California Legislators Color Public Power as Scapegoat for Price Spikes.

The price spikes and reliability problems that have plagued California and the Northwest this summer have raised the ire of residential and small business customers and sent politicians scrambling. Members of Congress, the Federal Energy Regulatory Commission (FERC) and the Clinton Administration

In their panic, some California legislators are attempting to paint public power as the scapegoat and have proposed legislation to eliminate the federal preference clause. The preference principle gives public utility districts, municipal utilities and rural electric cooperatives the "first right to purchase" power from federal power marketing administrations, including the Bonneville Power Administration.

Gorton, Burns Ask FERC to Investigate

On June 30, Sen. Slade Gorton (R-Wash.) wrote FERC chairman James Hoecker, asking that the agency investigate the sudden rise in Northwest spot market prices in the preceding weeks. Gorton asked FERC to identify short- and long-term solutions for the price volatility and about the impact in the Northwest of the operation of the California Power Exchange (PX), the state-run bulk power market. In a statement accompanying release of the letter Gorton said, "While high temperatures and a late runoff from Canada may be factors in the spikes, many of my constituents have speculated that the command and control approach of the California Power Exchange has created a situation that encourages suppliers, and in some cases large users, to 'game' the market."

Gorton also asked Sen. Frank Murkowski (R-Alaska), chairman of the Energy Committee, to conduct hearings on these events. Staff to Murkowski said in August that a hearing is unlikely, but the committee may survey market participants in writing to gain multiple perspectives on the current price and reliability problems.

Sen. Conrad Burns (R-Mont.) sent a similar letter to FERC, asking how the market price is set in the Northwest, whether a "small number of actors" could inflate the cost of power and whether FERC believes that such price inflation is taking place.

On July 31, Gorton and Burns received FERC's initial analysis of the factors that contributed to the price spikes. The response, which the Gorton office found disappointing, did not add much new information to that already reported in the press and offered little in the way of solutions. In addition to a constrained energy supply and the failure of some entities to use forward contracts and other mechanisms to hedge against price increases, FERC noted that the following conditions contributed to the rise in regional wholesale electricity prices:

* The Northwest experienced near-record high temperatures during parts of June 2000;

* The amount of run-off in June was lower than average and water flow was reduced to meet summer recreation and fish flow requirements, leading to a net decrease in the availability of hydroelectric generating capacity in June;

* Several large thermal plants and Energy Northwest were not operating at full capacity for various reasons; and

* Natural gas prices were elevated and increased operating expense for natural gas generating units.

As to whether the California PX's market structure exacerbated prices in the Northwest, FERC said "no evidence currently exists to suggest that it (the PX) adversely affected Northwest electricity prices or that Northwestern generators sold output into California in excess of historical levels." The Commission also told the senators that no evidence currently exists that entities artificially inflated prices during June.

FERC Launches Formal Inquiry; President Urges More Rapid Answers

In response to the concerns expressed by Gorton, Burns and other members of Congress, FERC on July 26 ordered a formal investigation of "factors affecting competition and market price fluctuations in electric bulk power markets." The national inquiry is designed to look at whether bulk power markets are working efficiently and, if not, the root causes of the dysfunction. "In light of rapidly changing markets and market price volatility, we believe it is incumbent on us to take steps to assure well functioning markets to the extent we have jurisdiction to do so," the Commission stated in issuing the order.

Results of the investigation were originally expected to be released on November 1, but on August 23 President Clinton directed FERC to speed up the inquiry. Capitol Hill sources now say they expect a report from FERC in late September. The president took two additional, but small, steps to aid consumers in San Diego. He directed the Department of Heath and Human Services to release $2.6 million in Low-Income Home Energy Assistance Program (LIHEAP) funds and encouraged commercial electric customers to seek loans from the Small Business Administration.

The Clinton Administration has been an aggressive proponent of utility restructuring and recognizes that if prices in California continue to increase, it could hamper or even kill efforts to pass a comprehensive wholesale electricity-restructuring bill.

Southern Californians Attack Federal Power Program

In an effort to find some way to lower costs for San Diego consumers, Rep. Brian Bilbray (R-Calif.) on July 27 introduced legislation to eliminate preference in the sale of power from federal hydroelectric dams. Bilbray, who represents the San Diego area, is in a very tight re-election race and has no public power in his district.

The bill would amend the Flood Control Act of 1944 to eliminate preference and offer equal access to federally generated power to investor-owned utilities. Republican Reps. Ron Packard (Calif.-48th District), Duncan Hunter (Calif.52nd) and Duke Cunningham (Calif.-51st), who also represent San Diego, are original co-sponsors of the bill. Bilbray plans to use a September 11 House Commerce Committee field hearing on the price spikes as a "bully pulpit" in support of his bill.

In a statement announcing introduction of his bill, Rep. Bilbray said, "San Diego stands alone in the United States as the first in the nation to pay what is being called true market prices for power, while some cities enjoy lower utility prices due to that city's ability to purchase cheaper subsidized power from the federal government." Bilbray believes that "truly open" markets should allow investor-owned utilities like San Diego Gas and Electric (SDG&E) "access to the same power generated by federal facilities as public power agencies."

Rates for SDG&E customers have risen because the utility paid off all of its stranded costs, triggering the end of the 10 percent rate freeze mandated by the California legislature. SDG&E is passing directly on to consumers the prices it is paying in the market, which has doubled and, in some cases, tripled monthly electric bills.

The American Public Power Association (APPA) was quick to respond to the Bilbray initiative. In an August 8 letter, APPA Executive Director Alan Richardson advised Bilbray of its opposition to his bill and challenged the assertion that federal power is subsidized. "The price spikes in San Diego... have nothing to do with federal hydropower. They are the result of a state law based on superficial notions of what is required to establish a workably competitive retail electricity market; unpredictable weather conditions; a shortage of regional generation capacity; and continuing market power abuse in the interstate wholesale market." The APPA letter also urged Bilbray as a member of the Commerce Committee to pass fair, comprehensive electricity restructuring legislation "that establishes and maintains effective competition in the interstate wholesale market by giving the FERC the appropriate tools to do so."

Northwest Public Power Association (NWPPA) also wrote to Bilbray voicing its concern over his proposed bill. "By eliminating the preference clause," the letter notes, "your bill would increase costs for consumers here in the Northwest in an effort to cushion the impact of California's retail restructuring law on customers served by San Diego Gas & Electric."

While passage of the Bilbray bill is highly unlikely this year, its introduction and the vigor of Bilbray's support should be a "wake up call" for public power. Until additional electric generation comes on line and the turbulence in energy markets subsides, further attacks on the federal power program are likely. As Congress struggles to understand the causes of price volatility in the West and Northwest, some politicians will be unable to resist the appeal of the political "quick fix."