EDITORIAL: We're all Californians now
Thursday, July 05, 2001
Copyright © Las Vegas Review-Journal
Regional price caps shift Golden State blackouts to Las Vegas
Throughout the spring and early summer, officials at Nevada Power assured Las Vegas-area ratepayers that the utility had secured enough energy through long-term contracts to save us from the blackouts that have plagued California residents for more than a year ... under normal conditions.
The situation has been anything but normal this week. Temperatures in Las Vegas, which reached a near-record 114 degrees on Monday, pushed demand for electricity to an all-time high of 4,421 megawatts that afternoon. That's nearly 100 megawatts more than the previous record, which was reached either last August ... or last Friday, when at least 4,300 megawatts were used.
Record power consumption led to rolling blackouts, leading many to wonder why they happened ... and whether more are on the way. What set of circumstances would cause the lights to go out on Monday, when a few days earlier -- with power use at about the same level -- they were able to stay on?
Two words: price caps. The federally mandated price limits weren't in place on Friday, and the juice kept flowing. On Monday, caps were imposed ... and blackouts ensued.
On June 19, the Federal Energy Regulatory Commission ruled that when California declared a Stage 2 alert -- indicating that the state's power reserves had dropped below 5 percent -- the agency would immediately impose "fair and just" caps on wholesale power sold on the immediate spot market there and in 10 other Western states, including Nevada.
The caps limit how much power suppliers can charge. As a result, if prices on the spot market rise above the caps, power companies can simply refuse to provide energy, given they might have to take a loss on every megawatt they sell. Self-styled consumer advocates claim the caps protect ratepayers from price-gouging, but that's little comfort when your air conditioner won't come on and your milk goes sour.
"Price caps did play a role in the blackouts," says Paul Heagan, vice president of Sierra Pacific Resources, Nevada Power's holding company. Under normal circumstances, Mr. Heagan says, utilities and independent suppliers are constantly buying and selling blocks of power, plugging temporary shortages in the process. But with the caps in effect, power companies have little confidence they will be able to recoup their costs ... so they don't sell anything.
To make matters worse, Mr. Heagan says, "there are no clear price signals from FERC." The agency announces the level at which it has capped prices after the immediate crunch has ended. Companies that might sell power profitably at, say, $200 per megawatt hour may refuse to do so for fear federal regulators will later accuse them of gouging. "If you're an independent power supplier and you don't know what the allowable price is, you won't sell power," says the Cato Institute's Jerry Taylor.
That's exactly what happened Monday, when California announced a Stage 1 alert at 1:30 p.m. At that time, the highest price the state was offering for electricity would determine where the rate cap would be set when Stage 2 was declared later that day. But the Los Angeles Times reports that at least three companies that had committed to sell power to the state at $90 per megawatt hour backed out when Stage 1 was declared, not knowing whether the caps would be set below the $90 level.
Tim Hay, the state's consumer advocate, considers these arguments "a red herring." He's concerned because the company failed to issue warnings of the blackouts in advance so that power users could cut back consumption ... and that several of Nevada Power's plants were offline for several days for maintenance.
Those are legitimate beefs. But his further contention that "no one should be losing money based on these caps" is difficult to fathom, especially when suppliers indeed pulled out after the caps were imposed.
In any event, the price caps have turned a debacle that was once confined to California into a regional problem -- a point that should not be lost on local residents and policy-makers. Particularly galling is the fact that when the caps are in effect, FERC gives power suppliers a 10 percent bonus if they sell energy to California rather than Nevada or any other state.
"We feel that Nevada has worked hard
over the past year to isolate this state from California,"
Mr. Heagan says. "These price caps have knocked us
back."