Economics, politics and public policy pressures seem to be converging against the creation of regional transmission organizations (RTOs) and more cohesive, coherent power markets in the West, according to a consultant and a generators’ representative who spoke at GasMart/Power 2002 last Tuesday in Reno. Although on opposite sides in California’s ongoing electricity restructuring debate, they agreed that regulators and public policymakers need to change their approaches substantially in the future.

Citing as a model the natural gas industry deregulation as “relatively simple and without massive government oversight,” Portland, OR-based economist and consultant Robert McCullough said the West has “seen the super structure” of the market collapse, so what is needed in the future is a combination of “simplicity, non-government intervention, customer choice and transparency.” To this laundry list, co-presenter Gary Ackerman, executive director of the Western Power Trading Forum, added the need for renewed “trust” among regulators, marketers, generators, consumers and elected officials.”

A vitriolic critic of California’s independent grid operator, McCullough said he believes the proposal for an RTO West in the Pacific Northwest is an example of “taking a bad idea and making it bigger,” citing an earlier, smaller RTO proposal (Indigo) in which it has transformed. He called the recently completed “cost-benefit study” completed by outside consultants on RTO West “as highly recommended reading that is better fiction that (Tom) Clancy writes. The bottom line is that “centralized, government solutions for power dispatch leads to the creation of another post office,” he said.

Ackerman challenged the working title for his co-presentation with McCullough, “Coordinating West Coast Power Markets,” because he said his group of merchant generator/marketer members would be subject to more public criticism and potential legal action if they actually “conspired” to try to coordinate anything related to their participation in the western markets.

Ackerman pointed out little-recognized facts about California’s past electricity crisis that support his contention that the generators have been made into scapegoats. Rather than manipulate the market prices, they reacted to market signals of basic-supply demand that were driven by weather, regulation and physical infrastructure constraints.

McCullough placed a large amount of the blame for California’s woes on the Cal-ISO, which he described as being a “political success that has failed in every operational category — huge staff, no response — but politically crushed” its critics. The agency routinely cancels firm contracts in real time, routinely reports congestion on transmission lines that don’t exist and allowed pumped storage to go dry, he said, noting it has been an enterprise of “amazing failures.”

The Ph.D. economist, who has a number of public and private-sector utilities in the Pacific Northwest among his clients, McCullough argued that the full cost of the Cal-ISO’s operation of California’s grid in the 2000-01 energy squeeze in the state will never be fully known because he alleges that the grid operator keeps most of its records “secret.” He thinks the ultimate cost is in the range of “hundreds of millions of dollars.”

After running numerous economic models on California’s power market, McCullough said he has concluded that there have been “massive market imperfections with few explanations,” and that effectively the markets in the state are “governmental entities,” as evidenced by the fact that he can forecast future prices more accurately by using Cal-ISO data rather than natural gas prices.

Departing from the Cal-ISO criticism, Ackerman talked more critically about California’s private-sector utilities that failed to take action in mid-2000 when they saw the cost of wholesale power supplies greatly exceeding capped retail utility rates.

“Somebody in (the utility companies) had to make a decision to leave the retail customers exposed to those wholesale prices,” Ackerman said. “These are sophisticated people — not like the utilities in Nevada who signed some long-term contracts last year and now are screaming that they didn’t know what they were doing and needed help. These people made the decision in May of 2000 not to hedge; maybe they thought they could depend on the mercy of the California Public Utilities Commission? Whatever they thought, the customers were left exposed to historically unprecedented wholesale power prices.”

Ultimately, it was not the FERC price mitigation measures in June last year that drove the wholesale prices down, but rather a market response to massive conservation efforts and milder-than-normal weather, Ackerman said.

Finally, Ackerman saved most of his criticism for California regulators who are trying to implement the suspension of direct access power contracts retroactively to July 1. In essence, he said, CPUC supporters want to eliminate a large portion of the private-sector utilities’ load that is avoiding paying their “fair share” of retail costs for the past power spikes, while ignoring the fact that customers who conserved massively, lowering their end-use demand, have done the same thing.

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