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Frontlines

California pays the bill, but who gets the blame- the feds or the fundamentals?
Fortnightly Magazine - September 1 2000

Frontlines

Prices Hit a Pique

California pays the bill, but who gets the blame- the feds or the fundamentals?

What did they know and when did they know it? That's what California consumers are asking utility regulators and system operators, now that the heat of summer has made a shambles of the state's vision of electricity competition.

Yet the regulators and operators appear divided on just who to blame.

According to state Public Utilities Commission president Loretta Lynch in San Francisco, and Electricity Oversight Board Chairman Michael Kahn in Sacramento, California had lost control over its electric industry, having handed over the reins to federal regulators. But down in Los Angeles, the California Power Exchange was claiming to have put together a mathematical model capable of explaining most price fluctuations within PX markets. But the PX had tested its model only through March, before the summer heat really got cooking and power prices took off to levels politically untenable.

Nevertheless, they all should have seen this coming, and taken some preventive measures. Certainly one could predict chaos in a system designed to take commodity prices in a volatile wholesale market and pass them along directly to retail customers without any leavening.

In a report issued at the end of May, the California Power Exchange noted that average market clearing price for the month had doubled from the same period the year before-from about $23 to more than $47 per megawatt-hour. In fact, the price had been climbing steadily since the start of the year. The numbers were there for all to see.

Earlier this year, in February, March, and April, the average PX clearing prices for each month rose above the 1999 averages for the same months by increments ranging anywhere from from 11 percent to 55 percent. (That's what the PX calls the "unconstrained" price, measured without regard to transmission congestion.) Then came June, when it was too late to change course, and prices quadrupled-$120/MWh on average, versus $23.50 for June 1999. July brought precious little relief-$105/MWh, up over two-and-a-half times the average price the year before.

But volumes appeared rather stable, by contrast. Average monthly power quantity traded in May "increased slightly from 1999," according to the PX. Quantity rose 8.5 percent in June against 1999, but then fell 4.3 percent in July from 1999. That means that something else was forcing prices through the roof. Was it market manipulation?

For now, at least, we have price caps through Nov. 15, for purchases by the state's Independent System Operator in markets for real-time energy and ancillary services, plus a request pending by San Diego Gas & Electric to extend the cap to markets run by the PX. What does that mean for the real world-for Wall Street and the private power producers?

At First Union's Evergreen Utility Fund, senior vice president Doris A. Kelley-Watkins draws an analogy.

"If California were to announce that it would regulate utilities in the old way, I would not be the only one looking to get out. You can't put the yolk back into the

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