NGI The Weekly Gas Market Report
Political repercussions from California’s high-priced heat wavereached all the way to the White House last week as Gov. Gray Davisappealed to President Clinton to pressure the Federal EnergyRegulatory Commission to “accelerate its investigation of wholesaleenergy prices in California.”
The governor’s letter was sent Thursday as lawmakers in anacrimonious joint state legislative session struck out in alldirections, looking to lay blame and find a fix for the powershortage situation which has rocketed electric prices in the state.On Friday, after a week of somewhat milder weather, the heatreturned and California again went to a Stage Two Alert in whichutilities are asked to cut 500 MW of interruptible load.
Davis said it was “extremely important” that FERC’s inquiry bespeeded up and “that the investigation and related proceedings beconducted on a formal evidentiary basis. It is also important thatrefunds to customers be made immediately upon a determination thatrates are not just and reasonable. It is my understanding that thisinvestigation can be completed within 30 to 60 days.”
Noting that “San Diego consumers have paid an enormous price forderegulation in a market that no one believes is functionallycompetitive,” the governor outlined the measures he had taken onthe state level to ameliorate the situation…But the outrageouswholesale prices being charged by out-of-state generators makes anyrate stabilization plan a difficult and expensive endeavor,”
In the joint state legislative session state/federal regulators,third-party transmission grid and market operators, academics,private/public sector utilities, environmentalists, consumer groupsand merchant power plant developer/operators testified amidrepeated questions and speeches from San Diego lawmakers.
Bombast aside, the most concrete proposals that emerged were forrolling back and re-freezing San Diego electric rates, cutting thepower plant siting time to six months and perhaps the state suingthe Federal Energy Regulatory Commission (FERC) to force merchantgenerators to retroactively cough up their perceived “excessprofits” from recent peak-demand periods. In addition, stateauthorities will put out a request for proposals next week for3,000-MW of peaking units to put in place by next summer.
The only thing that could be counted on after a seven-hourlegislative session last week was that there will be more hearings,new legislation and increased state regulatory action. In additionthere is likely to be increased pressure from California on FERC tocap Western wholesale prices; quickly complete an investigation ofpossible market gaming and price gouging by merchant generators andmarketers, and extend the state’s authority to impose price caps onwholesale emergency electricity purchases. In the remaining weeksthat California lawmakers are in session a variety of electricitylegislation could emerge.
Even before the marathon joint legislative session got underway, the state senate quickly passed a bill to rollback and freezeSan Diego electric rates and sent the measure on to the Assembly.In the meantime, Gov. Davis a day earlier directed the CaliforniaPublic Utilities Commission to cut the San Diego rates in half, andthe CPUC has set a special meeting Aug. 21 to consider that andother electricity proposals.
Almost all agreed California’s electricity market is not workingcorrectly, but they couldn’t agree on how to fix it or even whetherfixing it was a good idea. A stumbling block for advocates ofmarket-based solutions were statistics that show wholesale pricesthis summer even on days that have lower demand than a year earlierare five times higher than they were in 1999. These nonpeak-periodaberrations have lawmakers, utilities, consumer groups and otherspointing accusing fingers at a combination of the state’stransmission grid operator, power exchange or FERC.
“In California’s market, there are single producers who can movethe market,” said economist Severin Borenstein, director of theUniversity California Energy Institute. “In a truly competitivemarket, no single producers can do that.”
Two troubling market notes were sounded by the Cal-PX CEO GeorgeSladoje and Southern California Edison representative, GarySchoonyan. This summer total supply bids into the Cal-PX have beendown by 700 MW over historic summer levels, said Sladoje,indicating the producers are holding back so they can bid into theCal-ISO’s higher-priced emergency supply market. “That istroubling,” he said.
Edison’s Schoonyan said his utility, which still has ratesfrozen at 1996 levels, has energy charges of almost $1 billion morethan rates they have collected for the past 2-1/2 months. Pricesduring a low-volume Sunday this past July were “eight times” higherthan those on a corresponding Sunday a year ago, he said,concluding “that is not a competitive market.”
San Diego Gas and Electric, the center a hailstorm of criticism,was represented by Tom Shayles, a vice president from its parentcompany, Sempra Energy. He said his companies “are outraged by whata dysfunctional market is causing.” He believes at some pointCalifornia may need to conduct an old-fashioned protest or sit-inat FERC’s headquarters in Washington, DC to get the federal actionto cure California’s market ills.
Douglas Smith, FERC’s chief counsel, countered the Commissionhad acted quickly on a complaint regarding the California marketrecently, supporting the Cal-ISO’s move to install price caps onits purchases of imbalance energy and ancillary services. He notedthe Commission now had complaints before it from SDG&E askingto put a cap on prices suppliers could sell into markets operatedby the ISO and PX, and Reliant Energy requesting clarification onthe amount of compensation the ISO should pay them if it curtailstheir exports of power from California.
“The Commission fully understand the importance and timesensitivity of these matters and intends to act expeditiously.” Hepointed out FERC has jurisdiction over sales for resale andtransmission only when they are done by public utilities. Also,while FERC has authority to change utility tariffs, any reliefprovided would be prospective in nature – taking effect 60 daysafter the tariff change is filed. No refunds would apply untilafter that period.
At the outset of the legislative hearings, the chairman of thestate energy commission (CEC), William Keese, said his agencyexpects in the next few days to have a proposal to establish anemergency six-month power plant siting process that does notcompromise environmental requirements sent to Gov. Davis whoordered such a move earlier this month.
In another context, State Sen. Steve Peace, the San Diegolawmaker who helped craft the 1996 electricity restructuring law,said the legislature should also pass legislation to make theElectricity Oversight Board (EOB) the direct overseer of both theCalifornia Independent System Operator (Cal-ISO) and CaliforniaPower Exchange (Cal-PX) “much like you would have an audit teamtake over a bankrupt company.”
In response to calls from the CEC chairman for a “balanced”approach of new generation, market reform and increased demand-sidemanagement, Sen. Peace said “for five years I have heard thisHarvard grad school cockamamie that market-based solutions willwork along with demand-side management. There is no way we aregoing to crawl out of this predicament with demand-sidemanagement.”
The CEC’s Keese said 3,000 MW in five power plants are now underconstruction, and another 7,000 MW and 11 plants are in the sitingapproval process.
CPUC President Loretta Lynch and EOB Chairman Michael Kahnportrayed the problem as being a combination of the market beingnoncompetitive and the means of correcting that resting with FERC.Therefore, Kahn repeated that California does not have a problemswith “deregulation,” but rather what he calls “federalization.” “Weought to stop saying we’re ‘federalized,’ it may be technicallytrue, but it is misleading,” said S. David Freeman, general managerat the Los Angeles Department of Water and Power and a formerenergy official in both Washington, DC and Sacramento. “The stateof California has a lot of authority it can use. We can all worktogether to solve the problem and then we can get back to lettingthe ‘grand experiment’ work, which I support.”
Sen. Peace indicated he thinks the newly passed state Senatelegislation to freeze San Diego rates will “curb” the wholesalemarket to a certain extent, and that eliminating the stakeholderoversight boards for the Cal-ISO and PX will solve the other partof the state’s problem. “There is now clear statistical proof thatthe ISO prices created a target and drove up prices [in thewholesale market],” he said.
The CPUC’s Lynch said there was definitely a problem inCalifornia market, “but we can’t fix it; all we can do is go to thefederal government.”
Many officials and industry representatives advocate temporarypeaking plants be put in place to avoid the crunch state officialspredict will get much worse next summer before it gets better. Thedebate is whether the regulated utilities should develop theseplants or the merchant operators. Both Duke Energy and CalpineCorp. representatives said the non-utility generators could do itquicker, cheaper and more efficiently. Sen. Peace expressedskepticism.
“It is clear the state needs to add peaking generation by nextsummer,” said Jan Smutny-Jones, Cal-ISO board chairman and head ofthe state’s trade group for independent generators. “Ultimately theway out is to build more generation. We do not need a 180-degreemove backwards [re-regulation], which would be a disaster for bothreliability and price.”
Cal-ISO CEO Terry Winter, told the lawmakers that the reason noappreciable new generation was built in the 1990s in California,and for most of the United States, for that matter, was theuncertainty of what was going to unfold. “I think it is veryimportant that we offer some stability moving forward to the peoplebuilding power plants. In our recommendations [to the governor] wehave identified a few plants – not all of them – that must getbuilt. One of those is [Calpine’s] Metcalf in San Jose [to serveSilicon Valley] and Otay Mesa in San Diego. They are absolutelycrucial.”
When he was a member of the utility industry, Winter said, “Iwas involved in a 500-MW re-powering proposal for San Diego in 1998that we canceled. Boy, would we love to have that 500 MW now.”
Winter said he also supports demand-side programs, but he saidthe lowering of the price cap to $250/MW is a disincentive for mostDSM. “Part of the reason the programs people talked about here werenot developed was because at the lower cap, people weren’tinterested in participating.”
Richard Nemec, Los Angeles
©Copyright 2000 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.
© 2020 Natural Gas Intelligence. All rights reserved.
ISSN © 2577-9877 | ISSN © 1532-1266 |