authorities issued a blackout alert at 1:45 p.m. yesterday when 
power reserves dipped to dangerously low levels. They canceled the alert 
about an hour later, after finding additional supplies. 

"Everyone in the West is fighting for megawatts," said Stephanie McCorkle, a 
spokeswoman for the California Independent System Operator, which oversees 
the state's power network. 

The Golden State's latest brush with lights-out conditions came a day after 
Nevada experienced its own rolling blackouts for the first time, prompting 
heavy power users such as the MGM Grand and Caesars Palace to dim their 
lights. 

Don Soderberg, chairman of the Nevada Public Utilities Commission, said that 
the sudden power emergency took state authorities by surprise and that they 
are investigating to see what role the federal price limits may have had in 
exacerbating Monday's shortage. 

"We're looking very closely at this," he said. "There seems to be a potential 
for unintended consequences." 

Specifically, Soderberg said Nevada is focusing on operators of older, less- 
efficient plants who would find profit margins shrinking, if not vanishing, 
under capped prices. 

"We're going to see how the caps might have played into this," he said. 

The federal ceiling in 10 Western states, excluding California, is about $92 
per megawatt hour. In California, a 10 percent surcharge is added because of 
the state's credit risk, bringing the price to just over $101. 

Ackerman at the Western Power Trading Forum said regional price controls have 
extended California's power crisis to neighboring states. 

"California sneezed and the rest of the region caught the virus," he said. 

'LAWYERS LOOKING FOR LOOPHOLES' 

California and Nevada officials, however, said that they still have faith 
that price limits can stabilize Western electricity markets but that federal 
regulators may have to tweak the system so that power companies cannot 
withhold output. 

"The generators have banks of lawyers looking for loopholes (in the plan)," 
said Hidalgo at the Department of Water Resources. 

Unfortunately, it may take some time for the regulators to revisit an issue 
that they took up only with the greatest reluctance. For months, federal 
regulators refused to impose price controls, preferring instead to let supply 
and demand determine costs. 

Hidalgo said that when it appeared that power companies were throttling back 
on output Monday, California officials immediately dialed the hot line number 
provided by the Federal Energy Regulatory Commission in case of emergencies. 

"No one answered," he said. "They were closed." 

State officials tried again yesterday, and this time were told that the 
commission would look into the matter. They were not given a time frame for 
when the commission might come up with a response. 

E-mail David Lazarus at dlazarus@sfchronicle.com. 

,2001 San Francisco Chronicle   Page A - 1
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