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?file=/chronicle/archive/2001/07/04/MN186091.DTL&type=news

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.

-- Swissrose (cellier3@mindspring.com), July 05, 2001