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Subject: Washington Post - FERC Taken to Task Over Calif. Energy Crisis
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FYI

FERC Taken to Task Over Calif. Energy Crisis

By Peter Behr
Washington Post Staff Writer
Friday, April 27, 2001; Page E01


Even before President Bush took office, he and his staff were trying keep 
California's energy crisis a long arm's length away, saying it was primarily 
California's problem to solve.

But the Bush White House inherited an unavoidable link to California: the 
Federal Energy Regulatory Commission, a relatively small Washington agency 
with a large mandate to see that wholesale electricity rates remain "just and 
reasonable."

California's calamity is defined in part by a battle between FERC and state 
officials over what "just and reasonable" means.

On Wednesday, FERC made a new effort to hold down California's electricity 
prices without forsaking its commitment to energy deregulation, earning 
another round of sharp criticism from California officials. "FERC had a 
chance to bring meaningful relief to California's outrageous wholesale prices 
and they blew it," California Gov. Gray Davis (D) said yesterday.

The spotlight is bright and unsought for an agency with a modest $175 million 
budget, born in 1920 as the Federal Power Commission -- a weak, understaffed 
agency that promoted and supervised hydropower dams.

Fifteen year later, during President Franklin D. Roosevelt's New Deal battle 
against powerful utility holding companies, the commission was armed with the 
authority to regulate rates for wholesale electricity bought by utilities, 
and for power transmission. States regulate retail rates.

Today FERC makes rules for the nation's transition away from regulated 
utility electric service to a market-based hybrid. In California and many 
major states, powerful generating companies compete to sell electricity to 
utilities, which act as distributors.

The responsibilities have taxed FERC's staff of 1,200, which is about 10 
percent less than peak levels during the mid-1990s.

A backlog of 2,000 pending cases includes not just conflicts over power 
prices, but also critical issues of reorganizing the nation's power 
transmission network into large regional pools strong enough to make urgently 
needed investments in new lines.

When Congress set electricity deregulation in motion in 1992, FERC's goal 
became seeing that it succeeded. Gradually, it redefined the "just and 
reasonable" standard, saying that as long as electricity markets were 
competitive, the prices negotiated by generators and distributors met the 
standard.

In hewing to that doctrine, the agency turned down an increasingly angry 
flood of demands from Davis and a host of California officials to clamp down 
on the state's wholesale electricity prices when they suddenly shot upward 
last summer.

Although FERC concluded in November that California's power market was badly 
flawed and that the potential for unfair and unjust pricing existed, it did 
not impose hard price restraints, opting for a "soft" partial price ceiling.

FERC ordered California to try to fix its broken power purchasing system by 
buying the bulk of its electricity through long-term supply contracts with 
generators, rather than through last-minute purchases that forced the state 
to pay generators' and marketers' top prices. But FERC's plan was not 
implemented.

"They have the ability to resolve it and they are not following through with 
what we asked them to," FERC Chairman Curt Hebert Jr. said three months ago, 
just after being named chairman by Bush.

But under growing political pressure to restrain California's extraordinary 
wholesale electricity charges and respond to complaints of overcharging, FERC 
has moved deeper into the morass.

Since March, it has ordered power suppliers to refund $124.5 million or prove 
that their charges were justified. The generators say their prices have been 
based on high costs of natural gas and air pollution permits.

"We're very confident that FERC . . . will see that these issues and 
transactions were just and reasonable," said Randy Harrison, chief executive 
for western operations of Mirant, a major California generator.

On Wednesday, the commission went further, directing California to establish 
maximum rates that generators could charge during power shortage emergencies 
through a formula linked to plant operating costs. All generators would be 
entitled to get the highest approved price, but suppliers that exceeded the 
price benchmark would have to justify their prices or face refund orders.

The decision, on a 2 to 1 vote, reflects a compromise between the agency's 
desire to defend the troubled experiment with deregulation while protecting 
consumers against overcharging, said energy consultant Peter Fox-Penner of 
the Brattle Group.

"They're searching for middle ground here. It's not what we think of as price 
caps," he said. "It's flexible. It's related to costs, and that's very 
innovative."

But FERC's many critics in California rebuked the agency again yesterday, 
saying its actions were too little and too late.

Because the new FERC rules would apply only during power emergencies, there 
would be no price restraint at other times, some said.

And by pegging approved rates to the costs of plants burning costly natural 
gas, FERC's order would confront California with continuing costs of $300 per 
megawatt-hour for large quantities of electricity this summer, eight to 10 
times what the state was paying before the crisis, critics said.

"What they did do is virtually irrelevant," said Harvey Rosenfield of the 
Foundation for Taxpayer & Consumer Rights. "It's like offering someone who's 
been hit by a car an aspirin."

"FERC has failed its responsibilities at every point in the crisis," said 
Adam Goldberg, a policy analyst with Consumers Union.

Hebert responds that slapping hard price regulations on California's energy 
market is the wrong course for at least three reasons: It does not encourage 
generators to build more plants, it doesn't prompt consumers to conserve 
energy and it will prompt power suppliers to sell electricity to neighboring 
states where prices aren't controlled -- unless California blocks power 
exports.

What lessons the public will draw from California's plight this summer and 
the deregulation debate remains to be seen, but FERC -- and perhaps the Bush 
administration too -- has been pulled more closely than ever into that drama.

Special correspondent Jeff Adler contributed to this article.



, 2001 The Washington Post Company
mmilner@coral-energy.com, rreilley@coral-energy.com, 