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FERC Fact-Finding Team To Probe High Power Prices

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 regulatory officials.

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 available.

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

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