Suppliers said to have held back; industry blames ISO

The San Diego Union-Tribune

The first emergency tests of new electricity price controls have generated accusations that suppliers were withholding power and questions that the caps might need to be revised or scrapped.

And in a case of turnabout, a power industry spokesman yesterday said the Independent System Operator, which manages the state’s electricity grid, might be using the federal price caps to manipulate the electricity market. This time, however, the charge is that the ISO is gaming to push prices lower.

At any rate, California survived its second consecutive day of power emergencies without blackouts under price caps recently imposed by federal regulators, but not without some bumps along the way.

The main culprit was hot weather that baked Western states for two days, forcing the ISO to issue Stage 1 and then Stage 2 alerts. Yesterday, the ISO warned that rolling blackouts might hit in the afternoon.

But as has happened often this year, the ISO bought power in the last minutes to avoid outages. The grid operator also credited conservation efforts with shaving from 2,000 to 4,000 megawatts of consumption. A megawatt can power about 750 homes.

“It was a lot hotter than expected and a lot more humid,” said Kristina Werst, spokeswoman for the ISO.

Today, state officials expect to avoid any blackouts because of the holiday, which tends to decrease electricity demand, Werst said.

The price controls ordered last month by the Federal Energy Regulatory Commission set up formulas for maximum prices during emergency and nonemergency periods. The FERC said the complex system was intended to balance the need for lower costs with its desire to promote a power market.

But questions are growing about the effectiveness of the FERC price caps.

A Department of Water Resources spokesman, which buys power for the state, said generators withheld between 660 and 1,500 megawatts of electricity during a critical period earlier this week because of the price caps. That would be enough to cut electricity reserves from 7 percent to 5 percent and bump a Stage 1 alert to a Stage 2.

Sempra Energy Trading, a marketing unit of San Diego Gas & Electric Co.’s parent corporation, admitted that it ceased selling power to the state for what could have been a critical 30 minutes Monday.

A spokesman for the trading company said it halted sales for the half-hour because it was unsure about where the ISO would set maximum prices during the first power emergency under the new caps.

When power emergencies are called under the FERC plan, a new price cap is set based on the cost of operating the least efficient, most costly electric generating plant. Because the identity of that plant is unknown beforehand, the selling price is set retrospectively by the ISO.

“It was unclear to the traders what the proxy price would be,” said Doug Kline, a Sempra spokesman, who emphasized that the company’s trading unit resells power generated by other companies. “So it was unclear whether the ISO would come back later and say, ‘You purchased power at $70 per megawatt-hour but we’re only going to pay you $60.’ ”

For its part, the ISO said the impact of price controls on electricity supplies during emergencies is still unclear. The controls this week kept emergency prices Monday from a little over $70 per megawatt-hour to a high of about $90. FERC’s nonemergency price cap has been about $92 per megawatt-hour.

Earlier this year, the average price per megawatt-hour was nearly $300. Before the power crisis hit last year, the price was about $30.

The ISO said several factors other than the price controls might have contributed to tight supplies this week, including plant shutdowns in other states and the regional heat wave.

But a spokeswoman for Nevada Power said the utility believed the price caps, or confusion over their implementation, had contributed to a power shortfall that led to blackouts Monday. The utility fell about 100 megawatts short of its need as temperatures in some of its service areas hit 122 degrees.

“Power is tight in the region,” said Sonya Heagen of Nevada Power. “What tipped it over (for southern Nevada) was several utilities decided to hold back power.”

Gary Ackerman, executive director of the Western Power Trading Forum, an industry group, said the FERC’s price-control plan fails to allow the recovery of electricity transportation costs. That has the effect of keeping electricity in the region in which it is generated, rather than where it might be needed most, he said.

Ackerman said transportation costs, which typically run from $2 to $8 per megawatt-hour, are more significant now that overall prices have settled into a $100 range.

“They didn’t mean as much to the suppliers when they were getting $400 per megawatt-hour,” Ackerman said.

He also said some of his members suspect the ISO made moves during power alerts to artificially keep prices lower.

The FERC pricing regime sets nonemergency prices at 85 percent of the last full hour of a Stage 1 emergency. But this week, the ISO twice went from a Stage 1 to a Stage 2 alert in less than an hour. That kept the nonemergency price cap in place at about $92 per megawatt-hour, set back in May.

“Some traders said the ISO is ‘gaming the market’ to keep the price lower,” Ackerman said. “I have a few traders who think the price should be higher.”

The ISO rejected the charge of manipulation and said it continues to make its emergency declarations based on power supply and demand. The ISO also said it has not identified transportation costs as a problem under the FERC order.

Other energy experts, however, said the FERC system of using the most inefficient power plants to set emergency prices was a mistake.

Frank Wolak, a member of the ISO’s market monitoring unit and a Stanford University economist, said the plan invited energy companies to keep their least efficient plants in operation to ensure the highest prices.

But James Sweeney, also a Stanford professor and energy expert, said he preferred the FERC plan to a rigid market price cap.

Consumer advocate Doug Heller of the Foundation for Taxpayer & Consumer Rights said the FERC plan is too complex and urged a return to a regulated system, which pays generators for their production costs plus a reasonable profit. Gov. Gray Davis supports a similar approach.

Arthur O’Donnell, editor of California Energy Markets, saw much of the maneuvering this week as an industry road test of new price regime.

“I think they were testing the boundaries,” O’Donnell said. “This is the week where we test the bugs in the system.”

STAGE 2

A Stage 2 alert was declared yesterday after power reserves dropped to less than 5 percent of available energy.