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Power Market Soars; CA-ISO Lowers Price Caps

Power Market Soars; CA-ISO Lowers Price Caps

The finger-pointing and calls for market intervention --- most notably centered on electricity price caps --- heated up faster than the temperatures on both coasts this week, with merchant generators and incumbent regulated utilities drawing the ire of state and federal policymakers.

A combination of the weather, partially functioning markets and ill-timed forced outages of generating units all contributed to the problem, along with rising natural gas prices. By Friday as temperatures eased, however, gas prices trading earlier in the $6 range had dropped to the $4.80s in Transco's Zone 6-NYC pool.

New England, New York, Pacific Northwest and California energy officials all issued various forms of electricity alerts and instituted voluntary measures to lessen peak demands on their respective electrical grid systems. Natural gas transmission systems were operating full-bore as a result, and regulators were either instituting or lowering electric price caps in New York and California, respectively.

In New York City Thursday, the city council announced public hearings in which it will have Consolidated Edison, the city's major combination utility serving Manhattan, appear July 6 to explain how it can stop a nagging series of service interruptions and the specter of the major blackout. A ConEd spokesperson was quoted by Reuters as saying outages were caused Monday when three of 28 feeder lines failed on a key transmission system in eastern Manhattan.

ConEd had to curtail service and reduce voltage by 8% as a result, affecting about 76,000 customers. This happened the day when Manhattan experienced an all-time record demand of 11,200 MW. Easterners took some consolation in reminding state and local officials that the problem this summer is nationwide and not unique to certain regions.

Citing May increases driven by early sustained heat that drove electric prices from about $30/MW-hour to $3,900/MW-hour, New York State's Public Service Commission has proposed instituting a $1,000/MW-hour price cap, despite opposition from producers, distributors and environmentalists, each for different reasons.

Energy Secretary Bill Richardson last Wednesday appeared before Congress and expressed worries for the overall reliability of the nation's grid with particular concerns for the Pacific Northwest and California.

In the West, bipartisan pressure from state lawmakers and regulators prompted the California Independent System Operator (Cal-ISO) board late Wednesday to roll back price caps to $500/MW (from the present $750 level) through the summer months, along with taking steps to determine what new rules and operations were needed before all caps could be lifted. The action came in the midst of the state's third week in less than two months where alerts mandating curtailments and conservation measures were necessary due to a combination of sustained heat throughout the West and unavailable generation units. Last week saw the Cal-ISO issue alerts Monday through Thursday as reserves dipped below 5% three of those days. All three major investor-owned utilities and large municipal electric operations issued alerts to their customers to cutback on power use.

In almost six hours of discussions and debate, the 24-member Cal-ISO board revealed a majority that clearly does not favor price caps, but nevertheless it lowered the caps in the face of strong pressure from the principal state lawmaker who crafted California's 1996 electricity law. The pressure came as a result of continuing generation constraints in the state when demand breaks the 40,000 MW mark. Ultimately, the board found a compromise in which 16 board members were able to swallow the lowering to $500, a figure the board earlier had agreed was the level to use if the $750/MW proved unworkable.

"This is what we told everyone we would do if the markets turned out not to be workably competitive, and it does recognize the fact that there have been significant changes in the market --- most significantly the doubling of natural gas prices," said Jan Smutney-Jones, Cal-ISO board chairman and head of the state's independent energy producers' trade association.

The $500 price cap is to stay in place at least through Oct. 15, by which time the Cal-ISO hopes to have various analytical work completed to identify the rule and operational changes needed to allow eliminating any caps. Before the reliability problems encountered with unusually hot weather in the San Francisco Bay Area June 13-15, the Cal-ISO had signaled its intention to remove the price caps entirely by the end of this summer electrical load season. A report is due Aug. 1 to California's Gov. Gray Davis on the recent managed series of power outages and some of the generating plant problems contributing to that situation.

Merchant power plant generators and other market participants appearing before the ISO board's vote gave detailed explanations of what they think is wrong with California's market, citing everything from unclear price signals to arduous too-time-consuming power plant siting requirements. Depending on the speakers' points of view, the problem could be centered on a still-immature market that needs more government supervision, generators who are withholding capacity from the market to drive up prices or incumbent regulated utilities that are failing to schedule adequate supplies in the state power exchange's block-forward markets.

One Texas-based plant operator outlined in detail how even a return to regulated markets with bundled services and demand charges for customers would end up costing customers more than the $750/MW price for peak load power supplies because of the relative few hours during a calendar year when the market reaches those levels.

"It is clear that California's energy and ancillary services markets are not workably competitive, and there is [therefore] a need for price caps to prevent customers from being victimized by the exercise of [unharnessed] market power," said state Sen. Steve Peace (San Diego), the leading lawmaker on the state's electricity restructuring. "Many factors must be in place before the market can be success, including the construction of generation and badly needed transmission.

"The market is not that mature, and acting as though it is doesn't make it so," Peace told Cal-ISO board members gathered at ISO headquarters outside of Sacramento and six of the 24 of whom were hooked via telephone from points scattered around the state and globe.

Merchant generators, including Duke Energy Services, Reliant Energy, Williams and Dynegy, echoed one another in saying that they feel prices caps are not the solution, but rather more hedging by incumbent utilities, accelerated power plant/transmission siting and a redesign of the market's incentives will lessen the extent of price spikes and improve the state grid's reliability.

Reliant's John Stout, vice president power projects, said: "Perhaps we need to rethink the fundamental design of the market and the way people are compensated for capacity. We perhaps need to revise the market so we have a capacity market, rather than an all-energy market."

By Wednesday last week, California markets stood out for being flat amid a sea of softness. Electricity prices remained high as the Pacific Northwest remained abnormally hot and unable to spare much if any excess power to the Golden State. The 16-hour peak average for next-day prices on the California Power Exchange was $509/MWh, "and that is close to as high as we have ever seen it," an aggregator said.

It wasn't just California heat exacerbating the situation. The desert Southwest was at its normal scorching levels, but the real kicker was unusually high temperatures in the Pacific Northwest with Portland, OR temperatures nearing record high levels.

Electricity traders reacted by pushing same-day hourly peaking prices reported by the California Power Exchange (CalPX) to just over $1,071/MWh at one point. Next-day trading was a little more subdued but still was around $750 over a five-hour period.

The situation wasn't quite as critical back East. ISO New England issued a Power Watch advisory during the morning rush hour, citing anticipated high electric demand, but was able to lift the advisory around mid-afternoon. The ISO said "Ten-Minute Non-Spinning Reserve" prices in the New England Power Pool got as high as $1,000, but topped out a little over $343 on an hourly basis.

In the Pacific Northwest, which normally provides substantial imports to California, utilities were confronting their own regional constraints in the midst of unusually hot temperatures and electrical units forced out of service. The result was California's ability to import supplies was cut to about 20% of normal.

Two of the major electrical operators, however, expressed confidence they would be able to fulfill their customers needs throughout the six-state region of Washington, Oregon, Idaho, Nevada, Utah, and western Montana. PacifiCorp, the unit of Scottish Power with 15,000 miles of transmission, generation facilities in 8 states and customers in six states, said through a Portland, OR-based spokesperson that it hasn't experienced any major forced curtailments over the past 20 years, and it doesn't see the need for any developing in the wake the current supply-demand strains.

In Seattle, Puget Sound Energy was more concerned about natural gas prices than electricity reliability. Puget announced Wednesday it is asking state regulators for a $137 million rate increase (16.7 cents/therm) to cover rising gas costs. It gets most of its supplies from the Rocky Mountains and western Canada through Northwest Pipeline Co., principally, and PG&E Gas Transmission-Northwest.

Bill Donahue, a senior regulatory analyst, said Puget expects a regulatory decision in July and the gas cost rate increase to be effective Aug. 1. He added that unlike other areas of the country, Puget Energy is ahead of schedule storing natural gas, despite the extreme electric load demands. The have interests in storage facilities in both the state of Washington and Utah.

Richard Nemec, Los Angeles

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