The new F.E.R.C. 'price mitigation' ruling could have significant unintended consequences. The "devil" is in the fine print details. As these are not posted on this forum yet, this June 18 Reuters article gives these details, followed by commentary about the ruling's unintended consequences.

Hyperlink: http://dailynews.yahoo.com/h/nm/20010618/ts/utilities_california_dc_6.html

Monday June 18 7:05 PM ET

U.S. Regulators Approve Power Relief for West

By Patrick Connole and Tom Doggett, Reuters News Service Copyright, Reuters News Service, Fair Use for Education and Research Purposes Only

WASHINGTON (Reuters) - Federal regulators, acting after intense political pressure, unanimously approved a plan on Monday to extend California electricity price relief throughout 11 Western states to keep wholesale prices from spiraling out of control this summer.

But the Federal Energy Regulatory Commission's plan to rein in prices that have soared up to ten times higher than normal stopped short of Democrats' demands for a strict cap on wholesale prices.

However, it did address pleas from lawmakers of both parties for more relief in western states ahead of next year's congressional elections.

The plan also received a guarded endorsement from the White House, which opposes strict price controls on electricity. White House spokesman Ari Fleischer said that the president ''would be supportive'' of a market-based approach.

FERC agreed to expand a ``price mitigation'' plan rolled out last month for California whenever the state declared a power emergency. The new plan for all 11 Western states will remain in effect through September 2002.

The broader plan means that during non-emergency periods in Western states, the price for wholesale power cannot exceed 85 percent of the cost of electricity sold during the end of a so-called Stage 1 emergency. A Stage 1 emergency is declared when electricity supplies fall below 7 percent of demand on the western power grid.

For example, when the plan takes effect on Wednesday, prices cannot exceed $107.95 per megawatt hour. That price reflects 85 percent of the highest hourly price of $127 per megawatt hour during the last Stage 1 emergency.

Power generators selling above the 85 percent threshold would have to justify the higher cost to the agency.

California Gov. Gray Davis, a Democrat who has demanded firm price caps, called the FERC vote a ``step in the right direction,'' but said further action was needed.

PRICE LIMIT, NOT CAP

Under the new plan, all power sold in California will also carry a 10 percent surcharge because of credit risks that out-of-state generators incur in selling to bankrupt utility Pacific Gas and Electric, a unit of PG&E Corp, and two others facing financial problems.

FERC said the plan was a better solution than imposing strict price caps.

``The mitigation price is not a blunt, arbitrary figure,'' said FERC Chairman Curtis Hebert, a Republican. ``A return to cost-based regulation of individual suppliers is simply not feasible and is not in the best interests of consumers.''

In California, soaring temperatures and the threat of possible power blackouts sent power prices sharply higher on Monday. Spot market prices for power in the west rose to about $120 per megawatt hour, double the price on Friday.

The California ISO issued a warning to residents and businesses that rolling blackouts could occur on Monday and Tuesday.

FERC unanimously approved expanding its plan throughout the West, winning over Democratic Commissioner William Massey, who has criticized his own agency for not taking bolder action like price caps.

``This order moves sharply in a direction I have been advocating for eight months,'' said Massey, who was appointed to FERC by former President Bill Clinton. Massey said he was pleased that the plan will cover two summers and extend through the end of next year.

Massey also said the order would prevent ``megawatt laundering,'' in which generators sell power to other western middlemen, who then resell the electricity back into California at sharply higher prices.

Agency officials say that their earlier measures are working. Since the FERC plan for California price relief went into effect on May 29, wholesale power prices in the state have dropped from more than $400 per megawatt hour in May.

ACTION WON'T PREVENT BLACKOUTS

Monday's meeting marked the first time that FERC has been fully staffed with five commissioners since the California energy crisis began last year.

New FERC Commissioner Pat Wood, a former Texas utilities regulator who worked with Bush when he was governor of the state, noted that while the agency has done all it can to alleviate the California power crisis, it would not be enough to prevent blackouts.

``It is likely we will see the lights going out'' in California this summer, Wood said. But FERC's mission will be to ``ensure that the pain of black-outs is not accompanied by a big bill,'' he said.

The five FERC commissioners were to defend their price relief plan before the Senate Energy Committee on Tuesday.

Sen. Jeff Bingaman, the New Mexico Democrat who heads the panel, said earlier on Monday that Congress was ready to act.

``We will watch to see what action they (FERC) decide to take. I hope that Congress does not have to act,'' he said.

Democrats have made it clear that unless FERC moved quickly, they would push legislation to set wholesale prices based on costs plus a moderate profit. That approach would be similar to how U.S. utilities were regulated for decades.

Republican lawmakers feared they could take a political hit for the Bush administration's decision to oppose strict price caps and therefore sought a FERC compromise to expand its limited price curbs.

The White House said it was worried that price caps would discourage investment in new power plants and fail to encourage consumers to cut home energy use.

End article

Author's Comments: This ruling could politically influence the I.S.O.'s official posted emergency "Stage" alert declarations. Once a "Stage 1" is officially declared, the price cap is off, and as prices rise, a new higher cap is established.

Hence, this political ruling could induce the I.S.O. to seriously UNDERdeclare the seriousness of grid conditions, and possibly even underpredict blackout forecasts. Predicting blackouts without also foreseeing a "Stage" alert would be too disingenious to pass muster.

As a result, I.S.O.'s posted grid margin status, and even the (lack of) blackout forecasts can no longer be trusted. The grid may be far "Closer To the Edge" than is being declared.

This does not reflect unfavorably on I.S.O. The motive is financial, and this is a serious component of the crisis. The blame is with poorly drafted government edicts, and their unintended consequences.

To determine grid status, use website http://energycrisis.lbl.gov/, which shows import levels. The difference between system load and available resources is crucial. Note when this difference is less than the import level, it indicates dependence on imports to avoid blackouts. The problem is that "available resources" may be over- reported, for the political reasons stated above.

The bottom line: The lack of "Stage" alerts or blackout forecasts may be deceptive. Beware of blackouts hitting with little or no warning.

If there are errors in the reasoning above, constructive criticism for purposes of correction is encouraged.

-- Robert Riggs (rxr999@yahoo.com), June 23, 2001

Answers

Great reasoning. It make nothing but sense, sense, sense.

-- Uncle Fred (dogboy45@bigfoot.com), June 23, 2001.