Responding to state political pressure triggered by incumbentutilities, the California Independent System Operator’s (Cal-ISO’s)board will meet today in a special session to reconsider its movelast week to lower wholesale power price caps to $500/MWh in theface of a continuing grid and peak generation reliability crunch.

On the table will be whether to lower the cap even further to$250/MWh as has been strongly recommended by state legislators andregulators.

One of the Cal-ISO’s 24 board members, Camden Collins, anindependent representing non-market participants, resigned Monday,citing too much state political interference for what she considersa federal jurisdictional matter of ISO prices.

Everyone from the governor to state legislative and regulatoryleaders has weighed in since the June 28 Cal-ISO board action,according to energy industry participants in California. At thesame time, last week’s tightening of the cap prompted generatorsthe following day — June 29 — to sell 6,000 MWh of electricityproduced in the state to loads in other states.

In a separate regulatory forum, a related issue of the incumbentinvestor-owned utilities, use of hedging mechanisms to mitigateagainst price spikes that inevitably come with hot weather wasscheduled to be discussed today by the California Public UtilitiesCommission as part of its regular biweekly meeting in SanFrancisco. Southern California Edison and the other IOUs have askedthe CPUC to expand their authorization for participating in somenew hedge markets offered by the state-chartered, nonprofitCalifornia Power Exchange (Cal-PX).

Both traders and Cal-ISO sources verified earlier this week that6,000 MWh in the day-ahead market were sold out-of-state on June 29for last Friday’s market. They noted, however, the out-of-statesales came in a greatly reduced California market from the40,000-plus MWh daily peaks for the first four days last week. OnMonday (July 3) in what was considered a four-day holiday tied tothe Fourth of July, California’s peak electrical load was running10,000 to 15,000 MWh below the earlier week, hitting just above30,000 MWh, and the forecast peak for the Fourth was at the 28,000MWh level.

“The generators are saying, ‘If I can sell my power outside ofCalifornia for a dollar more, guess where I am going to sell it?’,”said a source close to the California market. “Obviously it makesbusiness sense. Another question being kicked around is how (stateauthorities) can make that power stay here (in California)? That isone of the philosophical questions being raised, and I don’t knowhow it can be done without re-regulating the market.”

The source said no one expects a major part of the state’sgeneration load will leave California, but there is widespreadacceptance that some of it will follow higher prices out of state.”If you can’t guarantee a buy here that makes it worthwhile forgenerators to fire up, then it doesn’t make business sense to sellthe power in California,” said the source, noting that this sort of”run-for-the-border” hasn’t occurred on a hot day, but if it does,then the state would feel more of the impact.

Other sources watching the political process attribute to SoCalEdison the push to consider the $250/MWh cap, even though Edison’sCal-ISO board member was not one of three that officially asked forthe special meeting and reconsideration. That came from municipalutility board members. Behind the board members’ request, however,is Gov. Gray Davis, according to the political sources.

“The governor’s muscle is definitely behind the push for the$250 cap,” the source said. “If traders are correct and generatorsquickly sell more out of state, it will be clearly apparent that$250/MWh is a bad idea.”

Two other related issues — natural gas prices and supplies tofuel electric generation and the incumbent electric utilitiesinadequate use of the Cal-PX block-forward markets to hedge againsthot weather price spikes — turned up as increasing postscripts tothe Cal-ISO actions.

A source close to the nation’s largest municipal utility, theLos Angeles Department of Water and Power (LADWP), noted that thesummer has barely begun and his utility can already “write a book”about its precedent-setting experiences trying to keep natural gasflowing.

Over the latest four-day western heat spell (June 26-29), LADWPburned more than 2 Bcf of gas, hitting what the source said was its”highest burn in 15 years” on June 28, consuming 533 MMcf/ddelivered through a combination of Southern California Gas and KernRiver transmission pipelines.

“Even through gas costs were high, gas usage was also highbecause of strong wholesale electric sales activity,” said theLADWP source. “Our native electric load requirements were typicalfor warm weather, but not spectacular.” (Last August, thedepartment’s high peak day for gas use was 511 MMcf/d.

Among the three major private sector electric utilities, sourcessaid that San Diego Gas & Electricwas not participating atall in the Cal-PX block-forward market and had failed to get timelyauthorization from the CPUC to do so. PG&E and Edison wereparticipating in those markets, but not as fully as they could havebeen.

SDG&E is just now completing its paperwork for block-forwardparticipation, and one source speculated it was because SDG&Epaid off its stranded debt for the most part last year and does nothave to worry about the cost of power cutting into it ability topay down competitive transition costs (CTCs).

“If I wanted to be a prudent company, I probably should behedging,” said one industry source watching the California utilitycompanies. “But they (SDG&E) were not hedging a dime. They werepaying a premium price for their energy. That is why the customersthere (in San Diego County) are really going to get hit when theysee their bills.”

Speculation by the same source is that if the price cap islowered further to $250/MWh, it will “do a lot of damage to thehedge markets.” The block-forward market then “runs down to atrickle,” according to this source. At $750 caps, there has been”quite a bit of energy traded in block-forwards,” amounting toabout $65 million in the June 12-16 week when some sources reportedone-billion-dollars worth of electricity being sold over thatfive-day period in which rolling blackouts were instituted in thegreater San Francisco Bay Area. The bulk of the hedged savings inthe Cal-PX block-forward market belonged to Edison.

“If you go to $250, you lose the ability to gain those type ofsavings. The question is which gives the utilities the best way topay down their CTC — by lowering the cap or by hedging and, thus,saving much more?”

The departing Cal-ISO board member, Collins, in a memo tocolleagues dated July 3, urged the board to correct what she thinksare too strong an incentive for the utilities to “under-schedule”power supplies to avoid unrealistic penalties if theyover-schedule.

“Surely (the board) can get on with fixing the real problems —the incentives to under-schedule and the need for equitablestranded cost collection,” Collins wrote.

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