The finger-pointing and calls for market intervention — mostnotably centered on electricity price caps —heated up fasterthan the temperatures on both coasts this week, with merchantgenerators and incumbent regulated utilities drawing the ire ofstate and federal policymakers.

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

New England, New York, Pacific Northwest and California energyofficials all issued various forms of electricity alerts andinstituted voluntary measures to lessen peak demands on theirrespective electrical grid systems. Natural gas transmissionsystems were operating full-bore as a result, and regulators wereeither instituting or lowering electric price caps in New York andCalifornia, respectively.

In New York City Thursday, the city council announced publichearings in which it will have Consolidated Edison, the city’smajor combination utility serving Manhattan, appear July 6 toexplain how it can stop a nagging series of service interruptionsand the specter of the major blackout. A ConEd spokesperson wasquoted by Reuters as saying outages were caused Monday when threeof 28 feeder lines failed on a key transmission system in easternManhattan.

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

Citing May increases driven by early sustained heat that droveelectric prices from about $30/MW-hour to $3,900/MW-hour, New YorkState’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 beforeCongress and expressed worries for the overall reliability of thenation’s grid with particular concerns for the Pacific Northwestand California.

In the West, bipartisan pressure from state lawmakers andregulators 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 withtaking steps to determine what new rules and operations were neededbefore all caps could be lifted. The action came in the midst ofthe state’s third week in less than two months where alertsmandating curtailments and conservation measures were necessary dueto a combination of sustained heat throughout the West andunavailable generation units. Last week saw the Cal-ISO issuealerts Monday through Thursday as reserves dipped below 5% three ofthose days. All three major investor-owned utilities and largemunicipal electric operations issued alerts to their customers tocutback on power use.

In almost six hours of discussions and debate, the 24-memberCal-ISO board revealed a majority that clearly does not favor pricecaps, but nevertheless it lowered the caps in the face of strongpressure from the principal state lawmaker who crafted California’s1996 electricity law. The pressure came as a result of continuinggeneration constraints in the state when demand breaks the 40,000MW mark. Ultimately, the board found a compromise in which 16 boardmembers were able to swallow the lowering to $500, a figure theboard earlier had agreed was the level to use if the $750/MW provedunworkable.

“This is what we told everyone we would do if the markets turnedout not to be workably competitive, and it does recognize the factthat there have been significant changes in the market — mostsignificantly the doubling of natural gas prices,” said JanSmutney-Jones, Cal-ISO board chairman and head of the state’sindependent 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 workcompleted to identify the rule and operational changes needed toallow eliminating any caps. Before the reliability problemsencountered with unusually hot weather in the San Francisco BayArea June 13-15, the Cal-ISO had signaled its intention to removethe price caps entirely by the end of this summer electrical loadseason. A report is due Aug. 1 to California’s Gov. Gray Davis onthe recent managed series of power outages and some of thegenerating plant problems contributing to that situation.

Merchant power plant generators and other market participantsappearing before the ISO board’s vote gave detailed explanations ofwhat they think is wrong with California’s market, citingeverything from unclear price signals to arduous too-time-consumingpower plant siting requirements. Depending on the speakers’ pointsof view, the problem could be centered on a still-immature marketthat needs more government supervision, generators who arewithholding capacity from the market to drive up prices orincumbent regulated utilities that are failing to schedule adequatesupplies in the state power exchange’s block-forward markets.

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

“It is clear that California’s energy and ancillary servicesmarkets are not workably competitive, and there is [therefore] aneed for price caps to prevent customers from being victimized bythe exercise of [unharnessed] market power,” said state Sen. StevePeace (San Diego), the leading lawmaker on the state’s electricityrestructuring. “Many factors must be in place before the market canbe success, including the construction of generation and badlyneeded transmission.

“The market is not that mature, and acting as though it isdoesn’t make it so,” Peace told Cal-ISO board members gathered atISO headquarters outside of Sacramento and six of the 24 of whomwere hooked via telephone from points scattered around the stateand globe.

Merchant generators, including Duke Energy Services, ReliantEnergy, Williams and Dynegy, echoed one another in saying that theyfeel prices caps are not the solution, but rather more hedging byincumbent utilities, accelerated power plant/transmission sitingand a redesign of the market’s incentives will lessen the extent ofprice 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 marketand the way people are compensated for capacity. We perhaps need torevise the market so we have a capacity market, rather than anall-energy market.”

By Wednesday last week, California markets stood out for beingflat amid a sea of softness. Electricity prices remained high asthe Pacific Northwest remained abnormally hot and unable to sparemuch if any excess power to the Golden State. The 16-hour peakaverage 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. Thedesert Southwest was at its normal scorching levels, but the realkicker was unusually high temperatures in the Pacific Northwestwith Portland, OR temperatures nearing record high levels.

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

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

In the Pacific Northwest, which normally provides substantialimports to California, utilities were confronting their ownregional constraints in the midst of unusually hot temperatures andelectrical units forced out of service. The result was California’sability to import supplies was cut to about 20% of normal.

Two of the major electrical operators, however, expressedconfidence they would be able to fulfill their customers needsthroughout the six-state region of Washington, Oregon, Idaho,Nevada, Utah, and western Montana. PacifiCorp, the unit of ScottishPower with 15,000 miles of transmission, generation facilities in 8states and customers in six states, said through a Portland,OR-based spokesperson that it hasn’t experienced any major forcedcurtailments over the past 20 years, and it doesn’t see the needfor any developing in the wake the current supply-demand strains.

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

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

Richard Nemec, Los Angeles

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