FERC Fact-Finding Team To Probe High Power Prices
The fallout continued from the late June price blow-up in the
Midwest electric market, as industrial users weighed in with
complaints, FERC scheduled an investigation, and industry experts
told Congress that half-baked deregulation was at fault.
Federal Energy Regulatory Commission Chairman James Hoecker last
week offered a generalized response to a variety of complaints
filed at the Commission from utilities, marketers and end users
(See following AEP story and NGI 7/13/98), announcing the formation
of a fact-finding team.
The team is made up of staff members drawn from several offices
at the Commission and will delve into the events precipitating the
price spike into the thousands of dollars per MWh in the Midwest
the week of June 22. Hoecker said Commissioner Vicky Bailey has
agreed to "participate actively" in the fact-finding effort. The
review could last several weeks or "until we understand more fully
what occurred and how the maturing bulk-power market was
affected..." The team expects to work cooperatively with state
The "remedies available to this Commission are not entirely
clear," the chairman said at the bi-monthly meeting. "...[W]e are
not prepared in anyway to rush to judgment on this. On the other
hand, we are not disinterested either, far from it."
Bailey echoed Hoecker's belief that a "very temperate" approach
was warranted, saying she had "great respect for the important
policies that this Commission has in place and is committed to. I'm
not walking away from the market concepts we have in place."
Still, "oftentimes there are prices that require Commission
intervention. I'm making no pre-judgment here." Bailey said the
fact-finding effort wouldn't be a "witch-hunt or a gotcha" type of
exercise. "Ultimately, we want to understand what happened. Is this
a persistent problem?"
Specifically, the Commission "would like to know did the market
succeed or did it fail under these circumstances? What did people
know and when did they know it? What led to these price spikes,
...pricing disparities and to contract problems? What does this
tell us about emerging market structures and behaviors," Hoecker
said. For Bailey, the key issue is how much of the market turmoil
was caused by a capacity shortage and how much was due to the
"immaturity of the market"?
Partial Deregulation to Blame
Meanwhile, at the same time last week on Capitol Hill industry
experts were telling a congressional committee it wasn't just the
usual suspects of protracted heat wave, unplanned generation
outages, and transmission constraints. Those would have explained a
price run-up in the hundreds of dollars, but it took the halfway
nature of deregulation in the electric industry to hamstring market
participants, cause a panic and send prices into the thousands of
dollars per MWh.
Electric deregulation "has been slow and has resulted in a
'patchwork' of electricity markets with varying levels of
competition and limited transparency," Robert Levin, a Nymex senior
VP, said. The spiking up to between $7,000 and $10,000 a MWh was
not an example of how a competitive market works. In a working
market, there would have been curtailments and supplies would have
been reallocated long before the price hit $10,000, Levin said. But
there were no curtailment; "the lights were on everywhere."
With contracts and policies oriented to the competitive market
in place, utilities could have cut deliveries to interruptible
customers or even paid industrials to shut down. "With a 5%-10%
reduction in peak demand, prices would have dropped 80% to 90%,"
Levin said. Prices should have gone to $700, not $7,000. The panic
resulted because the mechanisms to deal with the situation were not
Levin said in his 11 years at Nymex he had seen crises such as
the Mideast Gulf War strike the oil market and Gulf of Mexico
hurricanes put pressure on gas prices, but those markets behaved in
a relatively orderly fashion - not anything like the recent
electric market. He added that the opening of two new power futures
contracts, in the South and Midwest in early July, should help the
electric market by providing better price transparency.
The comments came in response to congressmens' questions during
a hearing on electronic commerce in the energy industry, scheduled
before the current crisis by the House Subcommittee on Energy and
Power. The subcommittee members diverged from the planned agenda to
quiz witnesses extensively on the electric market situation.
Rusty Braziel, chairman of Altra Energy Technologies, which runs
an electronic gas trading system and just launched one for the
power market, said the situation reminded him of the gas market
about 10 to 15 years ago when some gas was sold for 50 cents/MMBtu
and some for up to $12/MMBtu. "A market that's half regulated and
half unregulated does some odd things," Braziel said. He
illustrated with the story "about a guy in the UK who suggested
they change from driving on the left hand side of the road to
driving on the right hand side. But he suggested a phased approach:
'let's just change the trucks first.'"
Richard Tabors, an economist with the Massachusetts Institute of
Technology, pointed out that little new capacity had been built in
the Midwest in recent years. And he maintained the electric market
had worked and sent "incredible price signals about what we're
willing to pay for a small amount of incremental capacity." The
cost of that incremental capacity in the thousands of dollars per
MWh "is roughly what it would cost to buy and build a gas turbine
and only run it 10 to 15 hours in a five-year time period. The
market reached a price that sent a signal to someone -- maybe me --
to go build a gas turbine out there because I can in fact, make
money using it for a very small number of hours."
Part of the problem with the electric market, Tabors said, is
"the dismal state of OASIS," the electronic posting and scheduling
system for electric transmission. This is caused by monopoly
utilities, which have other ways of scheduling transmission, and
obstruct the operation of OASIS to keep new market entrants in the
dark. Tabors said for many nodes or trading points on OASIS "it
appears that the goal is to provide as little useful information as
possible in as untimely a manner as possible."
Susan Parker, Ellen Beswick