Frontlines

Taken to the Cleaners

 

 

FERC's California plan needs pressing, to fix blatant gaffes on NO _x, demand bids, and megawatt laundering.

You're a federal utility regulator. You want to place a ceiling on electricity prices paid to power producers in California, but you don't want to impose those evil price caps. No sir.

So you set a proxy price for a hypothetical competitive market, based on what you think are reasonable costs for operating a typical power plant, like thermal efficiency (plant heat rate) and buying natural gas for fuel. Then add $2 for miscellaneous operating and maintenance expense. That should do it.

But something goes wrong. After you've written your ratemaking order, have seen it hit the street, you discover that one of your cost categories--the cost of purchasing emissions allowances to meet environmental requirements--isn't even a cost any more. While you had your back turned, two or three months earlier, that darned governor out in California granted a reprieve to power plants designed to bring more supply to the market. He freed local generators from having to buy additional emissions credits for nitrogen oxides (NO _x) for each hour of operations, but your fellow regulators somehow remained clueless.

So now the industry is calling for rehearing, and you're reduced to writing a letter to Barry Wallerstein, executive director of California's South Coast Air Quality Management District (SCAQMD), to ask how SCAQMD applies their NO _x emission permit rules to electric generators. But the California Independent System Operator (ISO) filed tariffs ignoring your NO _x cost and pricing emissions credits at zero, since the ISO already knew about the governor's order.

Didn't everyone?

That's just one of the seemingly obvious gaffes lurking in the order that the Federal Energy Regulatory Commission (FERC) issued on April 26 that imposed a price control scheme on electricity sold through the wholesale real-time market run by the California ISO. Now add in the other mistakes, including plans to (1) mandate demand-side bidding, (2) collect surcharges to build an escrow fund to cover debts owed to power producer robber barons, (3) link price mitigation to formation of regional transmission organizations, and (4) ignore megawatt laundering--the one single biggest problem facing state price control efforts. Pretty soon you're running a serious risk of reversal on an appeal that's sure to be filed.

THESE ERRORS HAVE GIVEN NEW LIFE TO CALIFORNIA IN ITS FIGHT WITH WASHINGTON OVER ENERGY POLICY. But let's first distinguish between the parochial complaints we always hear from the utilities and the power producers on issues that FERC probably got right:

• Gas Costs. Utilities and producers both say FERC's averaging of natural gas prices for all delivery points statewide will wreck the proxy price, giving a windfall to producers in northern California, who pay less (and also to those with long-term contracts or gas supply affiliates). That leaves costs unrecovered for southern generators, who pay more for gas, or for producers relying more on spot purchases. Everyone seems to want an index with multiple price zones. Why not?
• Must-Offer Rules.