NGI The Weekly Gas Market Report / NGI All News Access

California Utilities, IPPs, Nymex Argue Over Power Crisis

California Utilities, IPPs, Nymex Argue Over Power Crisis

While Chairman James Hoecker last week expressed doubt FERC could provide any real "immediate" relief to California electric customers, the state's two largest investor-owned utilities called on the Commission to move quickly to rescue the malfunctioning wholesale power market, saying it could not stand on the sidelines as the nation's first retail electric experiment teeters on the brink of disaster. (See related report, this issue).

FERC "must be a constructive participant in the effort to fix the problem in California. It cannot sit by and watch injured consumers overthrow the new competitive markets. Failure to act may set restructuring and competition back in a politically irreversible manner," said Southern California Edison in a plea filed at the Commission. "The worst possible alternative [for FERC] would be to do nothing while the promise of restructuring dies stillborn..."

As an interim measure to restore public confidence, Edison and Pacific Gas and Electric (PG&E) said in separate filings they supported San Diego Gas and Electric's (SDG&E) request for a $250/MWh price cap on wholesale electric sales in the state [EL00-95]. But they urged the Commission to quickly investigate potential medium- and long-term solutions to California's market problems, the possibility of "anomalous behavior" by market participants, whether customer refunds are due and to establish the earliest possible effective date for the refunds, as well as change the rules of the California Power Exchange (Cal-PX) and California Independent System Operator (Cal-ISO), if needed. The Commission already has initiated an investigation of the bulk power market nationwide, with particular focus on the California and New York ISOs.

In contrast, Dynegy Power Marketing Inc. and others, which oppose SDG&E's request for a $250/MWh price cap, contend the utility has failed to show evidence of "sustained market power" by generators or of structural flaws in the Cal-PX. "California's problems today are primarily a lack of generation, a lack of transmission and a lack of demand response," Dynegy Power said. Further, it contends some of SDG&E's problems are of its own making. SDG&E "chose not to hedge in the forward markets, thereby leaving its retail customers subject to spot market prices." (see related report, this issue).

The price cap being sought by SDG&E will have "little more than a placebo" effect on the California market, according to a protest brought by the New York Mercantile Exchange (Nymex) last week. It agreed with SDG&E that the market institutions in California require "fundamental reform," but it doesn't think "generic wholesale rate caps are the answer." Rather, Nymex advocates holding off action until after a comprehensive evaluation of the California market is completed.

The "'cocktail' combination" of the policies of the California Public Utilities Commission (CPUC), the California Legislature and FERC "has yielded the expected results this summer" in the state, Nymex told FERC. Many have pointed to the state's lack of new generation capacity as the culprit, but Nymex believes that's a "red herring."

It sees a lot of problems with California bulk power market. First, it "is dominated by transactions that focus on next-day or sooner delivery (spot market). Relatively little contracting for delivery further out (forward market) takes place." The emphasis on spot market sales has been has been "more pronounced" this summer than it was two years ago.

"Spot markets are intended to be residual markets, not primary markets, but California's policies have squarely reversed this. The result is that the 'high' spot market prices experienced this year in California have had a riveting effect as opposed to a residual one. This misplaced role for the spot market is what California has been reeling from."

Although California likes to think of itself as a pioneer in electricity deregulation, Nymex said the market there still is "highly regulated." Because of the "many regulator-installed artificial constraints on competition," the state "falls dramatically short of a competitive market by comparison to other energy markets."

It faulted FERC and the CPUC for placing "overwhelming emphasis on achieving competition in generation to the exclusion of other major considerations," such as "shaping demand to be more market responsive." Also, federal and state regulators/legislators have established the Cal-PX as the "stand-alone transaction center in California," while virtually eliminating the opportunities for potential competitors of the Cal-PX - marketers, aggregators and brokers.

In a nutshell, the policies of the CPUC, FERC and the state legislature have created a market that lacks: 1) retail access to the wholesale market; 2) a level playing field for competitors to the Cal-PX; 3) commercially priced firm transmission; and 4) greater emphasis on forward contracts, according to Nymex.

Given all the market shortfalls, "does anyone seriously expect California-based suppliers to ignore profitable opportunities located outside California, especially while operating under the yoke of competition-stunting policies that have so severely restricted the ability to pursue opportunities within California?"

Edison, the CPUC and the Cal-ISO do. Edison called on FERC last week to reject a plea by three generators to be to reimbursed for "lost opportunity" and replacement costs if the Cal-ISO curtails their exports of firm power to customers in more lucrative neighboring markets during in-state power emergencies.

A favorable response to the request of Reliant Energy Power Generation, Dynegy Power Marketing, and Southern Energy California would permit generators to reap "windfall profits" at the expense of the state's electric customers, Edison warned FERC [EL00-97]. It would be the final nail in the coffin for the state's electricity restructuring program, a movement that "threatens to spread nationwide..."

The three generators filed a complaint earlier this month seeking reimbursement for "lost opportunity" and replacement costs after the Cal-ISO set a $250/MWh price cap on emergency power purchases. Soon afterwards, SDG&E asked FERC to second the Cal-ISO's move and impose a matching cap on all sales of energy and ancillary services into the Cal-PX as well.

Edison contends the Cal-ISO has full authority to curtail power exports in times of emergencies, and says the generators should have included provisions in their export contracts with customers to cover this contingency. Specifically, it noted each of the generators signed Participating Generator Agreements (PGA) subjecting them to the "control by the ISO during a system emergency," and absolving the ISO of any liability for "losses, damages, claims, liability, costs or expenses..."

The CPUC called the generators' complaint a "sham" designed to "avoid the ISO price caps by making sales to affiliates or cooperating entities located out of state," which then would "sell the power back to the ISO at uncapped prices." The Cal-ISO argued the complaint was much ado about nothing since it has never curtailed a generator's firm exports, and added that it was "exceedingly unlikely" to occur in the future. It noted it would only consider curtailment of firm power exports during a Stage 3 emergency, which it has never declared. But if such an emergency did happen, the Cal-ISO said it would be bound to compensate the generator only for an amount equal to the clearing price within its market.

The generators cited two recent FERC decisions involving the New York and New England ISOs to justify their request. But Edison argued otherwise. In the New England case, for instance, Edison said the Commission required the ISO to reimburse the export buyer "only the extra amount, if any, that [he] must pay to replace the power that the ISO recalled." Likewise in New York, it noted FERC directed the ISO in the event of curtailed sales "to pay the generators the applicable New York market-clearing energy price - not the price that would have been received for exports to other regions."

Susan Parker

©Copyright 2000 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.

ISSN © 2577-9877 | ISSN © 1532-1266
Comments powered by Disqus