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News Analysis

Industry experts debate whether so-called "price mitigation measures" miraculously solved the California crisis.
Fortnightly Magazine - January 15 2002

and Nevada, and does not include any peaking capacity, but only baseload. In fact, Stout says that after the June 21 price cap announcement, Reliant put off plans for a peaking unit in Big Horn, Nevada until at least fall of 2002. The FERC price mitigation measures are set to expire in September 2002.

"The rate for projects has dropped off considerably," Ackerman says. While he knows of no new projects in California currently, he also cannot say that the downturn is a result of the caps, because the rates for megawatt hours were already dropping before the caps.

Many, including Ackerman, believe that price caps send the wrong signal to power plant investors. While there is some new investment in generation, there is also wariness, he says. "The most dangerous thing is if FERC extends caps- I guarantee that 2000-01 [rates and problems] will be seen again in 2005-06."

The forthcoming CEC energy outlook predicts an ample power supply for the short-term. "There is quite an adequate cushion for planning purposes, [and] projects are coming online adequately," Moore says. While not saying directly that projects are being withdrawn from the licensing process, he does say that it appears the market for new generation is contracting, so that companies are a good deal more conservative in their expectations. Comparing applications made in 2001 to those made in 2000 is to make a data regression without many data points, he says. "Some of the applications were so inept, they defied description, [and] a lot of those got shaken out." The market conditions were so volatile, Moore points out, that many applicants jumped into the market. The mid- to late-1990s period stands in stark contrast, with no applications filed-and that lack of investment in new generation is widely considered to be the root cause of the recent crisis.

CPUC's Bilas says that while the current power supply is adequate, he is not confident about the five-year supply for California. "The independent generators are absolutely correct not to build" new generation under the current scenario of caps, he says. Regulators cannot say to generators to go build new capacity, if their prices are going to be capped, he argues.

Yet others argue that the caps are not affecting investment decisions. "It's not clear that caps are preventing investment," says SCE's Stern. "Some want the measures removed, to see increases in prices as we had two years ago, but there is no evidence that generation owners are losing money."

Coming Out From Under the Price Cap Spell

The fundamental question underlying this debate, according to the FERC official, remains: Is the market functioning? The fact that FERC put a timeline on the measures, he says, signals that price mitigation is not favored. At some point, FERC would like not to have mitigation in place, and to have a market running with an independent ISO or regional transmission organization (RTO).

As for the future, the official says, all sorts of rules changes are probably necessary, because so many things are not working in California. In addition, he