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Industry News

FERC Chief Sees More California Problems

LCG, Sept. 27, 2001--Pat Wood, chairman of the Federal Energy Regulatory Commission, cautioned yesterday that the California electricity market was still flawed despite moderating power prices and an apparent improvement in the balance between supply and demand.

"We're all living in a dream world that it's all hunky-dory now," he told reporters following yesterday's commission meeting. "I don't think it is. That market is not at the point of closure now."

California's electricity market -- and its electric restructuring law -- began to unravel in the spring of last year, when it became evident that demand for power far exceeded supply. Though the state's population had grown by 5 million residents in 10 years, no new power plants had been built.

Making matters worse, the state's booming economy was fueled by the computer and Internet industries, which consumer vast quantities of electricity both in the manufacturing processes and for the eventual use of their products and services.

The problem was masked by the restructuring law which had frozen retail electric rates for households and small business customers at a level 10 percent lower than they had paid in 1997. Thus, the people of the state had no inkling that their electricity market was flawed.

When, in the spring of 2000, San Diego Gas & Electric Co. had paid off its stranded costs it became free to charge market rates for retail power. The company's residential and small commercial customers saw their monthly bills more than double between May and July of 2000.

Even so, it took more than six months for the state's elected and appointed officials to realize there was a problem. As late as December 2000, the head of the California Public Utilities Commission said she was "perplexed" by the problem and believed there was "plenty" electric generation capacity in the state.

There wasn't. By April of this year, the state's largest utility, Pacific Gas & Electric Co. had been driven to seek protection from its creditors under Chapter 11 of the U.S. bankruptcy law, and its second-largest utility, Southern California Edison Co., was teetering on the edge of bankruptcy. None of the three investor-owned utilities had enough cash to buy power for their retail customers.

Early this year, the state, through the California Department of Water Resources, began purchasing wholesale power on behalf of the three utilities, and has run up a bill of about $11 billion, using money in the state's general fund.

Mostly because of an unusually cool summer, partly because several new power plants have begun commercial operation, and partly because FERC stepped in with price controls covering the 11 Western states, the problem of high wholesale power prices has abated, but the improvement could be illusory.

And that's what worries Wood, who is concerned that "We're all living in a dream world."

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