State officials have launched an all-out effort to cure or atleast contain California’s runaway electric power market, sending$100 million in rate relief to customers of San Diego Gas &Electric, putting construction of new power plants on a fast trackand loosening the grip of the California Power Exchange (Cal-PX).

The California independent system operator (Cal-ISO) alsoinstalled a $250 price cap on emergency power purchases and FERChas been asked to match that with a cap on purchases in the forwardmarket. Critics were labeling the market “dysfunctional and blamingthe situation on the state’s transition to deregulation.

At the end of the week the California governor and the U.S.president ordered cuts in power use in federal and state facilitiesin the region. Clinton said federal facilities would cut power useby 5% and federal agencies that produce or market electricity mustdo what they could to increase power availability in California.

Emergency actions by the California Public Utilities Commission(CPUC) and the governor came as the nation’s most populous statesuffered through another week of blistering heat, punctuated byStage One and Stage Two emergency power alerts. Last Wednesday theregion came within a few MWs of a Stage Three Alert, which wouldhave activated rolling blackouts. Hardest hit were customers of SanDiego Gas & Electric (SDG&E), the only California utilityto have completed deregulation, who have racked up an additional$80 million in power costs. Additional power costs across thestate for June and July are said to total $1 billion.

According to observers, the most far-reaching action may havebeen that of the CPUC last Thursday in allowing utilities to enterinto bilateral power supply contracts outside the state-createdmonolithic Cal-PX. Investor-owned utilities had been prohibitedfrom doing so under the state’s electric restructuring.

John Stout, Houston-based vice president with Reliant Energy,who oversees its California operations, pointed to the prohibitionas “a fundamental market design flaw that forces all demand throughthe wholesale spot market (Cal-PX).” He said ideally the IOUsshould only be buying about 15% or 20% of their supplies throughthe PX and that would moderate prices overall, but he added newgeneration is also needed to alleviate the supply crunch.

Freeing utilities to enter into bilateral supply contracts wasone of nine items approved unanimously by the CPUC yesterday. Theagency also gave utilities authority to encourage various purchasedpower (QF) suppliers to offer supplies above-contract but below theCal-PX price as another means of tempering price spikes.

Another major move was to grant Southern California Edison arequest to re-operate one of the smaller power plants it had soldon an interim basis.

The agency’s actions came after California Gov. Gray DavisWednesday issued executive orders to speed up the approval processfor new power plants, cut down electricity use in state facilitiesand establish a statewide task force on energy reliability modeledafter the federal government’s National Security Council. Thegovernor acted on the basis of a strongly worded 40-page emergencyreport on California’s power shortfalls this summer submitted bythe CPUC president and the Electricity Oversight Board chairman.

The governor and state legislative and regulatory officials seethe state’s economic and political security being threatened bypeak electric supplies that are stretched dangerously thin and bywholesale power price spikes. Davis also formally asked the stateattorney general’s office to investigate “possible manipulation inthe wholesale electricity marketplace.”

The governor’s action came on the same day SDG&E petitionedFERC, asking the federal agency to install a $250/MWh price cap onsellers’ offerings of power into California’s bulk power markets.FERC action is necessary, the utility said because a $250 capinstalled by the California Independent System Operator (Cal-ISO)Aug. 1 only limits extra emergency power supplies and does notapply to the day-ahead or forward markets operating through theCal-PX. FERC action is needed to rein in the Cal-PX.

SDG&E’s filing noted fueling costs for power generation weredouble those of a year ago, but “higher gas prices do not begin toexplain the dramatically elevated prices that prevail in 2000compared to 1999” during high use periods. While gas prices haverisen to a June/July average at the Southern California border of$4.62, compared to $2.30 in the same period in 1999, that onlyequates to $60/MWh versus $36/MWh. It does not explain triple digitpower price increases, SDG&E said.

In a letter to Gov. Davis last Wednesday, FERC Chairman JamesHoecker attempted to assuage the governor’s concerns, but he didnot respond to Davis’ urgent requests for the Commission to extendthe wholesale power price caps in California beyond the Octoberdeadline, declare that “no competitive market exists in the state,”and grant “immediate refunds” to statecustomers if FERC’sinvestigation into the price volatility and reliability of the bulkpower market reveals that the rates aren’t just and reasonable.

“I cannot comment on specific proposals that may be filed withthe Commission,” Hoecker wrote, but “I stand ready to takeappropriate action on matters” within the Commission’sjurisdiction, which is limited to the wholesale power market. Henoted FERC has been following “this summer’s events in Californiaclosely,” and shared Davis’ concern about the effect of high priceson “certain California consumers.”

Further, Hoecker told NGI, “I think the solutions here arelargely long-term solutions having to do with the way the ISO doesbusiness, how much [generation] capacity there is in California,and how the distribution utilities use the forward market” he said.

“It may be a while before we sort out exactly what the causes ofthis [are]. I think on its face we’ve got a market that’s veryshort of capacity in a peak air conditioning period. Californiaclearly needs more generation and may need more transmission insome places, and we need to keep pushing ahead to make sure therules are certain and that people continue to have confidence incompetitive markets because frankly I don’t think there’s analternative here…..We also need the ISO to be a real RTO, and weneed to ensure that investors are willing to invest in theCalifornia markets.”

The emergency report noted costs for wholesale power sincemid-June have averaged 270% above the same period in 1999, whichexperienced cooler-than-normal weather. The total electricity billfor California was $1 billion higher over the period, andCalifornians will pay billions of dollars more before the summer iscomplete. The report includes 30 possible actions – many of whichalready are under way – and it makes numerous references to FERCactions that are deemed necessary “to give California the tools tohandle electricity pricing problems.”

The language in the report is particularly strong in regard tostate regulators’ inability to obtain recent pricing statisticsfrom both the Cal-ISO and the Cal-PX.

“The data we need to assess wholesale market pricing and supplyscheduling behavior is in the hands of two private, autonomousentities (Cal-PX and Cal-ISO), and despite the ElectricityOversight Board’s legislative mandate to oversee thoseinstitutions, we have been unable to obtain this data.

“Nevertheless, we believe enough evidence of questionablebehavior exists that the (state) attorney general should conduct aninvestigation into these statewide market practices, coordinatingwith other state agencies, including the CPUC and EOB. Such aninvestigation would provide the factual foundation that Californiapolicymakers and regulators need to recover any illegally obtainedprofits.”

Meanwhile, marketers were not long in responding to theCal-ISO’s price cap. Late last week three top powermarketers/generators in California’s besieged electricity marketfiled a complaint at FERC, saying the Cal-ISO’s price cap reductionis backfiring because it’s causing more and more suppliers tomarket already-strained generation supplies to out-of-state buyers,where they can recoup much higher prices.

For example, last Tuesday — when the Cal-ISO reduced the bidcap for imbalance energy and ancillary services to $250/MWh —power was trading in neighboring markets for as much as $1,500/MWh,said Reliant Energy Power Generation, Dynegy Power Marketing andSouthern Energy California. As a result, 1,300 MW of power wasexported when the Cal-ISO was on the verge of declaring a Stage 3Emergency.

In light of this, the three companies have asked FERC to orderthe Cal-ISO to compensate participating generators, schedulingcoordinators or other sellers for “actual damages and lostopportunity costs” should the Cal-ISO begin to curtail scheduledenergy exports to adjoining states. Further, they urged theCommission to prohibit the Cal-ISO from limiting payments forcurtailed energy exports to the Cal-ISO-imposed capped prices. Theyare seeking expedited consideration of the matter.

In other action Duke Energy last week offered additionalfacilities dedicated to the California market, urging stateofficials to speed up the permitting process to bring newgeneration online (see related story this issue).

Richard Nemec, Los Angeles; Susan Parker, Ellen Beswick,Washington

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