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Industry News

Regulatory Tinkering Further Muddles California Power Market

By Ric Teague

LCG, Oct. 30, 2000--The Board of Governors of California's Independent System Operator last week voted 13 to 10 for a new, convoluted system of wholesale electricity rate caps which would vary depending on predictions of the state's electricity load and market prices for natural gas.

Events have proved that a system requiring a crystal ball will not work in California. Regulators never tire of tinkering, however, so we have tried to figure out how it would work.

There exists today an artificial cap of $250 per megawatt-hour in California's wholesale power market. That cap would remain in effect only on those days when soothsayers predict that peak loads will exceed 40,000 megawatts, but that happens only on the hottest days when air-conditioners are running and personal computers are going full blast. It happened 31 times this past summer. On top of that, the forecasts would be made more than a month in advance and the resulting cap would remain in place for an entire calendar month, no matter what the weather did.

The rest of the time, the cap would vary depending on not only the load foreseen by the palm readers but on the average closing price of natural gas futures contracts. Here we have two sets of Cassandras at work -- the fortune tellers at Cal-ISO and the commodity traders at work on the New York Mercantile Exchange.

The futures contracts would be those traded on the exchange for gas at the Henry Hub, a pipeline facility near Erath, La., where a number of interstate and intrastate pipelines interconnect through a header system by Sabine Pipe Line. It is the standard delivery point for the New York Mercantile Exchange natural gas futures contract.

Now, suppose that the Cal-ISO sibyls predicted a load of between 35,000 and 40,000 megawatts and the average Henry Hub closing price per million BTUs of gas for the previous three days was $6.00. In that case, the wholesale price cap for electricity in California would be $165.

However, if the prophets predict a load of between 30,000 and 35,000 megawatts, and the same $6.00 had prevailed on the Henry Hub futures for three days, the price cap would drop to maybe $105. Don't ask us how we figured that out, because we didn't. But it's the only example we have, and it's based in part on a fairy tale. The price of gas at the Henry Hub has never been $6.00. On Friday it was $4.66 per million BTU, after flirting with $5.50 earlier in the month. A year ago it was $3.00.

All of this complex arithmetic will be for naught, anyway. The Federal Energy Regulatory Commission has been invited to all but take over the California power market and is due to arrive on Wednesday. After FERC takes a look at the state's problems, it will likely conclude that there is an imbalance between supply and demand and suggest that new power plants be built.

Getting new power plants built is a problem because the "fast track" runs through a regulatory swamp tended by the California Energy Commission which takes up to three years to listen to all the environmentalists and "not in my backyard" opponents of new generating stations.

Even if FERC somehow thought the Cal-ISO governors were onto something, it would take new software to put it into effect.

The plan was proposed by Michael Florio, a lawyer for The Utility Reform Network, a San Francisco-based utility "watchdog" organization, and even he doesn't think it's here to stay. He called the plan "an interim measure until the ISO implements comprehensive market changes."

One proponent of the proposal said she thought power producers were colluding to drive up the price of electricity in the state. Karen Johanson, chairwoman of the Electric Restructuring Committee for the League of Women Voters, said "From the information we saw, there was no explanation other than market power."

Gregory Blue, senior director of governmental affairs for Dynegy Inc. which owns generation assets in California, thinks federal regulators are going to overturn the plan out of hand. "FERC is going to be dismayed to hear about this vote," he said. "I think FERC is going to be upset at the ISO, and this could influence their ruling next week. FERC may come in and say, 'ISO, your price cap authority is gone.'"

FERC, which regulates the wholesale power market, granted Cal-ISO the authority to set price caps in the first place. That authority is due to expire on November 15.

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