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Regulators Hear of Pending Repeat Crisis in California

Four years after the power crisis that put out the lights in California, the state is still locked in an untenable position, facing a growing load with little net gain in generation capacity, relying on a fleet of aging power plants with the prospect of reduced imports from the Pacific Northwest and continuing policies that keep investment out of the state and limit demand response, according to witnesses at a joint hearing presided over by federal and state regulators last Thursday.

Federal Energy Regulatory Commission Chairman Pat Wood in his opening statement, said he found the lack of progress "disheartening...After four years I thought we would be further along. I thought that we would have the restoral of a lot of the anomalies that our commission, that [the California Public Utilities Commission , the California Energy Commission], and the two governors who have presided over this state in that period have identified and articulated pretty well."

Mid-way through the day-long session which Wood presided over, he sounded a bit more than "disheartened," saying they should "put a stake in the ground" for June 1, 2006 for the elimination of the reliability must run (RMR) scheme which was cited as the reason there was little investment in new generation. "Why on earth would anyone sign any kind of contract for power when he can get it for free?" Wood said. A witness for merchant power generators said the system amounted to "capacity stealing" and was why the generators "continue to believe California is no place to do business."

While commissioners of the California Public Utilities Commission (CPUC) and the California Energy Commission (CEC) noted there had been some progress, no one disputed there were dangerous times ahead. This summer could be tight if it is warmer than normal, but the next summer and those beyond, almost certainly will be more than tight unless there is a break in what appears to be a stalemate between industry and regulators.

There has been 3-4% demand growth in the California ISO market over the last few years, while neighboring southern Nevada, which has been supplying imports to California, has seen its own market grow 8-9%, Jim Detmers, vice president of grid operations for CAISO, told FERC and CPUC commissioners presiding over the joint conference.

Jeff Wright, head of the infrastructure division of FERC's Office of Energy Projects, also pointed to the growth in the use of natural gas for power generation, noting that 31% of the gas going into California goes for power generation. Power plants yet to come on line are expected to need another half Bcf/d

Meanwhile, the Southern California market has a "very intense air conditioning market, but we have no control over air conditioning demand," Detmers said. What is needed is some kind of demand response program affecting that market, he said.

The "southern part of the system will be stressed," notably around Path SP26. Detmers noted that heat may not be the only problem. Southern California has had 30 inches of rain and the underbrush in the transmission rights of way has grown by three feet, increasing the risk of fire.

Detmers said CAISO has added transmission lines to maximize deliveries in Southern California for this summer, but there is nothing left to do for the following summer. The CAISO official and others seemed to rate the 2006-2007 summers as reaching the critical stage. Detmers said the state is relying on 40-50 year old generators that are falling apart. "Industry needs to step forward and solve this problem."

Industry, however, sees it differently. As long as the state maintains rules that allow CAISO to commandeer power supplies for free under its reliability must-run (RMR) program, investors and would-be sponsors of new generation projects will remain on the sidelines, said Brian Chin, energy merchant analyst for Smith Barney Citigroup. While the regulatory environment is moving in the right direction, "the sentiment on Wall Street is that it is moving too slowly.

The lack of a definitive market structure "has made investors wonder what the situation will be, particularly if there is 2006-2007 crisis." Chin said part of the problem is that investor-owned utilities (IOU) have an incentive to hold off long term contracting for power supplies for as long as possible with the idea they will be able to build their own plants and ratebase them. He suggested regulators make the IOUs "agnostic" as to who builds the power plants.

Because they can rely on getting free power through the must-run mechanism, load-serving entities (LSE) are not contracting for adequate power supplies. They are more likely to sign a contract with a questionable supplier since they know if he defaults they will get must-run power, witnesses said.

Detmers said that CAISO's 2005 summer assessments were made on general assumptions on the import picture for physical power, but he had no way of knowing if there were actual contracts for the power, and he wouldn't know until the day before the power was to be delivered. "We need to have that information before the summer. We need to know what is actually committed to serving the California load."

A representative of the Independent Energy Producers (IEP) said there currently is about 6,000 MW of installed capacity without contracts and under must-run obligations. While producers are making decisions right now about investing in new plants for 2007-8, they see "capacity stealing" going on and "continue to believe California is no place to do business." The IEP representative said if the regulators would set a date certain, such as June 1, 2006, when RMR would cease, that would be reassuring to potential plant sponsors.

Yakout Mansour, president of CAISO, said RMR "is not a sustainable solution," but he doesn't want it lifted. "It's a blessing and a curse....Reliability must run is far from cost effective, but life has to go on." He said it was a "time of waiting" since they are in the middle of the process of market redesign, and "a possible time of crisis. If the resource issue is not addressed, no market design will work. I have yet to see sure success on market design in other parts of the country."

Gary Ackerman, executive director of the Western Power Trading Forum, said the state needed $6 billion in infrastructure investment now, "and more down the road." But the "shaky investment climate needs reforms." To sustain liquidity regulators need to: (1) create well-defined trading hubs so multi-year delivery deals can be made; (2) provide suitable congestion management; and (3) relax systemwide mitigation measures such as must-run rules and soft and hard price caps. California should have a $1,000 MWh price cap similar to other regional markets.

Ackerman also fixed on the June 1, 2006 date, as did the FERC chairman who said RMR should be replaced by resource adequacy requirements by June 1, 2006. Wood said CAISO should "put a stake in the ground" for that date. "Right now it's ambiguous." He suggested to the hearing audience in San Francisco that there must be specific capacity products, and that bilateral trade could replace RMR.

Meanwhile, a final word to regulators from CAISO: they need to focus on ways of opening up the market, installing incentives and systems that are "not too far in advance of what is achievable." Congestion costs in CAISO last year were $1 billion. "There are no capacity products on the books in the West; these need to be defined." Detmers noted that the stakeholder process to develop the market was not progressing because, "we still haven't closed the past. If we're going to rebuild, we really need to close the past."

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