Despite the study by the Mid-America Interconnected Network(MAIN) last month indicating that power supplies in the Midwesthave greatly improved over last year, there are some who aren’tquite ready to write off the possibility of a recurrence of pricespikes for the region this summer.

Judah Rose, vice president of wholesale power for ICF KaiserInternational Inc., is one such person, although he admits thesituation has improved somewhat over last summer. “I would say it’slike 50-50 whether we’re going to have very gross spikes there,” hesaid at NGI’s GasMart/Power ’99 in Dallas last week. “It looks likewe may luck out, but it’s still very, very dicey” in the Midwestregion, which saw prices soar to $7,000 per MWh for a brief periodlast summer.

A major factor is “no one knows who’s in charge of reliabilityin the Midwest,” the consulting firm executive said. Rose believesthe federal government needs to intervene to settle the issue onceand for all. “There is nothing more federal than the intersectedpower grid. The federal government needs to set up who’s in chargeof reliability, figure out what the rules are.”

Part of the problem is “market motivations,” according toconsultant Paul Messerschmidt of Energy Security Analysis (ESAI).Spikes occur when a “pure profit maximizer” meets a utility traderwho is handcuffed to an obligation to serve. “The utility trader’sfirst and foremost Rule No. 1 is Obligation to Serve; Rule No. 2 isObligation to Serve and Rule No. 3 is ‘See Rule No. 1.'” When theutility trader needed the power and was quoted the $7,000 MWh price”he sweated for a minute and then said ‘deal done.'” He had nochoice and the profit maximizer knew that. Until you get away fromthe obligation to serve and the 100% cost recovery, the market willcontinue to have what appears to be irrational behavior,Messerschmidt told another GasMart/Power ’99 session.

And as a result of last summer “credit has become a huge issue,”according to Gary Morsches, chief operating officer for SouthernCompany Energy Marketing. Some of those in the market last year”weren’t sophisticated enough to understand the credit risk theywere taking on. Counterparty credit risk is a huge risk. A lot ofpeople put their heads in the sand. They would trade with anybodyand trust the power would show up,” Morsches said. “We’ve seen alot of those weaker counterparties cease to do business. Everyoneis much more focused on credit risk now. It’s becoming a sciencewith a lot of CFOs getting involved.”

“I don’t feel summer ’99 will be as exciting,” Messerschmidtsaid, pointing to much more rigid third-party credit procedures.And “stress testing has gone way beyond last summer. Only thelarge, extremely well-capitalized can participate in this business.They have to have credit ratings to back them up.” He cited aMoody’s report on power marketing and credit risk that set “aminimum size of $50 million to get in the game.”

There is some question as to “whether a truly independent ISOmight have helped relieve some pressures” last summer, the ESAIpower marketing specialist said. Some had questioned whether poweraccess from the PJM region was truly constrained. And finally,”everyone is much more awake. I don’t think people expected June24-25 would be when the excitement was going to happen…maybe Julyor August.”

ESAI is creating some market models including an interregionalelectric market model and models on the interaction betweentemperature and spot prices “to get a better handle on energypricing.” He suggested “those who would have a handle on naturalgas prices should keep an eye on residual oil. The dynamic betweengas and resid is important to watch.” And he cited thebackwardation in the crude oil futures market, which reveals themarket does not believe OPEC is going to hold to its productionlimits. “If they continue to cheat you will see prompt pricesdrop.”

As for the futures market, he suggested hedgers be wary of theCOB and Entergy contracts where 70% of the market is held by fourlarge traders. “You could be stepped on by elephants.”

According to ICF Kaiser’s Rose, some price spikes are to beexpected and shouldn’t alarm the power market. “In a deregulatedgrid that doesn’t have excess capacity, you should have some pricespikes….But you want to avoid having too many price spikes.”

Although peak demand for power is expected to be about 2% higherthan last summer, MAIN believes reliability levels will besignificantly higher than in 1997 and 1998 since all nucleargenerating plants in the region are anticipated to be up andrunning, and about 1,300 MWs of capacity will be added in variouslocations throughout the region. Also it said reliability in theMidwest will be enhanced as a result of transmission systemupgrades and procedures to boost the region’s import capability.

Messerschmidt commended Dynegy. “I think they set a record ingetting a new 500 MW gas-fired combined cycle generator in place”in the Chicago area.

Rose reported “there are some nuclear power plants that are outin the Midwest,” although “on whole the grid looks [in] a littlebit better shape” than last summer. “But there are things that areoccurring also that make me nervous.” For instance, he cited the”absurdly high” growth in the Gross Domestic Product by 4 1/2% lastquarter.

The MAIN study projects a peak demand of 48,157 MWs for thesummer, up from 1998’s regional summer peak of 46,824 MWs. MAIN,which is one of 10 reliability councils under the North AmericanElectric Reliability Council, covers Michigan, Wisconsin, Illinoisand Missouri.

Susan Parker, Ellen Beswick, Dallas

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