Deal with state costs consumers millions
The San Diego Union Tribune
Southern California’s utility customers, who already pay among the highest rates in the nation for electricity, are now paying companies millions of dollars a month for power they never deliver.
The payments arise from a program created by the state electricity grid’s manager to deal with congestion on a key power line leading into San Diego.
As power shipments increase beyond the line’s capacity, the grid manager – California’s Independent System Operator – triggers a curious auction system.
The ISO asks companies planning to transmit electricity to bid for the
right not to do so. When a bid is accepted, the ISO takes the money and then
must find another source of power for that company’s customers.
Because the bids for nonproduction have fallen short of what the ISO has to pay for replacement power, regional utility customers are paying millions more for power and companies are profiting as a result, according to a watchdog committee within the ISO.
The committee says the system gives companies an incentive to clog power lines and then reap profits for clearing them.
The power companies deny that they’ve manipulated the market or earned profits from congestion. They say the fundamental problem is the state’s cumbersome regulatory process for siting and upgrading electric transmission lines to overcome congestion.
The costs of relieving congestion grew dramatically last year, when electricity from newly built Sempra Energy and InterGen plants in Mexicali helped tip the power line in question, the Southwest Power Link, into chronic overload.
Sempra, the parent company of San Diego Gas & Electric, says that, at best, it breaks even on the payments it receives through the program. The company says there are occasions when it even loses money, though it receives payments for electricity it never generates, procures or delivers.
InterGen declines to discuss how it fares on the congestion management program, but says it tries only to break even.
Both companies deny that they intentionally create congestion for profit.
Consumer advocates doubt those assertions and point to the bottom line: Southern California utility consumers have paid at least $20 million since August as a result of the congestion the ISO attributes largely to the Mexicali generators.
The consumer advocates say these costs demonstrate that California’s partly deregulated electricity market is susceptible to the financial manipulation that took place during the power crisis of 2000 and 2001, and that state regulators continue to fail the public.
During the crisis – which cost California’s electricity customers at least $40 billion – suppliers insisted that problems were caused by simple shortages. But state and federal regulators later concluded there was massive market rigging by generators and traders. The regulators vowed to close loopholes and provide an honest market for electricity.
A recent report by the ISO’s Market Surveillance Committee concluded that power suppliers are profiting from creating and then resolving power line congestion, a scenario similar to abuses discovered during the electricity crisis.
The committee said the Mexicali congestion problem is worsened by California ‘s controversial long-term power contracts. These deals allow suppliers to deliver electricity to points of their choosing, not necessarily the locations of greatest customer need. And, the committee said, suppliers frequently choose to deliver power at the ISO’s most congested locations.
The grid manager says that recent changes in its congestion program – such as increasing the minimum bids – should soon begin to reduce costs arising from the power generated in Mexico. The problem has already eased somewhat because InterGen has shut down one of its generating units to install pollution control equipment.
Sempra and InterGen both opened new power plants in Mexicali last summer despite inadequate transmission capacity on the U.S. side of the border.
The companies are quick to point out that there also has been growing electricity traffic on the Southwest Power Link from new power plants in Arizona. But, since the Mexicali plants opened, the ISO has been forced to trigger its congestion program on most days.
Whenever the ISO detects too much electricity scheduled along a power line, it tells generators they will be unable to transmit their planned loads.
In exchange for its payment to the ISO, the generator can reduce production for that day with the assurance that the ISO will make up the difference to the company’s customers.
With the company’s payment in hand, the ISO buys replacement power from a non-congested generator elsewhere on the state grid. These transactions typically take place within one hour of the power’s planned delivery to customers.
The system enables the power companies to fulfill power supply obligations without ever producing electricity. But the ISO’s service to generators comes at a net cost – not to the generators, but to consumers.
In theory, the amount paid by generators to reduce output – it’s called the decremental bid – should equal the ISO’s cost of buying replacement power. That would allow the ISO to break even on the transaction.
But generators along the Southwest Power Link have consistently offered bids well below the cost of replacement energy. The shortfall between what the generators pay to trim their loads and what the ISO pays for replacement power is passed on to consumers.
And those are the costs that have totaled $20 million or more since last summer.
$1.8 MILLION A MONTH
Consider Sempra during the month of December:
Under terms of its long-term power contract with California, Sempra was to be paid about $66 per megawatt hour for electricity delivered that month. When the ISO ordered Sempra to reduce output from Mexicali, the company paid roughly $30 per megawatt hour to shift its customers’ power supply obligations to the ISO and kept the $66.
Using Sempra‘s bid money, the ISO then shopped for replacement power, which cost an average $69 per megawatt hour in December, or $39 more than it got from Sempra. Under its congestion program rules, the ISO billed the additional $39 to SDG&E‘s and Southern California Edison‘s electricity customers.
This means that the electricity the state purchased from Sempra for $66 per megawatt hour ultimately cost those customers $105.
SDG&E officials estimate that the congestion program costs its customers about $1.8 million a month and probably adds 80 cents to a typical residential bill. The company has 1.3 million electricity customers.
Sempra‘s long-term contract has long been a point of contention between the parties. California officials say Sempra has violated the terms of the deal and says its power prices are excessive and its terms inflexible. But the state has failed in its attempts to negotiate or litigate changes to the agreement.
Sempra insists the contract is a good deal for the state. It also says that as a consequence of the agreement, it has built several badly needed new plants to generate electricity, including the one in Mexicali.
The Sempra contract and dozens of others were signed at the height of California’s power crisis, when federal regulators and the energy industry urged the state to lock in long-term deals to halt the soaring cost of electricity.
But experts say the state erred by allowing Sempra to deliver the power wherever the company chooses.
‘COSTS EXCEED VALUE’
Southern California Edison administers the Sempra contract on the state’s behalf. Kevin Cini, manager of energy supply for Edison, says Sempra consistently delivers its electricity to the most congested points along the grid. Sempra owns power plants in Bakersfield, near Las Vegas and in western Arizona, as well as Mexicali.
Cini said Edison‘s analysis found the agreement obligates the state to pay the company $6.8 billion for electricity that is valued at only $5.2 billion.
“The contract costs exceed the value of the electricity by $1.6 billion,” he said.
Cini added that talks on reducing costs resulting from the deal have not been productive.
“Sempra says the agreement obligates it to make commercially reasonable efforts,” Cini said. “Their interpretation is that anything that increases their costs is not commercially reasonable.”
William Engelbrecht, vice president of energy supply for Sempra Energy Resources, the company’s power producing subsidiary, confirmed that is the company’s interpretation of the contract. He denied that Sempra intentionally chooses to deliver power to congested locations.
“When we schedule, we have no knowledge of congestion,” he said. “The administrator may be correct in hindsight, but we cannot fully anticipate what the level of congestion will be.”
Engelbrecht also said Sempra did no better than break even on its congestion payments and might even lose money because of the costs of adjusting production volumes at power plants as well as general overhead costs.
The Sempra executive said the company had bid the amount it cost to reduce output, and that it had long advocated for changes to the ISO’s bidding system to counter low-bidding abuses by other generators.
InterGen sells its power to the state through Coral Energy, a marketing unit. Like Sempra‘s deal, Coral’s agreement with the state gives the company broad latitude in selecting delivery points for its power.
A company spokesman declined to comment on whether it was profiting from congestion, but said it was “not InterGen’s intention to make money as a result of congestion.”
Both companies insisted they would prefer the congestion problem was fixed.
However, the ISO’s Market Surveillance Committee concluded that there is financial incentive for companies to exploit congestion problems.
The program, the report stated, “allow(s) suppliers in this region to earn significant profits from causing intrazonal congestion through their scheduling behavior and then relieving this intrazonal congestion.”
‘THE CONGESTION GAME’
InterGen criticizes the market surveillance committee for focusing on the power exports from Mexico. The company says generators from Arizona push more electricity through the crowded Southwest transmission line and make even lower payments – or even get money from the ISO – for reducing their output to and transferring their customer delivery obligations to the ISO.
The ISO says the problem along the border was caused by poor transmission planning. Asked why the ISO subsidizes independent generators that encounter congestion problems by buying replacement energy for them at a loss, Jim Detmers, the ISO’s vice president of grid operations, said the rules for dealing with congestion were unclear when new power plants were added along the Southwest Power Link.
“That does need to get resolved,” Detmers said. “And any new generation there needs to have transmission sufficiency, and we need to know who is going to pay. “
The ISO, the nonprofit public benefit corporation whose board is appointed by the governor, believes that the congestion-related costs will be more reasonable in a few years, when it institutes a new system for apportioning transmission costs.
In the interim, the grid manager says it has addressed the problem by raising the minimum payments from generators ordered to trim production, adding more staff to manage congestion problems and improving the scheduling of power distribution. To boot, SDG&E says upgrades at a key substation by year’s end will increase capacity and ease the congestion problem.
Critics of deregulation argue that getting paid for what amounts to nonproduction is an example of what suppliers will do when the electricity market isn’t fully regulated. They are also critical of the ISO and regulators for allowing the situation to continue.
“We must immediately stop the ISO from subsidizing the congestion game,” said Douglas Heller of the Foundation for Taxpayer and Consumer Rights. “It’s not just that you have this deregulated market failing miserably, but, because fear of the power industry is so strong, the grid administrators don’t stand up for consumers.”
“These companies should be investigated to find out who in the corporation conceived of these schemes,” he said. “At the very least, this should destroy the contracts that have allowed these companies to steal billions from the state.”
A spokeswoman for Gov. Arnold Schwarzenegger targeted the contracts as a part of the congestion problem.
“California ratepayers are being overcharged, and the contracts need to be renegotiated,” said Ashley Snee, the Schwarzenegger spokeswoman.
Michael Shames, executive director of the Utility Consumers Action Network, called the congestion costs a “wonderful example of how the gamesmanship continues.”
Shames said questions should be raised as to whether SDG&E did all it could to expedite an upgrade of the power line.
“Their parent company is milking the system, and SDG&E does not have the incentive to be a vigilant advocate on behalf of its customers,” Shames said.
SDG&E says it pressed for upgrades but saw its efforts bog down in the regulatory process. The California Public Utilities Commission is still considering several transmission proposals and says it’s streamlining the process for future projects.
The commission, however, says consideration of further power line-upgrading has been delayed.