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
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
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
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
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
Susan Parker, Ellen Beswick, Dallas