FERC reviewing price caps in West

Ann de Rouffignac
OGJ Online

HOUSTON, Nov. 13, 2001 — Federal regulators are reviewing the cap on electricity prices in the West and are expected to issue an order to either replace on confirm the cap before December.

The California Independent System Operator wants the Federal Energy Regulatory Commission to continue price caps on generation in the West, generators want the caps removed, and Pacific Northwest elected officials want FERC to create price caps specific to the region.

FERC ordered price caps for the entire West June 19.. The price was tied to marginal prices in California during the summer and had “must offer” provisions that forced generators to bid all uncontracted or available generation into California’s real-time market.

But price caps based on California conditions can produce anomalous results outside California, the Western Power Trading Forum said in a FERC filing. Electricity markets in the West experience seasonal variations and have different supply/demand profiles, the San Jose trade association said.

“It is not economically justifiable to set prices in the winter peaking Northwest based on prices set in the summer peaking California market,” the association said.

The organization argued price caps ordered by FERC in June can lead to shortages of power in the Northwest in winter. Using California data on a year round basis to set the price throughout the West means the marginal unit during the winter will be located in California where demand is at its lowest. The marginal unit for the price cap should be located in the Northwest where demand is peaking, it said.

No incentives
“If there is cold weather in the Northwest, there won’t be incentives to generators located in the Southwest or in California to ship power up to the Northwest,” said Gary Ackerman, executive director of trade group. “They are rolling the dice and taking a risk here. It’s like a Dirty Harry movie. How lucky do you feel?”

If the cap is not removed or modified before winter, the trade group said shortages of power could occur. The trade association is opposed to caps in any form and would prefer they be removed.

Northwest elected officials wrote FERC they too were worried about the impact on the Northwest of prices tied to market conditions in California. US Sen. Patty Murray (D-Wash.) isn’t ready to do away with price caps because they “played a role in stabilizing prices.”

But she told FERC, “It may be inappropriate for FERC to continue to tie Northwest electricity prices to those set by the California ISO, given the fact that California’s periods of peak demand differ from those of the Pacific Northwest.”

Murray suggested FERC exempt new generation from price caps and change the “must offer” requirement, which forced generators inside California to offer surplus power to buyers outside the state.

The California ISO argued in favor of continuing existing price caps because market fundamentals haven’t improved enough to let prices move freely again. But the ISO said it wouldn’t oppose price caps for different regional markets in the West. The ISO said the price caps in California should remain through summer 2002 no matter what FERC decides to do in the rest of the region.

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