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Price Spike Tsunami: How Market Power Soaked California

Last year saw no shift in fundamentals. Then why was the ISO so willing to be deceived?
Fortnightly Magazine - January 1 2001

ISO to the EHV database. The figure shows two distinct price curves derived from data points, using the regression equations shown on the figure. (Individual data points are omitted here for clarity).

As can be seen from the figure, between May 1 and May 22 an additional offer of 1 mill ($0.001) per kilowatt-hour ($1.00 per megawatt-hour) would have been enough to call forth a 500-MW increase in generation for the ISO-dispatched plants in the ISO database. After May 21, however, the same increase in price brought forward only 200 MW in new generation.

In the jargon of an economist, the supply curve for early May shifted upwards and to the left on May 22. Since this comparison is conducted within a single month, it effectively avoids questions of hydroelectric supply and gas price. The bottom line is that this massive shift has no explanation from market forces.

At our firm we have conducted a number of case studies of dispatch of generating plants operating within and without California during this period. The simplest analysis often is the best: Did these plants run the way we would have expected given prices and costs? We have efficiency and fuel cost estimates from a number of sources. Efficiency data can be taken from the California Energy Commission, the FERC, and the Environmental Protection Agency.

We calculated the cost of generation by taking the heat rate (the number of units of natural gas required to generate a kilowatt-hour of electricity) and added two mills for variable O&M. We conducted a variety of sensitivity studies to see if the results would change markedly if we added additional charges for losses and transmission, but given the very high prices experienced this summer, these charges were not significant. Natural gas prices are taken from the EIA's Electric Power Monthly publication.

The detailed analysis indicates a broad pattern of undergeneration at California thermal units. Our approach was to assume full generation when it would have been profitable for the plant to generate. During periods when the plant would not have been profitable, we have assumed zero generation.

As a general rule, the California plants in our case studies have been characterized by surprisingly low levels of generation given the prices this summer. For example, the Pittsburg unit from the San Francisco area indicates a generation level only 46.7 percent of the level of generation that we would expected for June 2000, based on data from the Environmental Protection Agency and the WSCC EHV database. Although the ISO generally has been quiet on the issues raised by this research, the ISO did criticize the EPA data as being of very poor quality.

The economic losses borne by these generators over prolonged periods of undergeneration are enormous, so enormous that the generators could have doubled their profits if they had followed traditional price signals. We do not have detailed information on possible forced outages or environmental constraints on most plants, although when the California Public Utilities Commission conducted its review of utility generating plants set to be sold, it did not