Report proves negative impact of price controls, DOE says

California will likely experience nearly 5 days of rolling blackouts this summer affecting 1.4 million households, but the situation would worsen under a hard price cap or cost-plus prices, the US Department of Energy said in a new analysis. Separately, US Sen. Barbara Boxer (D-Calif.) Wednesday said she introduced the 'Electricity Gouging Relief Act of 2001.'

June 21, 2001

2 min read

By the OGJ Online Staff

HOUSTON, June 21 � California will likely experience nearly 5 days of rolling blackouts this summer affecting 1.4 million households, but the situation would worsen under a hard price cap or cost-plus prices, the US Department of Energy said in a new analysis.

With political pressure intensifying on Republicans over the correct response to the electricity crisis in the West, Energy Sec. Spencer Abraham said the results prove the Administration's point that price controls will do more harm than good.

The report was released Wednesday just prior to California Gov. Gray Davis's testimony before the US Senate Government Affairs Committee. Republicans have largely opposed price caps on the grounds they will discourage construction of new generation.

Davis has argued for a hard price cap or cost-plus price controls and urged the committee to pressure the Federal Energy Regulatory Commission to force California generators to refund $9 billion to the state. Sen. Barbara Boxer (D-Calif.) Wednesday said she introduced the "Electricity Gouging Relief Act of 2001."

The bill would require FERC to order refunds for past electricity purchases in cases where FERC determined that the prices charged by the generators were "unjust and unreasonable." The bill would affect electricity sales that took place between June 1, 2000 and June 19, 2001

California lawmakers said they would wait to see if FERC's new price control scheme is effective in holding electricity costs down this summer. The agency instituted a price setting mechanism Monday that applies to all spot market transactions throughout the West. But commissioners specifically avoided instituting a hard price cap or cost-plus rules.

The DOE report found up 1,300-3,500 Mw of gas-fired generation would be forced off line, if a $150/Mw-hr price cap were imposed because some peaking plants would not be able to recover their fuel and maintenance expenditures. If 2,000 Mw went off line, the study estimated the expected hours of outages would double to 235 hr from 113 hr.

The assumptions were based on gas costing $8-$11/MMbtu. California gas prices, another point of contention, have recently exceeded the national average but have come down recently.

A cost-plus-$25 price cap would discourage new generation, with developers worried they couldn't operate the plants enough to be economic, according to the report. A projected break-even point of 55% represents a considerable risk for developers, which many will be unwilling to bear, the DOE said, potentially raising outages by another 28 hr.