The halfway nature of deregulation in the electric industry,which left market participants without the tools necessary to dealwith a sudden tight market situation-and panic-were criticalelements in the recent spiking of spot electric prices, marketexperts told congressmen Wednesday.

Electric deregulation “has been slow and has resulted in a’patchwork’ of electricity markets with varying levels ofcompetition and limited transparency,” Robert Levin, a Nymex seniorVP, said. The spiking up to $10,000 a MWh in the Midwest the weekof June 22 was not an example of how a competitive market works. Ina working market there would have been curtailments and supplieswould have been reallocated long before the price hit $10,000,Levin said. But there was no curtailment; “the lights were oneverywhere.”

With contracts and policies oriented to the competitive marketin place, utilities could have cut deliveries to interruptiblecustomers 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 panicresulted because the mechanisms to deal with the situation were notavailable.

The comments came in response to congressmen’s questions duringa hearing on electronic commerce in the energy industry held by theHouse Subcommittee on Energy and Power. At the same time FERCseveral blocks away was announcing its own investigation of theprice spike in the electric market, the subcommittee quizzed itswitnesses extensively on the electric market situation.

Rusty Braziel, chairman of Altra Energy Technologies, which runsan electronic gas trading system and just launched one for thepower market, said the situation reminded him of the gas marketabout 10 to 15 years ago when some gas was sold for 50 cents/MMBtuand some for up to $12/MMBtu. “A market that’s half regulated andhalf unregulated does some odd things,” Braziel said and then toldthe story “about a guy in the UK who suggested they change fromdriving on the left hand side of the road to driving on the righthand side. But he suggested a phased approach: ‘let’s just changetrucks first.'”

Richard Tabors, an economist with the Massachusetts Institute ofTechnology, pointed out that little new capacity had been built inthe Midwest in recent years. And he maintained the electric markethad worked and sent “incredible price signals about what we’rewilling to pay for a small amount of incremental capacity.” Thecost of that incremental capacity in the thousands of dollars perMWh “is roughly what it would cost to buy and build a gas turbineand only run it 10 to 15 hours in a five year time period. Themarket reached a price that sent a signal to someone-maybe me-to gobuild a gas turbine out there because I can in fact, make moneyusing it for a very small number of hours.”

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