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CA Governor, CPUC Attack Dysfunctional Power Market
State officials have launched an all-out effort to cure or at least contain California's runaway electric power market, sending $100 million in rate relief to customers of San Diego Gas & Electric, putting construction of new power plants on a fast track and loosening the grip of the California Power Exchange (Cal-PX).
The California independent system operator (Cal-ISO) also installed a $250 price cap on emergency power purchases and FERC has been asked to match that with a cap on purchases in the forward market. Critics were labeling the market "dysfunctional and blaming the situation on the state's transition to deregulation.
At the end of the week the California governor and the U.S. president ordered cuts in power use in federal and state facilities in the region. Clinton said federal facilities would cut power use by 5% and federal agencies that produce or market electricity must do what they could to increase power availability in California.
Emergency actions by the California Public Utilities Commission (CPUC) and the governor came as the nation's most populous state suffered through another week of blistering heat, punctuated by Stage One and Stage Two emergency power alerts. Last Wednesday the region came within a few MWs of a Stage Three Alert, which would have activated rolling blackouts. Hardest hit were customers of San Diego Gas & Electric (SDG&E), the only California utility to have completed deregulation, who have racked up an additional $80 million in power costs. Additional power costs across the state for June and July are said to total $1 billion.
According to observers, the most far-reaching action may have been that of the CPUC last Thursday in allowing utilities to enter into bilateral power supply contracts outside the state-created monolithic Cal-PX. Investor-owned utilities had been prohibited from doing so under the state's electric restructuring.
John Stout, Houston-based vice president with Reliant Energy, who oversees its California operations, pointed to the prohibition as "a fundamental market design flaw that forces all demand through the wholesale spot market (Cal-PX)." He said ideally the IOUs should only be buying about 15% or 20% of their supplies through the PX and that would moderate prices overall, but he added new generation is also needed to alleviate the supply crunch.
Freeing utilities to enter into bilateral supply contracts was one of nine items approved unanimously by the CPUC yesterday. The agency also gave utilities authority to encourage various purchased power (QF) suppliers to offer supplies above-contract but below the Cal-PX price as another means of tempering price spikes.
Another major move was to grant Southern California Edison a request to re-operate one of the smaller power plants it had sold on an interim basis.
The agency's actions came after California Gov. Gray Davis Wednesday issued executive orders to speed up the approval process for new power plants, cut down electricity use in state facilities and establish a statewide task force on energy reliability modeled after the federal government's National Security Council. The governor acted on the basis of a strongly worded 40-page emergency report on California's power shortfalls this summer submitted by the CPUC president and the Electricity Oversight Board chairman.
The governor and state legislative and regulatory officials see the state's economic and political security being threatened by peak electric supplies that are stretched dangerously thin and by wholesale power price spikes. Davis also formally asked the state attorney general's office to investigate "possible manipulation in the wholesale electricity marketplace."
The governor's action came on the same day SDG&E petitioned FERC, asking the federal agency to install a $250/MWh price cap on sellers' offerings of power into California's bulk power markets. FERC action is necessary, the utility said because a $250 cap installed by the California Independent System Operator (Cal-ISO) Aug. 1 only limits extra emergency power supplies and does not apply to the day-ahead or forward markets operating through the Cal-PX. FERC action is needed to rein in the Cal-PX.
SDG&E's filing noted fueling costs for power generation were double those of a year ago, but "higher gas prices do not begin to explain the dramatically elevated prices that prevail in 2000 compared to 1999" during high use periods. While gas prices have risen to a June/July average at the Southern California border of $4.62, compared to $2.30 in the same period in 1999, that only equates to $60/MWh versus $36/MWh. It does not explain triple digit power price increases, SDG&E said.
In a letter to Gov. Davis last Wednesday, FERC Chairman James Hoecker attempted to assuage the governor's concerns, but he did not respond to Davis' urgent requests for the Commission to extend the wholesale power price caps in California beyond the October deadline, declare that "no competitive market exists in the state," and grant "immediate refunds" to state customers if FERC's investigation into the price volatility and reliability of the bulk power market reveals that the rates aren't just and reasonable.
"I cannot comment on specific proposals that may be filed with the Commission," Hoecker wrote, but "I stand ready to take appropriate action on matters" within the Commission's jurisdiction, which is limited to the wholesale power market. He noted FERC has been following "this summer's events in California closely," and shared Davis' concern about the effect of high prices on "certain California consumers."
Further, Hoecker told NGI, "I think the solutions here are largely long-term solutions having to do with the way the ISO does business, how much [generation] capacity there is in California, and how the distribution utilities use the forward market" he said.
"It may be a while before we sort out exactly what the causes of this [are]. I think on its face we've got a market that's very short of capacity in a peak air conditioning period. California clearly needs more generation and may need more transmission in some places, and we need to keep pushing ahead to make sure the rules are certain and that people continue to have confidence in competitive markets because frankly I don't think there's an alternative here.....We also need the ISO to be a real RTO, and we need to ensure that investors are willing to invest in the California markets."
The emergency report noted costs for wholesale power since mid-June have averaged 270% above the same period in 1999, which experienced cooler-than-normal weather. The total electricity bill for California was $1 billion higher over the period, and Californians will pay billions of dollars more before the summer is complete. The report includes 30 possible actions - many of which already are under way - and it makes numerous references to FERC actions that are deemed necessary "to give California the tools to handle electricity pricing problems."
The language in the report is particularly strong in regard to state regulators' inability to obtain recent pricing statistics from both the Cal-ISO and the Cal-PX.
"The data we need to assess wholesale market pricing and supply scheduling behavior is in the hands of two private, autonomous entities (Cal-PX and Cal-ISO), and despite the Electricity Oversight Board's legislative mandate to oversee those institutions, we have been unable to obtain this data.
"Nevertheless, we believe enough evidence of questionable behavior exists that the (state) attorney general should conduct an investigation into these statewide market practices, coordinating with other state agencies, including the CPUC and EOB. Such an investigation would provide the factual foundation that California policymakers and regulators need to recover any illegally obtained profits."
Meanwhile, marketers were not long in responding to the Cal-ISO's price cap. Late last week three top power marketers/generators in California's besieged electricity market filed a complaint at FERC, saying the Cal-ISO's price cap reduction is backfiring because it's causing more and more suppliers to market already-strained generation supplies to out-of-state buyers, where they can recoup much higher prices.
For example, last Tuesday --- when the Cal-ISO reduced the bid cap for imbalance energy and ancillary services to $250/MWh --- power was trading in neighboring markets for as much as $1,500/MWh, said Reliant Energy Power Generation, Dynegy Power Marketing and Southern Energy California. As a result, 1,300 MW of power was exported when the Cal-ISO was on the verge of declaring a Stage 3 Emergency.
In light of this, the three companies have asked FERC to order the Cal-ISO to compensate participating generators, scheduling coordinators or other sellers for "actual damages and lost opportunity costs" should the Cal-ISO begin to curtail scheduled energy exports to adjoining states. Further, they urged the Commission to prohibit the Cal-ISO from limiting payments for curtailed energy exports to the Cal-ISO-imposed capped prices. They are seeking expedited consideration of the matter.
In other action Duke Energy last week offered additional facilities dedicated to the California market, urging state officials to speed up the permitting process to bring new generation online (see related story this issue).
Richard Nemec, Los Angeles; Susan Parker, Ellen Beswick, Washington
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