Regardless of what state and federal officials would prefer,California’s now-Chapter 11-bound former wholesale spot powermarket, the California Power Exchange (Cal-PX) is not goingquietly. The PX perfers to fight to re-attain former utilityfutures contracts seized by the governor and to support theviability of electricity commodity exchanges if regulators andpoliticians will make a commitment to make them work.
In an interview laced with some regret and bitterness, Cal-PX’sCEO George Sladoje showed offers for five-year futures contractsavailable to California’s three major investor-owned utilities lastsummer through early fall that were at $10 to $20/MWh cheaper thanwhat the state has now negotiated.
“The utilities never responded,” Sladoje said. “They absolutelyrefused. They could have come back with lower prices even to seewhat would happen. They never even did that. The CPUC (CaliforniaPublic Utilities Commission) hadn’t given them reasonablenessreviews beyond March of 2002. I’m saying they should have taken achance and done a few of these, but they didn’t.”
An offshoot of a running battle the exchange has had with FERCrelated to the Cal-PX implementing the so-called “soft” $250 and$150/MWh price caps is potential additional refunds the federalregulators would have to order from generators related to theJanuary transactions. Cal-PX has suggested several methodologiesfor the essentially closed exchange to recalculate some of its pastcharges.
“The methodology we have recommended gives variousalternatives,” Sladoje said. “FERC is going to pick one, and it isgoing to result in millions of more dollars refunded for January.”
He said that the Cal-PX still holds the collateral of its 70-oddparticipants in the form of letters of credit and bonds worthhundreds of millions of dollars even as the state-charterednonprofit exchange made a Chapter 11 bankruptcy filing March 9.Chapter 11 was prompted by the preponderance of litigation andfederal regulatory actions pending, Sladoje said.
Cal-PX is still providing its regular settlement services, somost of its remaining employees have something to do with billingsor with the myriad of regulatory and legal data requests that arean ongoing chore. All the marketing, trading, scheduling and morecomputer people have been let go, Sladoje said.
In hindsight, the “beginning of the end” for the Cal-PX camelast July when the Federal Energy Regulatory Commission (FERC)lowered the price caps from $750/MWh, said Sladoje, at the powerexchange’s Pasadena offices where staff has dwindled to around 40from a peak of 200. Because of the pending court and FERC cases,Sladoje said he expected to be working at least through May.(FERC-authorized tariffs run out April 30.)
Among the many unfinished pieces of business facing Cal-PX isits continuing attempt to get back the two major Californiaprivate-sector utilities’ defaulted bock forward contracts from thegovernor, who seized them in actions Feb. 2 and 5 to preservebelow-market supplies for California consumers. Cal-PX estimatesthe value of the contracts in today’s market at nearly $1.5billion.
“The fact of the matter is that the utilities last year didn’tdo very much with the forward market,” Sladoje said. “Now it isironic that the biggest asset they have for 2001 is the forwardcontracts they bought last year. Everyone is fighting over themnow. The governor has commandeered them, and the sellers are tryingto weasel out of them.
“We sent a bill to the governor’s office for a little over abillion dollars the day after they were commandeered. This week weare applying to the state board of control in a formal applicationand it now comes out to close to a billion-and-a-half dollars.”
Ironically before “all hell broke loose” last summer inCalifornia’s wholesale power market, the Cal-PX was close togetting some local traders interested in its future market, saidSladoje, a former executive with the Chicago Board of Trade, whonoted that the lack of local individual traders was one of theshortcomings the Cal-PX couldn’t overcome, and it will be tough, hesaid, for the privately financed Automated Power Exchange (APX) inSanta Clara, CA, or another electricity exchange to overcome this.
The model should be the Nymex natural gas and petroleumexchanges, both of which, Sladoje said, have managed to get localtraders involved. And “efficient, smooth-running” commodityexchange has between 50 and 70% of its volume down by individuals— not commercial and trading professionals.
Before its demise when FERC Dec. 15 ordered the end of mandatorytrading in the Cal-PX and a ban against California’s investor-ownedutilities even selling through the nonprofit exchange, Sladoje’spower exchange had agreed to open new exchanges in New England andAlberta, Canada, both of which have now been set aside for the timebeing.
Aside for California’s well-documented supply, frozen retailrates, transmission congestion and natural gas price spikes,Sladoje said there are four more important, but less recognizedreasons for why the state’s electricity restructuring failed:
The two (PG&E and SoCal Edison) largest utilities’ size wastoo disproportionally large relative to the total marketplace.
Those two, along with San Diego Gas and Electric Co., wereunprepared for deregulation, totally unable to push forwardcontracting until it was too late.
State regulators, legislators and utilities distrusted marketsolutions; and
FERC, despite its commissioners’ contention, has not beenmarket-oriented either.
“The jury is still out on FERC,” Sladoje said. “It ordered us toshut down, and it never wanted us running a day-ahead market, andthey put this ‘soft cap’ on us (and the Cal-IS0), the only place inthe country. And then, FERC turns around last Friday and ordersrefunds based on costs. I don’t think it is very market oriented.
“In all my years at the Chicago Board of Trade and the ChicagoStock Exchange, I never once saw a transaction on the floor when Isaw a buyer run across the pit and say ‘before I buy this contractI have to know what you paid for it’.”
Richard Nemec, Los Angeles
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