By ANN DE ROUFFIGNAC
OGJ Online

Nov. 20, 2000—U.S. Energy Sec. Bill Richardson Wednesday proposed the Federal Energy Regulatory Commission cap rates on existing California electric generation and look into imposing a similar cap throughout the Western region.

He suggested leaving the rate cap in place until "an increase in generation capacity and other difficulties with the wholesale market are resolved."

Richardson filed comments on behalf of the Department of Energy (DOE) concerning problems in the California wholesale power markets. FERC's investigation of the market grew out of complaints about high prices incurred by San Diego residents this summer as a result of restructuring of the state's electricity industry and power shortages that also led to numerous industrial and commercial curtailments.

Local utilities and state politicians charged independent power producers unfairly benefited from tight power supplies, charging outrageously high prices. They have denied the charges.

Wednesday was the last day for comments concerning FERC's proposed order issued Nov. 1-culminating its investigation-which could change the structure of the markets in California and also impose a rate cap.

Richardson proposed an alternative plan which would cap bids from existing generators at marginal costs but would also exempt generators that begin operation after FERC's order becomes final. Such a plan would institute a "hard cap" on existing generators, while encouraging construction of new power plants, according to DOE.

DOE notes FERC's proposed "soft cap" will allow generators to recover rates exceeding $150/MW-hr.

"We have concerns that this proposal may not establish sufficient price discipline on the market until new capacity is added," DOE's filing states.

FERC would permit generators to bid power at prices higher than the cap, but they would have to justify the higher bids with FERC and generators could be subject to refunds, if the agency finds the higher prices are unjustified.

DOE's proposed cap at marginal costs would include variable operating costs, such as fuel, operating, and maintenance costs; costs for environmental emission allowances; and other incremental costs necessary to recover a plant's full operating costs. (Marginal costs by definition do not include capital costs of the plant.)

While new generation would be exempt from price controls, bids from these generators would not be used to set the market-clearing price for existing units.

Recognizing existing California generators will be inclined to sell power out-of-state in markets not subject to price controls, DOE proposes FERC initiate a proceeding to consider applying the cap to all spot markets in the Western region.

The Energy Department also said FERC should revisit its investigation of market power abuse in California. The original FERC investigation into market power in California did not find any evidence of wrongdoing. But Richardson says look again.

"We urge the commission to thoroughly investigate the allegations of market power abuse using all the tools available to the commission," the filing states.

Finally, DOE urges California to promote energy conservation and develop a program that would manage demand more aggressively.