You've heard talk lately about the convergence of electricity and natural gas. That idea has grown as commodity markets have matured for gas and emerged for bulk power.
THE FEDERAL ENERGY REGULATORY COMMISSION met Aug. 14 in Chicago to address complaints filed concerning late-June electric price spikes in the Midwest, which saw prices climb a high as $7,000 per megawatt-hour.
Back in July, Commissioner James Hoecker had noted, "We need to know what led to the price spikes, and what ¼ this tells us about emergency market behaviors." He added: "We foresee a growing role for this commission in monitoring market performance."
But while the FERC debated, a shakeout loomed.
Debate at the Meeting
Charles E. Bayless, president, chairman and CEO of Illinova, parent company of Illinois Power Co., urged daily price caps on power trading to prevent huge price spikes during emergencies, similar to trading limits on commodity prices at the Chicago Board of Trade or circuit breakers used by the New York Stock Exchange.
Paul McCoy, senior vice president at Commonwealth Edison Co., disagreed. "I urge the commissioners to consider any corrective actions carefully. [W]e are dealing with a developing market, with some participants not properly hedging their portfolios.
"Let market participants deal with the credit risk," he added. "I would, however, recommend that those selling to a party that has defaulted be allowed to terminate new deliveries of electricity following a default, and not have to wait 60 days after making a filing with the commission."
Steve Bergstrom, senior vice president of Dynegy Inc. and president and COO of Dynegy Marketing and Trade, but appearing on behalf of the Electric Power Supply Association, said his company stood ready with local partner Nicor to build merchant plants in the Midwest. He also urged more creative ideas: "Dynegy had an industrial customer that wanted to shut down its plant to sell power it had purchased back into the market. Incredibly, the utility denied it the right to do so. [That's] a huge, largely untapped source of relief from tight situations."
But Bergstrom added perspective: "According to the data ¼ the high prices you heard about represented less than 1 percent of the power traded during that 2-day period."
Contrast that market with California. In July, at the summer meeting of the National Association of Regulatory Utility Commissioners, California Power Exchange CEO George Sladoje had cited the Midwest price spikes as confirming the value of the PX in cutting risk. "The default of an option trader not only caused a chain reaction increasing Midwest prices, but also impacted electricity prices in western bilateral markets," Sladoje said.
While buyers scrambled with $100 MWh energy in western bilateral markets, the PX on-peak index price held steady at $26 MWh, he said, adding that a single marketer cannot easily influence the PX's day-ahead market. "When you trade on the PX, you are assured that all participants are held financially accountable for their trading commitments."
Fallout in the Market
LG&E Energy, a top-ten power marketer last year, announced on July 28 that it was closing its energy trading business and would lose $225-million in the