Critics say FERC ignored California’s deregulation flaws
FOLSOM, Calif. (AP) – The federal agency in charge of monitoring and policing California’s power system was warned by experts both inside the agency and out of potential deregulation flaws such as the price gouging that now fuels the state’s power crisis.
The Federal Energy Regulatory Commission has a legal obligation to ensure ”just and reasonable” prices, and is meant to operate as an oversight agency, similar to the Federal Securities Commission that oversees Wall Street.
However, just three months into the 1998 launch California’s deregulation experiment, energy traders tested their ability to manipulate the market by offering a megawatt-hour of electricity for $9,999 – the highest price they thought trading computers could accept. Electricity had been trading below $100 per megawatt-hour.
FERC may have set itself up for problems by eagerly promoting deregulation, despite red flags from one of the nation’s top deregulation experts and the agency’s own staff members, including its economists, according to interviews and a review of hundreds of documents published Sunday by the San Jose Mercury News and the Los Angeles Times.
”There were a lot of issues that got swept under the rug,” said economist Carolyn A. Berry, who headed FERC’s analysis of the California plan. ”We were trying to point out the ugly warts, but it wasn’t our job to set policy.”
But Curtis Hebert Jr., who took over as FERC’s chairman in January, insists the agency isn’t failing to investigate the energy industry. FERC’s job is to make the market competitive, which will bring lower prices, he said.
”We do have enough resources, and we are handling it in a way that’s appropriate,” Hebert said of California’s energy crisis.
Before deregulation began, FERC commissioners, generating companies, utilities and politicians argued that a deregulated market for electricity – as was done with natural gas – would reduce prices and increase competition. In 1992, Congress passed a law encouraging open access, and in the mid-1990s, a draft plan was started for the California Public Utilities Commission.
Bill Hogan, a deregulation expert from Harvard University, said he was hired to analyze the state’s plan for San Diego Gas & Electric Co. He wrote a 71-page report citing potential price spikes and other problems to be presented at FERC’s deregulation hearings in the summer of 1996.
That report was eventually withdrawn after the utility was pressured to join the deregulation bandwagon if it wanted to have a say in the final plan, said Bill Reed, chief regulatory officer for the utility’s parent company.
Once the California Legislature passed the bill in 1996, it essentially gave FERC the sole authority to intervene when wholesale power prices soar.
But FERC also had the final say on each part of the plan before it was implemented. Some say the agency did not promote internal debate, and add that the plan was already charging forward and would have been politically difficult to stop.
”There was great resistance on the part of many people at the commission to undo the process that California sent in,” Berry said. ”There was a reluctance to start pulling at the threads for fear that the whole package might fall apart.”
At that same time, FERC officials also were working on a $12.7 million plan reorganize the agency’s staff and upgrade computers.
Then came the hot July day in 1998 when energy traders charged nearly $10,000 for a megawatt-hour of electricity to test the waters. The Independent System Operator, manager of California’s power grid, was forced to buy the power to keep the grid from crashing.
The ISO then requested that FERC grant an emergency price cap, which it did. But ISO officials continued to warn the federal agency that this was just the beginning.
”I don’t think they had any thought of what the potential was,” said Anjali Sheffrin, the ISO’s market surveillance director who visited the agency twice in the fall of 1999 in an effort to convince FERC officials of potential dangers.
James Hoecker, who served as FERC’s chairman during the transition to deregulation, now disagrees with the way in which deregulation was pushed through in California. He says more attention should have been given to critical analysis.
”I would have liked for the commission to be more prepared for California,” he said.
FERC has approved deregulation plans in New England, New York and the mid-Atlantic states. But FERC officials point out they only oversee wholesale energy prices, while state officials are responsible for the local utilities and other retailers selling power to customers.
Over the past few months, FERC has ordered a dozen companies to justify their high prices or pay $124.5 million to California utilities for January and February. Williams Cos. of Tulsa, Okla., also settled for $8 million after being accused of shutting down power plants last spring to spike prices.
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