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Frontlines

Why power prices may have hit a new plateau, and what it all means.
Fortnightly Magazine - December 2000

[equivalent to $70/MWh at a heat rate of 10,000Btu/kWh] and NO x emissions allowances in the Los Angeles basin running approximately $40-45/lb., these two categories of variable costs alone would total approximately $77-$148/MWh, depending on the efficiency of the generating unit."

Adds Dynegy, "The commission should carefully consider the very real possibility that the rise in prices actually reflects an efficient, market-driven outcome." Such talk has spawned a race among utilities to calculate and present to the FERC a "just and reasonable" power price for a simple-cycle peaking gas turbine, based on typical costs for financing, fuel, and emissions credits, plus a reasonable return on equity.

In fact, it seems that forward markets for next summer already are showing about $140/MWh. They come down to $50-$55/MWh about four to five years out, but California's electric utilities say they won't commit that far in the future because according to state rules, they are immunized against a prudence review for forward purchases from the PX only out so far as March 2002 (i.e., 18 months). Meanwhile, Edison is bleeding money.

"This is a matter of life and death for us," says Fielder. "Our undercollections are $2.5 billion. We added another $100 million last month. We are reducing employment."

And at PG&E, vice president (regulatory relations) Dede Hapner sees no net gain even in hedging against local California prices, since prices are rising all across the West.

"Even if PG&E ... bids $50 per MWh, and submits that bid to the PX as a scheduling coordinator, that bid may go out of state and then come back in. We need to untangle the web," she said, "and put the dollars back where they belong."

"THINK OF YOURSELF AS THE ALAN GREENSPAN OF THE CALIFORNIA MARKET. YOU NEED TO CURB THE IRRATIONAL EXUBERANCE." That came from Diane Jacob, the chairwoman of the San Diego County Board of Supervisors.

"There's no business that wants to come out to San Diego right now," she warned. "We have started studying the feasibility of starting a municipal electric utility."

More threats came from Debra Brown, chairwoman of the state Senate's Energy, Utilities, and Communications Committee.

"If another Prop 9 goes on the ballot again and if the populace sees that the generators are opposing it, then they will vote for it," predicted Brown.

Sen. Peace then raised the ante, suggesting the state could take its $7 billion tax surplus and simply buy up the state's entire electric utility industry.

"Our fear is your fear," warned Peace. "You will see a ballot initiative in 2002 to take the entire ... industry public. ... That would put the majority of generating capacity out West under public ownership [and] outside FERC authority. Where's your RTO plan then?"

And that's hitting where it hurts. You could just see the FERC commissioners stiffen.

In fact, of the 20-30 witnesses who testified before the commission on Nov. 9, not one suggested that grid access or congestion had anything to do with last summer's price spikes in California. In written comments filed Oct. 26, Dynegy explained why