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FERC Concerned About Summer Power Market in West

While most regions of the country "have adequate or better" power reserves and are likely to face "no problems" this summer, FERC staff said Wednesday in a 2005 Summer Energy Market Assessment that California could get pretty nasty given the low hydro conditions in some states in the Pacific Northwest, high fuel prices and expectations of above normal western temperatures.

FERC staff also is keeping an eye on southwestern Connecticut, which continues to require special actions, such as portable power generation units, to maintain reliability. But New England as a whole should have "slim surplus capacity" even under extreme conditions.

High fuel costs are likely to boost power prices nationwide, but particularly in regions that rely a lot on natural gas-fired generation, FERC staff said. The West is one area that relies heavily on gas-fired power, particularly when hydroelectricity is in short supply.

Hydroelectric power generation makes up nearly 30% of the total generation in the West and much of it is located in the Pacific Northwest where there has been a six-year drought. Hydro reserves in the Northwest are about 66% of average levels and some states have much lower reserves. Natural gas-fired power makes up more than 20% of the total generation and another 17% is made up of dual-fuel, gas- and oil-fired generation. With hydro conditions so low and natural gas as the main alternative, price spikes certainly are possible this summer, FERC staff concluded.

"Our review of supply and demand conditions in the West this summer indicates that there may be periods of market tightness and this is likely to be expressed as price spikes and possible interruptions," said Steve Harvey of FERC's Office of Market Oversight and Investigations. "I want to be clear about this. Spikes and interruptions are not the most likely results. We believe that the most likely situation is no serious disruption. However, the possibility remains and we need to take it seriously as we plan our oversight activities for the summer.

"The outlook for hydroelectric generation is not good," said Harvey. With the exception of California, which faced extraordinary levels of precipitation over the last winter, the West broadly has much less water available for hydro generation than in an average year."

Southern California probably will be the weakest link in the chain, FERC staff said. Extensive economic growth in the area has "created conditions where under extreme temperatures capacity may not be adequate to cover all load."

Meanwhile, current weather forecasts call for above-normal temperatures across the West with much-above-normal temperatures in the Southwest. "Under projected hot temperature conditions, it appears that reserve margins for Southern California will be tight in August and very tight in September," said Harvey. "Again I should stress that this problem only appears under fairly extreme conditions and may not appear at all." However, he noted that state regulators already are meeting with the governor about the potential solutions.

FERC staff believes the likelihood of spot price manipulation this summer is lower than in the past because utilities have signed significant long-term supply agreements, there will be less reliance on the spot market and the Commission has added rules to better govern market behavior. But current fundamentals could lead to high price spikes, and market observers certainly may suspect manipulation.

Such low hydroelectric availability, high gas prices and a forecast for above normal heat appear ominously similar to conditions that led to the 2001 western energy crisis. While FERC staff seemed to downplay the similarities, several commissioners stressed the need to take action now before problems arise.

"This would be the summer that I would like to not learn as we go," said Commissioner Nora Brownell.

Brownell said it is "hard to imagine that problems are unlikely" to occur when some states have such extremely low hydro reserves, such as Washington with 32% of the average snow water equivalent as of April 27. "Do we really believe they have sufficient capacity?" asked Brownell.

Harvey said power grid officials in the Pacific Northwest "carefully phrased" a response to that question, stating that during peak demand periods in California they could deliver energy to California but they would have to be paid back in kind and would have to also maintain a certain amount of water behind dams. "There seems to be comfort" about the situation, he said.

However, he also admitted that there is no organization in the West to oversee such power supply arrangements. "As far as I can tell no one is responsible for implementing [such] arrangements."

Chairman Pat Wood also expressed concern that stressed market conditions in the West might prompt some power companies, which have the potential to help provide supply, to avoid the market altogether due to past problems or fears of investigation. That could exacerbate any stressed market conditions, possibly increasing the chances of a power outage.

"It would be nice if people could get comfortable that within the parameters of what the Commission has laid out over the last four years there is an umbrella under which to operate even in a high-priced environment and there won't be some after-the-fact investigation," said Wood.

"If there's an opportunity here between now and the summer peak where the Commission could publicly invite anybody in the market to contact [FERC staff] to talk about any concerns they have...[the Commission should take it]."

Brownell also said FERC staff should take a closer look at the current western market fundamentals, validate the data and point out some potential effects on the marketplace and its participants to the public so that western officials are fully aware of the situation.

"I think we had better make sure that everyone understands exactly what the potential impact" will be.

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