In new light, the old rules on power rates look better : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

In new light, the old rules on power rates look better By Carrie Peyton Bee Staff Writer (Published Oct. 9, 2000) Is it time to re-regulate electricity? Less than three years into California's experiment with competitive markets, calls are mounting for a temporary return to doing business the old way: Make power plant owners open their books, and pay them for their costs plus a guaranteed profit.

After blackouts around San Francisco, huge electric bills in San Diego, and threats that double or triple prices could await much of the rest of the state, renewed regulation of power plants is attracting more supporters.

"I'm not interested in grounding the generators forever, but I think maybe they should go to their rooms for a while," said state Sen. Debra Bowen, chair of the Senate Energy Committee.

Lining up against the idea are some power plant owners and power traders, as well as some market experts who fear it could delay the long-term solutions California needs: investments in power plants and transmission lines.

For the next few months, much will rest with the divided members of the Federal Energy Regulatory Commission, who have been studying California's energy chaos since August.

The newest voice in the chorus for temporary regulation reached FERC Friday, in a filing from a group representing utilities that serve more than one-fourth of California's electricity consumers, those who get power from city-owned or ratepayer-owned utilities, such as SMUD.

The California Municipal Utilities Association asked federal energy regulators to rule that competition isn't working, and to impose cost-based rates until it's fixed.

This week, Pacific Gas and Electric Co. plans to make a similar request, asking FERC to impose individual price caps for each power plant, utility spokesman John Nelson said. Consumer representatives are urging price caps that would shrink and grow based on demand. And at least one bill is pending in Congress to go back to cost-based wholesale prices.

Whatever California has today, it's not the open market envisioned in 1996, when the Legislature restructured the electric industry hoping that competition among power plant owners would lower prices and boost efficiency.

Already, some aspects of today's market mimic features of regulation: a San Diego rate freeze imposed by the Legislature; some power plants being built through a statewide nonprofit agency instead of market forces; and wholesale price caps that keep getting lowered but still haven't put a brake on prices.

"It's very clear to all of the suppliers in today's market that the buyers are up against the wall, and they're basically charging the maximum they can charge," said Jan Schori, general manager of the Sacramento Municipal Utility District.

SMUD is among those urging FERC to revert temporarily to the old ways of paying for power plants.

"Is this the end of competition? No," Schori said. But some kind of solution should evolve that protects consumers, she said, and it is likely to have at least elements of regulation.

If the FERC rules this year that the electric market here isn't "workably competitive," it could order privately owned power plants to set their rates based on costs instead of whatever the market allows.

But FERC is philosophically divided. Some who have watched it closely believe it is unlikely to re-impose cost-based rates and that it will opt instead in November or December for smaller changes.

"An important objective we have is to make electricity markets and electricity competition work," FERC Chairman Jim Hoecker said in an interview. "It's my own view that a return to heavy-handed command-and-control regulation and utility monopolies is just not an option."

Hoecker said a wide range of actions, from state and federal officials, probably will be needed to solve California's problems, and in FERC's view nothing so far is off the table. He stressed that there is much worth saving in the California experiment.

"This is a market that has been operating, and during most times of the year operating quite well, for three to four years," he said.

More delicate tweaks of California's power market could solve the short-term problem far better than cost-based pricing, said Carolyn Kehrein, whose firm, Energy Management Services, helps large businesses save on power costs.

Kehrein serves on the board of the California Independent System Operator, the not-for-profit agency that oversees electric transmission. She said if ISO rules were structured to discourage last-minute trading, many of the problems would evaporate.

Kehrein fears regulated prices would just discourage new power plant builders who want to be assured of high profits.

Williams Companies, an energy firm that has earned substantial profits marketing power in California although it owns no plants here, would not have been as attracted to California under regulation, company officials said.

"We are very concerned about this call for a move to cost-based rates," said Tim Thuston, Williams' managing director of government affairs.

Calpine Corp., a San Jose-based company already building three plants in California, fears rates based on costs would reward higher polluting plants -- which can cost more to run -- by paying them more per megawatt than Calpine's soon-to-open, cleaner plants.

"I'm not sure that's fair," said company spokesman Bill Highlander. At the same time, he said, regulation wouldn't dry up any of Calpine's investment plans.

"In the long run, there is a continuing need for new generation within the state," he said. Calpine would still get "some kind of return on our money" under regulated rates, and could live with that until market problems are sorted out.

The rate debate is unfolding at a time when lawmakers, regulators and others around California are re-assessing every aspect of its electric dilemma.

"Long term, I see the potential for an entire rethinking and revamping of California's energy regulation," said Michael Shames, head of the Utility Consumers Action Network, a San Diego group.

Shames and some state officials are intrigued by a California Municipal Utilities Association proposal to do away with the ISO. In its place, the group wants a government-owned company to oversee electric transmission, an institution they believe would be subject to far less FERC control.

The notion, only loosely sketched out by the utility association last week, was dismissed by the ISO as unlikely to solve market problems. The proposal is likely to be among a parade of ideas offered to the Legislature in January.

"Next session is going to be completely different from anything we've had" since the restructuring law was passed, one legislative staffer said. Ideas "are all over the map. It's kind of like the whole deal is up in the air."

While the discussion goes on, longtime industry watchers are past astonishment at prices that have never behaved like this before. They don't go down much at night. They don't go down much when it gets cooler. "Off-peak" prices have sometimes been 100 times higher than two years ago, and average prices even in October are running two to three times higher than the highest prices of old.

Investor-owned utilities such as PG&E have said they are spending billions more on power than they can collect in now-frozen rates, and they are looking for ways to pass the difference on to consumers.

And ratepayer-owned utilities such as SMUD are feeling the pinch, generating some of their own power but paying higher prices for the rest. Schori is working on a 2001 budget that envisions power costs at double 1999 levels without raising electric rates -- something she said cannot go on for long.

"We've got to do something to fix the market or SMUD is going to have some serious rate issues to address next year, for rates in 2002," she said.

-- Martin Thompson (, October 09, 2000

Moderation questions? read the FAQ