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Federal Refund Order Validates Call for Price Caps

March 21, 2001

Federal Refund Order Validates Call for Price Caps

Although Regulators Find Evidence of Profiteering, Bush Refuses to Consider Only Option to Protect Consumers

WASHINGTON, DC — Emerging evidence of price-gouging in California’s deregulated electricity market supports calls for regional wholesale price caps, Public Citizen said today.

As California endures another wave of rolling blackouts, federal regulators and the state’s electricity grid manager are questioning whether power producers have been escalating the crisis by creating artificial shortages and by gouging utilities and consumers.

In fact, the federal government has told 13 power generators that they may have to refund $69 million in overcharges if they can’t justify their prices by March 23. Although ordering refunds is an important acknowledgment that the wholesale market is overpriced, only the Federal Energy Regulatory Commission (FERC) has the ability to force power producers to sell their power at reasonable prices.

If FERC were to set a regional wholesale price cap in the West — as eight of 11 Western governors have asked — the federal government would protect consumers and taxpayers by ensuring that electricity is sold close to its cost. Therefore, it should set such a cap, Public Citizen maintains.

However, Energy Secretary Spencer Abraham told a Senate hearing on March 15 that “the only action the [Bush] administration will not take is the implementation of price caps.”

Public Citizen urges the administration to reconsider.

“Without region-wide wholesale price caps, the electricity market will continue to be overpriced, placing the region’s taxpayers and consumers at risk,” said Wenonah Hauter, director of Public Citizen’s Critical Mass Energy and Environment Program. “Rather than defending the right of energy companies to charge outrageous prices for electricity, the Bush administration should be protecting consumers from greedy corporations.”

The California Independent System Operator (CAISO) acts as traffic cop, managing the flow of electricity supply and demand. In February, it issued a report (Report on Real Time Supply Costs Above Single Price Auction Threshold: December 8, 2000 – January 31, 2001) detailing how 13 power generators overcharged Californians by $562 million in December and January. The study found that total energy costs charged by these power generators was $11 billion in those two months, compared with $7 billion for all 12 months of 1999. Although the ISO manages the grid, it lacks authority to regulate the wholesale market. Only FERC has the authority to do that.

In December, FERC found that California’s sky-high wholesale electricity prices were not just and reasonable but declined to do anything about it. In response to the CAISO report, however, FERC was forced to act, placing 13 power generators on notice that they would be liable for up to $69 million in overcharges for January’s sales alone. These companies have until March 23 to either refund the amount or justify why they were selling electricity so far above the amount other generators were selling. FERC has yet to rule on alleged overcharges for the months of December, February and March.

FERC is investigating allegations that power producers have been intentionally taking plants off line to constrict supply and drive up the price of electricity. The power plants — Alamitos and Huntington Beach — are owned by Virginia-based AES, and the power is marketed by Oklahoma-based Williams. According to the FERC report, the plants were not operating in April and May “for reasons not directly related to the necessary and timely maintenance” of the facilities. As a result of the dubious plant shutdown, the state had to purchase electricity from an alternative AES-owned, Williams-marketed plant for $750 per megawatt hour — 10 times the $63 per megawatt hour charged when the Alamitos and Huntington Beach plants were operational.

“It’s about time FERC got off the sidelines and cracked down on these profiteering corporations,” Hauter said. “California taxpayers are forking over $50 million a day to these greedy companies, so it is high time the government stepped in to protect consumers.”