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Midwest Power Market 'Very Dicey' as Summer Nears

May 17, 1999
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Midwest Power Market 'Very Dicey' as Summer Nears

Despite the study by the Mid-America Interconnected Network (MAIN) last month indicating that power supplies in the Midwest have greatly improved over last year, there are some who aren't quite ready to write off the possibility of a recurrence of price spikes for the region this summer.

Judah Rose, vice president of wholesale power for ICF Kaiser International Inc., is one such person, although he admits the situation has improved somewhat over last summer. "I would say it's like 50-50 whether we're going to have very gross spikes there," he said at NGI's GasMart/Power '99 in Dallas last week. "It looks like we may luck out, but it's still very, very dicey" in the Midwest region, which saw prices soar to $7,000 per MWh for a brief period last summer.

A major factor is "no one knows who's in charge of reliability in the Midwest," the consulting firm executive said. Rose believes the federal government needs to intervene to settle the issue once and for all. "There is nothing more federal than the intersected power grid. The federal government needs to set up who's in charge of reliability, figure out what the rules are."

Part of the problem is "market motivations," according to consultant Paul Messerschmidt of Energy Security Analysis (ESAI). Spikes occur when a "pure profit maximizer" meets a utility trader who is handcuffed to an obligation to serve. "The utility trader's first and foremost Rule No. 1 is Obligation to Serve; Rule No. 2 is Obligation to Serve and Rule No. 3 is 'See Rule No. 1.'" When the utility trader needed the power and was quoted the $7,000 MWh price "he sweated for a minute and then said 'deal done.'" He had no choice and the profit maximizer knew that. Until you get away from the obligation to serve and the 100% cost recovery, the market will continue to have what appears to be irrational behavior, Messerschmidt told another GasMart/Power '99 session.

And as a result of last summer "credit has become a huge issue," according to Gary Morsches, chief operating officer for Southern Company Energy Marketing. Some of those in the market last year "weren't sophisticated enough to understand the credit risk they were taking on. Counterparty credit risk is a huge risk. A lot of people put their heads in the sand. They would trade with anybody and trust the power would show up," Morsches said. "We've seen a lot of those weaker counterparties cease to do business. Everyone is much more focused on credit risk now. It's becoming a science with a lot of CFOs getting involved."

"I don't feel summer '99 will be as exciting," Messerschmidt said, pointing to much more rigid third-party credit procedures. And "stress testing has gone way beyond last summer. Only the large, extremely well-capitalized can participate in this business. They have to have credit ratings to back them up." He cited a Moody's report on power marketing and credit risk that set "a minimum size of $50 million to get in the game."

There is some question as to "whether a truly independent ISO might have helped relieve some pressures" last summer, the ESAI power marketing specialist said. Some had questioned whether power access from the PJM region was truly constrained. And finally, "everyone is much more awake. I don't think people expected June 24-25 would be when the excitement was going to happen...maybe July or August."

ESAI is creating some market models including an interregional electric market model and models on the interaction between temperature and spot prices "to get a better handle on energy pricing." He suggested "those who would have a handle on natural gas prices should keep an eye on residual oil. The dynamic between gas and resid is important to watch." And he cited the backwardation in the crude oil futures market, which reveals the market does not believe OPEC is going to hold to its production limits. "If they continue to cheat you will see prompt prices drop."

As for the futures market, he suggested hedgers be wary of the COB and Entergy contracts where 70% of the market is held by four large traders. "You could be stepped on by elephants."

According to ICF Kaiser's Rose, some price spikes are to be expected and shouldn't alarm the power market. "In a deregulated grid that doesn't have excess capacity, you should have some price spikes....But you want to avoid having too many price spikes."

Although peak demand for power is expected to be about 2% higher than last summer, MAIN believes reliability levels will be significantly higher than in 1997 and 1998 since all nuclear generating plants in the region are anticipated to be up and running, and about 1,300 MWs of capacity will be added in various locations throughout the region. Also it said reliability in the Midwest will be enhanced as a result of transmission system upgrades and procedures to boost the region's import capability.

Messerschmidt commended Dynegy. "I think they set a record in getting a new 500 MW gas-fired combined cycle generator in place" in the Chicago area.

Rose reported "there are some nuclear power plants that are out in the Midwest," although "on whole the grid looks [in] a little bit better shape" than last summer. "But there are things that are occurring also that make me nervous." For instance, he cited the "absurdly high" growth in the Gross Domestic Product by 4 1/2% last quarter.

The MAIN study projects a peak demand of 48,157 MWs for the summer, up from 1998's regional summer peak of 46,824 MWs. MAIN, which is one of 10 reliability councils under the North American Electric Reliability Council, covers Michigan, Wisconsin, Illinois and Missouri.

Susan Parker, Ellen Beswick, Dallas

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ISSN © 2577-9877 | ISSN © 1532-1266
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