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Related links: Council comments to FERC on June 19th order

Contact: Larry Cassidy, Chairman, 360-693-6951; John Harrison, spokesman, 800-452-5161

August 29, 2001

Redesign price caps to ensure adequate electricity supply for Northwest next winter, Council tells FERC

PORTLAND, Oregon -- Price caps imposed by the federal government to hold down the price of electricity in California this summer should be redesigned to encourage power generators to sell electricity to the Northwest next winter, the Northwest Power Planning Council is advising the Federal Energy Regulatory Commission (FERC).

"While it is important to reign in runaway electricity prices in California during hot weather, when California’s demand for power is highest, it is equally important to us to reign in potential high prices during the winter, when demand for power is highest in our region," Council Chairman Larry Cassidy of Vancouver, Washington said. "The price caps, as currently constructed, might prove to be so low next winter that they would discourage generators from selling power in the Northwest if we have an emergency."

On June 19, the FERC ordered restrictions on the price of wholesale electricity in 11 Western states that are connected by high-voltage transmission lines. At the same time, the FERC also asked for comments on its order. Today the Council discussed and approved its comments.

The price caps apply during severe power shortages, defined by FERC for this purpose as any time electricity reserves in California fall below 7 percent -- that is, any time demand for power is within 7 percent of the total available supply. At that point, a "market clearing price" is calculated based on the cost of power from the highest-price power plant in California. The market clearing price applies throughout the interconnected West until the emergency passes.

The problem for the Northwest is that during winter, when cold weather boosts demand for power, California’s weather is milder and demand for power is lower. It is a matter of economics that high-price power plants mostly are operated when demand for power is highest, and that means high-price plants in California generally do not operate as frequently in winter as in summer. But their power may be needed to meet demand in the Northwest during a winter cold snap. In that event, the market price, based on the highest-cost plant then operating in California, might be low enough to discourage the higher-priced plants from operating -- even though the power is needed in the Northwest.

"We don’t know what the weather will be like next winter, but we do know that 2001 has been an extremely dry year and our hydropower system is about 4,000 megawatts below its normal operating capability," Cassidy said. "So we are concerned that we may need to import power from California or buy it from higher-priced plants in the Northwest next winter if we have severe cold weather, and we want to ensure that the power would be available if we need it."

To that end, the Council recommended six changes in the federal pricing mechanism intended to keep it from withholding generation from the wholesale power market next winter:

1. Include transmission costs in setting the price for interstate sales.
2. Ensure that California generators must offer power to other states, even when it is not needed in California.
3. Eliminate the California 10-percent credit premium or apply it West-wide. The credit distorts the wholesale power market.
4. Exempt small (less than 100 megawatts), temporary generators from the price restriction.
5. Tie the price cap for power sales in the Northwest to the price of natural gas so that price spikes for gas do not discourage the operation of power plants that use it as a fuel.
6. If a power emergency is declared in the Northwest, base the Northwest price cap on gas price and power plant operating costs relevant in the region (a formula is suggested in the Council’s recommendations).

The Council is an agency of the states of Idaho, Montana, Oregon and Washington and is charged in the Northwest Power Act of 1980 with preparing a program to protect, mitigate and enhance fish and wildlife, and related spawning grounds and habitat, of the Columbia River Basin that have been affected by hydropower while also assuring the region an adequate, efficient, economical and reliable power supply.

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