Board Rejects Lower Electricity Price Cap

SACRAMENTO — In another sign of the political and economic uncertainty roiling California’s fledgling deregulated electricity industry, the agency controlling most of California’s high-voltage grid on Thursday narrowly rejected a proposal to cap prices for emergency purchases of power at half the current price.

Such a reduction is needed, proponents urged, to shrink electricity costs in San Diego and south Orange County, where many homeowners’ bills have skyrocketed and political momentum for relief is building.

But energy producers warned that price caps could also worsen California’s precarious electrical reliability on hot days by driving power sellers to higher-paying customers elsewhere in the West.

The board governing the California Independent System Operator voted 12 to 9--one vote shy of passage--to cap the price of “real-time” electricity at $250 per megawatt-hour.

Cal-ISO manages the flow of electricity on the high-voltage transmission lines covering three-quarters of California.

A $250 cap was strongly urged by state Sen. Steve Peace (D-El Cajon), architect of the 1996 law that opened California’s electricity industry to competition.

In a meeting last month, the Cal-ISO board dropped its price cap for emergency power supplies from $750 to $500 per megawatt-hour but voted against a $250 cap.

“There needs to be some fixes out there, and it’s not necessarily this board who can do it,” said board Chairman Jan Smutny-Jones, who voted against the lower price cap.

Customers have seen electricity costs jump as much as 225% in the last month as Sempra Energy’s San Diego Gas & Electric unit passes on the soaring cost of peak-demand electricity. Those consumers are the first in California to feel the financial shock of deregulation because SDG&E; is the first utility to pay off its “stranded costs,” such as investments in nuclear power plants, and free itself of a rate freeze imposed by the Legislature in 1996.

Under the deregulation law, the locked-in electricity rates will disappear for the rest of California consumers within a couple of years.

The private companies running power plants in California warned Thursday that a lower price cap could shrink the state’s already slim electricity reserves on extremely hot days. Some company executives said they might bypass California’s capped prices to take advantage of higher prices from customers on the grid connecting the West from Washington to New Mexico.

Terry Winter, Cal-ISO’s chief executive, said that at times this summer, power companies have refused to sell to the ISO--the electricity supplier of last resort in California--because they could earn greater profit elsewhere.

The current $500 price cap applies only to last-minute purchases by Cal-ISO when demand outstrips supply and more electricity must be poured into the grid to avoid blackouts.

Nearly all of the electricity sold in California is purchased by utilities, free of price caps, a day in advance. In the “day-ahead” market, the average price of electricity per megawatt-hour in 1999 was $27, although it reached as high as $225 on a hot day in August, according to the California Power Exchange, the Pasadena-based nonprofit agency that works like a commodity exchange for buying and selling electricity in California.

On Thursday, state Sen. Debra Bowen, the Marina del Rey Democrat who chairs the Senate Energy Committee, told the Cal-ISO board that finding ways to shave California’s peak demand makes more sense than price caps. She noted that clothes dryers account for 2% of the electricity consumed in California on hot afternoons when the price of electricity soars--a sign that consumers are insulated from price fluctuations and don’t change their behavior.