NGI The Weekly Gas Market Report
The Federal Energy Regulatory Commission came out divided lastweek on whether regional price caps should be imposed on thewholesale power market in the West. FERC Chairman Curt Hebert andthe Commission staff maintained opposition to price caps, whileCommissioner William Massey came out strongly in favor of some formof temporary regional price caps until permanent solutions to thecurrent crisis can be found.
Massey said to do otherwise would be “unlawful” because FERC isobligated to ensure just and reasonable rates for wholesaleelectricity. Commissioner Linda Breathitt, meanwhile, waffled onthe issue, saying she was willing to consider all options. Shenoted the region needs a regional transmission organization toimplement required changes on a broad scale.
Hebert said regional price caps are “somewhat of animpossibility.” Much of the power in the West is sold by entitiesFERC doesn’t regulate. There’s no regional power exchange. Manywholesale transactions are bilateral, long-term agreements.
“Price caps also stifle competition,” said Hebert, adding themarket needs clear price signals right now to find a solution. Healso said FERC, the Department of the Interior and the EnergyDepartment need a “common vision on energy policy” to move in theright direction on this crisis.
Meanwhile the Commission staff released three reports in timefor the Energy Policy Roundtable in Portland, OR. One report is aresponse to questions posed at a Dec. 20 meeting of the WesternGovernors Association in Denver. Another lays out the numerouscauses of the fall price spikes in the Pacific Northwest andCalifornia. And a third involves an investigation into power plantoutages last summer and fall in California, concluding they werenot intentional attempts by wholesale generators to increaseprices.
In a response to questions from the Western Governor’sAssociation meeting, Commission staff laid out a host of reasonsprice caps should be avoided. Staff said that many who ask for spotmarket price caps really want spot prices to be set at levelizedlong-term rates. But capping spot prices would “exacerbate supplyshortages.”
“The danger as evidenced during the last year when Californiaoperated under price caps is that we turn a pricing problem into areliability problem. In this regard, price caps cannot be enforcedunless buyers are willing to go without electricity if supply isunavailable at the cap level.” Caps also “reinforce any reluctanceof California or other states to deal with long-term solutions.”
Capping spot prices also “unravel the economic decisions” ofthose who already have entered long term contracts, “rewardingthose who did not exercise their choice to hedge.”
Installing a regional cap also is no simple matter, staff said.Under Section 206 of the Federal Power Act, FERC would be requiredto initiate a separate proceeding with a notice and comment period,providing opportunity for all interested parties to express supportor opposition. “This process would be time consuming andcontentious.”
Distancing himself from the Commission staff and ChairmanHebert, Commissioner Massey suggested temporarily capping wholesaleprices at variable operating costs plus a reasonable profit of $25per MWh would be a smart solution. He said FERC should take under”serious consideration wholesale price relief.”
Massey called the situation a “tragedy” and said FERC needs totake a “more aggressive role.” A “hands off” approach would be”unlawful and politically unacceptable.” The region needs moregeneration and transmission and greater conservation, he said.
Fundamental Factors Converge
Soaring power prices have come about for a large number ofreasons, staff concluded in its report on Northwest Power Markets.There has been an inadequate amount of power generation added inboth the Pacific Northwest and California throughout the 1990s,which was one of major contributing factors to the current powercrisis, staff said. However, a number of fundamental factorsconverged in November and December 2000 to help drive prices torecord levels. They included “extreme cold, high natural gas pricesand low storage levels, and low water, precipitation and streamflow levels,” FERC staff said. “These conditions were made worse byan operating environment with a large number of outages andenvironmental constraints, and the general atmosphere of marketuncertainty surrounding the extreme nature of these fundamentalfactors.”
Although power plant outages were to partially to blame for theshort supply situation and price spikes last fall, a FERC staffinvestigation into California power plant outages found “noevidence suggesting that the audited companies were schedulingmaintenance on incurring outages in an effort to influence prices.Rather, the companies appeared to have taken whatever steps werenecessary to bring the generation facilities back on line as soonas possible by accelerating maintenance and incurring additionalexpenses. Also the outages did not necessarily correlate to themovement of prices on a given day,” staff said.
The investigation involved a review of 60% of the outages,including telephone interviews, three on-site plant inspections andseveral meetings at the Houston headquarters of several wholesalegeneration companies. The investigation discloses that the outagesoccurred at generating plants that were 30 to 40 years old and thatwere operated last year at a much higher rate than in the recentpast. Most of the outages occurred because of “tube leaks andcasing problems, turbine seal leaks and turbine blade wear, valvefailure, pump and pump motor failures,” the staff said in itsreport.
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