Former California PX leaders complain about FERC

By the OGJ Online Staff

HOUSTON -- In a letter to President George W. Bush and leaders of the US Senate and House, seven economists associated with the now defunct California Power Exchange expressed "deep" concern price controls imposed by federal regulators do not go far enough.

The move came as Bush headed to California for his first presidential visit, and a meeting Tuesday with Democratic Gov. Gray Davis.

Davis reportedly will ask Bush to impose wholesale electricity price controls and order refunds for overcharged consumers, but the White House Monday repeated Bush's position such steps will discourage new sources of energy.

In their letter, the 10 economists said the Federal Energy Regulatory Commission is abdicating its responsibility under the US Federal Power Act to set "just and reasonable" wholesale electricity prices in California. They warned failure to act now will set back electricity deregulation in other parts of the country, and potentially delay or reverse efforts to introduce competition into other formerly regulated industries.

The California Power Exchange, established under the California electricity restructuring law, was effectively shut down by a Dec. 15 FERC order. The law required spot power sales for the majority of electricity transactions in the state. As the electricity shortage became evident last summer, power prices rose astronomically on the California PX. FERC recommended a shift to long-term power contracts and less reliance on the daily spot market.

In an Apr. 26 order, FERC capped prices according to individual power plants cost of production during emergencies for 1 year, but critics complained the cap should apply at all times. The economists, including Roger Bohn, associate professor of management, University of California�San Diego, and a member of the California PX market monitoring committee; Alfred Kahn, professor emeritus, Cornell University, and chairman of the PX blue ribbon panel, did not mention the April order specifically.

But they said a review of FERC's most recent proposals for remedies "lead us to conclude that they will be ineffective and unlikely to enhance system reliability or reduce prices during the summers of 2001 and 2002."

California market flawed
There are numerous flaws in California's wholesale market, the economists said in the letter to Bush, Speaker of the House Dennis Hastert, and Senate Majority Leader Trent Lott, and the consequences have been "significantly" exacerbated by the tight supply in the western US. "We cannot expect a market to operate to benefit consumers or for the resulting wholesale prices to satisfy requirements of the Federal Power Act, if effective competition does not exist," the letter said.

FERC should remedy the situation by imposing market rule changes that guarantee wholesale prices in California are just and reasonable by setting "selling prices for a significant fraction or for all the output sold by generators and markets serving California," the economists said.

The proposal avoids the problem of setting prices below the costs of new market entrants and does not discourage sales from existing facilities into California during the next 2 years, they said. The economists noted designing a "well-performing" competitive electricity market is an "extremely complex evolutionary process," and the public must have confidence the federal government will work cooperatively with states to "establish appropriate restructuring, market design, and market monitoring programs."

Others signing the letter were Severin Borenstein, director, University of California Energy Institute, and former board member of the California PX; James Bushnell, director of research, University of California Energy Institute, and former chair of the California PX market monitoring committee; Peter Cramton, economic professor, University of Maryland, and member California PX blue ribbon committee; Alvin K. Klevorick, economics professor, Yale University, and former chairman of the California PX market monitoring committee; Robert Porter, economics professor, Northwestern University, and member of blue ribbon committee; Carl Shapiro, professor; University of California, and former member of the California Independent System Operator (ISO) market surveillance committee; Frank Wolak, economics professor, Stanford University, and chairman of the ISO market surveillance committee; and Paul Jaskow, director of the Massachusetts Institute of Technology Center for Energy and Environmental and Policy Research.