Although there are still proposals crowding the queue for newnatural gas-fired merchant power plants in California, the statehas lost a lot of its luster because of time-consuming sitingapprovals, environmental set-asides and a flawed pricing systemthrough the state power exchange (PX), according to a panel ofregulators and power plant developers.

One consumer advocate warned about a set of “perverseincentives” being established by some of the operating rulesestablished at the ISO and PX. As a result, instead of market-basedincentives and guidance, Eric Woychik argues that California islapsing into a potential morass of “market barriers and centralplanning” akin to what he has observed in working with clients inthe former Soviet Union republics in Eastern Europe.

Woychik, a consultant and member of the ISO board of directors,said problems are most pronounced in the way local congestionproblems and pricing are handled in the transmission sector. Whatare lacking are market-based solutions.

One offshoot of the large number of projects and lengthyprocessing is that aggressive plant developers are beginning tointervene in the cases of their competitors to try to slow down orkill those other projects.

“In the case of one competitor, they’re beginning to openly tryto kill another project,” said Bob Therkelson, deputy director ofthe California Energy Commission. From his state agencyperspective, Therkelson said electric restructuring has had a muchgreater impact on new generation than anyone anticipated.

Therkelson said he is sympathetic to the concerns of the plantdevelopers, but the energy commission nevertheless must assure,among other things, that the general public maintains input in thesiting process. Houston-based Reliant’s vice president John Stoutsaid “If you add everything up, California right now doesn’tjustify spending a lot of capital expenditures in new generation.Like our competitors we have a certain number of proposed plants inthe queue, but when I start prioritizing where in the U.S. is thebest place to put those plants, it does not come down toCalifornia. The prices are not enough to sustain a lot of newgeneration right now.”

He noted that in the state, under the California independentsystem operator (ISO) and PX, “there are a whole lot of generationunits that because of the shape of the load — not because of theeconomics of the power plant — only have a few hours all yearlong to recover a whole twelve months of fixed costs, and the onlyway they can do that is by bidding above marginal costs. For thoseunits, their bids can average $1,000/MWh.”

Stout attributes the problem to California officials adhering tothe belief that generators should not be bidding at prices above orbelow their marginal costs, based on the reports generated by theISO and PX separate market oversight committees. He cited theexample of the PX market monitoring committee’s development of a”bid-market indices” to calculate how much each of the merchantgenerators were bidding, on average, above what they determinedwere their marginal costs.

“They characterized this as some sort of evil behavior on thepart of new generation owners,” Stout told the industry audience atthe two-day conference, “California Energy Restructuring: Survivingthe Transition,” sponsored by Law Seminars International. He notedthat the committee was not saying that the generators’ necessarily”tried to do this,” but that they had been generally successful in”actually getting paid more than our margin cost was something thatis bad for the market.”

When the generators all bid above their marginal costs, Stoutsaid, regulators contend that the market is “broke,” but he arguesthat it is only a logical response to the “perverse” way the markethas been set up in California. “[Regulators] refer to generators’bidding above market costs as ‘withholding capacity,’ and that hasa very negative connotation,” he said.

The true test for deregulation in California is not lower pricesor more competitors, Stout noted; it is the healthy development ofnew generation. Absent that, “deregulation will absolutely fall onits face,” he said.

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