DAN McSWAIN

Staff Writer

WASHINGTON -- The Federal Energy Regulatory Commission voted 5-0 on Monday to close some big loopholes in its plan to control California's runaway electricity prices but refused to refund billions of dollars to consumers.

The nation's chief power regulator expanded its order to include the entire West. It lowered the price that sellers can charge during normal conditions, extending limits that had been in effect only during power emergencies. And, for the first time, the agency forced power-trading companies and publicly owned utilities to abide by the same price controls that limit what private generators can charge customers.

Federal regulators ruled to allow prices to rise and fall according to demand for electricity. In expanding a market-based pricing scheme and affirming deregulation, commissioners, three Republicans and two Democrats, resisted intense pressure from national and California Democratic politicians for a return to regulated prices that are based on the cost of production.

The new price controls take effect today.

Commissioner William Massey, a Democrat who has pushed for aggressive intervention in the markets since last August, said that he was encouraged by the compromise order but disappointed that fellow commissioners did not vote to order big refunds against power sales since Oct. 2, the earliest date set by regulators for potential refunds.

"We could have established a just and reasonable rate based on the new proxy price and ordered refunds back to October," Massey said. Such a refund would amount to billions of dollars to California consumers.

Hebert cites reductions

Curt Hebert, Jr., the Republican chairman of the commission, said the order will reduce prices charged to consumers and remove opportunities for traders to manipulate markets at the same time it pushes power companies to invest in new power plants that are more efficient and pollute less.

"Any escape hatches will be sealed off," Hebert said. "A generator or marketer now makes money by increasing its efficiency. The best way to clean the air is never to pollute it in the first place."

Analysts said the commission's order, which carries the weight of federal law for the industry, will protect consumers from the ruinous prices of the last year but still contain opportunities for power traders to make lots of money.

"I think it's basically good news; how good will depend on the implementation of the new market rules," said Severin Borenstein, a Berkeley economist who head the University of California Energy Institute.

Others said the order was generous to generators in that it allowed them to recover all of their costs.

"They certainly promised that these guys don't lose money in the market," said Frank Wolak, a Stanford economist who heads a market oversight committee of the state power manager.

The commission has tried with four separate orders since November to rein in wholesale prices in California, which have shot from about $30 per megawatt hour in early 2000 to more than $400 per megawatt last month. Billions of dollars in purchasing losses have crippled the state's big utilities, caused the largest rate hikes to consumers in state history and drained the state treasury.

Advocates critical

Consumer advocates called for prices to be set near the cost of each individual power plant, with a modest profit. Some criticized the commission's order to set a price target that awards to all sellers the cost of the most expensive power plant.

"That means the vast majority of generators make a windfall profit," said Mark Cooper, an analyst for the Consumer Federation of America, a Washington-based group.

Gov. Gray Davis and a host of state officials have charged the commission with inaction and have blamed high prices on market manipulation by power companies. Industry executives and federal regulators have in turn attributed California's problems to a flawed deregulation and a 12-year drought of power plant construction.

Prices have been falling since mid-May. Hebert said lower prices are a consequence of the commission's limited order issued on April 26.

Monday's sweeping expansion of the "price mitigation plan" contains the following key provisions:

• During power emergencies in California, Western prices may not rise above the cost of the most expensive power plant that state power managers order into service during a particular hour. The target price can thus move up and down to follow demand, simulating the workings of a competitive market. Hebert said this provision will spur construction of ultra-efficient, low cost plants as producers scramble to stay under the target price.

• During normal conditions, the top price charged by power companies will be 85 percent of the price set during the most recent Stage 1 power emergency. This condition removes a key bone of contention among state officials from the April 26 order, which restricted prices only during emergencies.

• Generators are ordered to bid all of their available electricity production into the market. If enforced by the commission, the order will end the practice of withholding power by bidding high prices or the alleged strategy of faking maintenance shutdowns of power plants.

• Power traders become "price-takers" instead of price-makers. They essentially have to bid a zero price into the market and take whatever is set for that hour, ending the practice of marking up contracts during conditions of tight supply.

• Price controls include 14 Western states, a move designed to end the practice of "megawatt-laundering," whereby a generator could sell power out of state to avoid California price controls, then import electricity back into the market.

• Commissioners allowed sellers to charge California a 10 percent credit premium to compensate power companies for hundreds of millions of dollars in unpaid bills and political uncertainty. At the same time, the commission ordered all parties to settle past-due debts in 15 days.

Gov. Gray Davis cautiously endorsed the ruling Monday, but renewed his call for refunds.

"Today the FERC has finally taken a step in the right direction, but there is much more they should do," the governor said. "For one thing, Californians have been overcharged billions of dollars for electricity. To date, we've not received one cent in refunds. Secondly, this order may have some loopholes as the first one did. If that's the case, they need to be closed immediately."

Commissioner Pat Wood, a recent appointee of President Bush, said that he would pursue an investigation into the historic rise in natural gas costs that doubled consumers' bills last winter. Natural gas is also a key fuel for the power industry, and generators have justified high electricity prices by pointing to high fuel costs.

Wood also said blackouts in California are inevitable this summer because of low production relative to rising demand from consumers.

"I think we will see the lights going out," he said. "We want to make sure the pain of blackouts is not followed by a great big bill."

Borenstein, the Berkeley economist, said the order will limit the astronomical prices charged to consumers last winter but will not mean the end of higher bills unless people use less electricity.

"We've gotten something out the FERC now. Now it's time for California to buckle down and do what it needs to do and that's to really increase conservation," Borenstein said. "We are still not seeing anywhere near as much conservation as we need to see."

Contact staff writer Dan McSwain at (760) 740-3514 or dmcswain@nctimes.com. McSwain is at 760-420-2014./jvd/krd

6/19/01