The fallout continued from the late June price blow-up in theMidwest electric market, as industrial users weighed in withcomplaints, FERC scheduled an investigation, and industry expertstold Congress that half-baked deregulation was at fault.

Federal Energy Regulatory Commission Chairman James Hoecker lastweek offered a generalized response to a variety of complaintsfiled at the Commission from utilities, marketers and end users(See following AEP story and NGI 7/13/98), announcing the formationof a fact-finding team.

The team is made up of staff members drawn from several officesat the Commission and will delve into the events precipitating theprice spike into the thousands of dollars per MWh in the Midwestthe week of June 22. Hoecker said Commissioner Vicky Bailey hasagreed to “participate actively” in the fact-finding effort. Thereview could last several weeks or “until we understand more fullywhat occurred and how the maturing bulk-power market wasaffected…” The team expects to work cooperatively with stateregulatory officials.

The “remedies available to this Commission are not entirelyclear,” the chairman said at the bi-monthly meeting. “…[W]e arenot prepared in anyway to rush to judgment on this. On the otherhand, we are not disinterested either, far from it.”

Bailey echoed Hoecker’s belief that a “very temperate” approachwas warranted, saying she had “great respect for the importantpolicies that this Commission has in place and is committed to. I’mnot walking away from the market concepts we have in place.”

Still, “oftentimes there are prices that require Commissionintervention. I’m making no pre-judgment here.” Bailey said thefact-finding effort wouldn’t be a “witch-hunt or a gotcha” type ofexercise. “Ultimately, we want to understand what happened. Is thisa persistent problem?”

Specifically, the Commission “would like to know did the marketsucceed or did it fail under these circumstances? What did peopleknow and when did they know it? What led to these price spikes,…pricing disparities and to contract problems? What does thistell us about emerging market structures and behaviors,” Hoeckersaid. For Bailey, the key issue is how much of the market turmoilwas caused by a capacity shortage and how much was due to the”immaturity of the market”?

Partial Deregulation to Blame

Meanwhile, at the same time last week on Capitol Hill industryexperts were telling a congressional committee it wasn’t just theusual suspects of protracted heat wave, unplanned generationoutages, and transmission constraints. Those would have explained aprice run-up in the hundreds of dollars, but it took the halfwaynature of deregulation in the electric industry to hamstring marketparticipants, cause a panic and send prices into the thousands ofdollars per MWh.

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 between $7,000 and $10,000 a MWh wasnot an example of how a competitive market works. In a workingmarket, there would have been curtailments and supplies would havebeen reallocated long before the price hit $10,000, Levin said. Butthere were no curtailment; “the lights were on everywhere.”

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.

Levin said in his 11 years at Nymex he had seen crises such asthe Mideast Gulf War strike the oil market and Gulf of Mexicohurricanes put pressure on gas prices, but those markets behaved ina relatively orderly fashion – not anything like the recentelectric market. He added that the opening of two new power futurescontracts, in the South and Midwest in early July, should help theelectric market by providing better price transparency.

The comments came in response to congressmens’ questions duringa hearing on electronic commerce in the energy industry, scheduledbefore the current crisis by the House Subcommittee on Energy andPower. The subcommittee members diverged from the planned agenda toquiz witnesses 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. Heillustrated with the story “about a guy in the UK who suggestedthey change from driving on the left hand side of the road todriving on the right hand side. But he suggested a phased approach:’let’s just change the trucks 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 go build a gas turbine out there because I can in fact, makemoney using it for a very small number of hours.”

Part of the problem with the electric market, Tabors said, is”the dismal state of OASIS,” the electronic posting and schedulingsystem for electric transmission. This is caused by monopolyutilities, which have other ways of scheduling transmission, andobstruct the operation of OASIS to keep new market entrants in thedark. Tabors said for many nodes or trading points on OASIS “itappears that the goal is to provide as little useful information aspossible in as untimely a manner as possible.”

Susan Parker, Ellen Beswick

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