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A viewpoint by Thomas D. Elias: FERC's good step still rewards greed, inefficency

July 17, 2001

There's plenty of good for California in the Federal Energy Regulatory Commission's new soft price caps on wholesale electricity in California and 10 other Western states. Plus one gigantic problem.

And although Gov. Gray Davis has consistently been among the first to blast the energy moves of President Bush and his FERC appointees, this time Davis has been motivated to keep quiet about that big problem.

Here's the huge positive in the federal move: By making sure power producers can get no more for their electrons on the spot market outside California than by selling it here, the motive for their massive out-of-state sales of California-produced power should now disappear.

This alone ought to go far toward minimizing blackouts during the next few months, a period when more and more new and repaired power plants will be coming on line in California anyway. This measure should assure that by summer's end there will be little danger of further sudden lights-out situations.


But the FERC order does not deal with the greed of the power producers, whom Davis has sometimes called "buccaneers" for their predatory pricing practices.

Indeed, the biggest problem with the federal measure is that it essentially institutionalizes the windfall profits reaped by power generators such as Duke Energy, Reliant, Mirant, AES, Calpine and the Williams Cos.

Here's how: The new price limits specifically avoid setting any maximum amount per kilowatt hour. Instead, they set the top price for all power during non-emergency periods at 85 percent of the highest hourly price paid to the least efficient generator during the most recent previous emergency.

Spot prices during emergencies will be based on the full price charged by the worst-performing power plants during the last crisis.

Inefficiency is institutionalized. Power plants that burn the most natural gas and spend the most to produce electricity now have no motive to improve performance as they would if the price cap were a set amount. In fact, since most companies operating in the state own more than one power plant, there's a motive for them to run at least one generating station as inefficiently as possible, for the less efficiently and the more expensively the worst-run plants can operate, the more money there is to be made from those that are tightly run.

It's an Alice-in-Wonderland situation where the worst performance leads to the best rewards.

But all Davis said about this is that "FERC has finally taken a step in the right direction" and that "this order may have some loopholes." You bet it does!

But Davis didn't single out this biggest, most gaping loophole. Why not? Maybe because it's the same one contained in many of his own vaunted education plans. Take the 4 percent admission system he pushed for the University of California. This policy guarantees UC admission to any student who graduates in the top 4 percent of his or her high school class. Schools with the most comprehensive and toughest curricula are treated exactly the same as the weakest. Students who take the easiest courses are given an advantage over those who attempt the hardest courses and therefore don't make quite as high marks.

Similarly, the financial rewards Davis set up for schools whose students most improve test scores plainly offer the biggest payoffs to those which performed worst in the past but now are able to clean up their act a bit.

Schools that always performed well stand to gain the least.

It's an institutionalized rewarding of mediocrity and inefficient performance. If Davis were to point out that FERC's new plan contains precisely the same flaw, he'd be the resident of a glass house throwing stones.

President Bush and his spokesman Ari Fleischer hailed the new and not-very-solid federal price caps as a major positive move. They were, even though the administration for many months resisted anything remotely similar.

"If the price is set by the least efficient producer, then what determines where the price is set? The market," said Fleischer.

Not exactly.

In fact, what determines the price is just how inefficiently generators can run their very worst plant.

That makes no more real sense than Davis' education policies. But at least there's still hope for improvement on the energy front. Maybe Bush and his aides will fix their order if they wake up one day and realize they've made poor performance the key goal for an entire vital industry.

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