Cambridge Energy Research Associates Chairman Daniel Yergin captures in a few words oil's extraordinary past. Might those words one day describe the next 100 years of natural gas development?...
Très Riches Heures
How to price energy during a stage 3 alert?
You know the painting. Les Très Riches Heures du Duc de Berry . You probably saw it first in Janson's "History of Art", in a college survey course.
It's a flat landscape, rather devoid of perspective. Peasants toil in a field before a huge ivory-tower castle. It's one of a series of 12 medieval calendar scenes, representing the liturgical book of hours, believed to have been painted by the Limbourg brothers Paul, Hermann, and Jean, sometime between 1412 and 1416, on commission for Jean, Duc de Berry, a noted art lover in 15th century France.
Now jump forward a six centuries, to the very generous hours of California's power market. Lacking much evidence of wrongful conduct by power producers, but generally feeling ripped off, when should regulators limit power prices?
(A) All the time, since markets have gone haywire pretty much around the clock, or
(B) Only in certain hours, when prices become exceedingly , and when the California Independent System Operator (ISO) finds it necessary to declare a "stage 3 alert," which it does whenever the available power supplies drop so low as to exceed customer demand by a bare margin of only 1.5 percent?
"AS THE BEER COMMERCIAL SAYS, 'IT DOESN'T GET ANY BETTER THAN THIS.' " So warns Sempra Energy's corporate attorney Don Garber, who asks why the regulators would limit price oversight to certain hours, covering only a "minuscule amount" of transactions serving California.
"All these transactionspooled or bilateral, real-time or shortforward, emergency or not-are contaminated to some extent," he adds. "The message to suppliers is unmistakable: you may charge whatever the market will bear, as long as the ISO has reason to believe that available power supplies at any price will exceed expected demand by at least 1.5 percent."
The California Oversight Board agrees. It wants the regulators to apply price controls "more broadly to all hours."
In essence, the staff of the Federal Energy Regulatory Commission (FERC) proposed a one-year plan to mitigate high power prices in California. But, here's the catch. Regulators would monitor prices only in the real-time market (the FERC hopes to trim that share to a bare 5 percent), and then only for transactions that occur when the ISO declares a stage 3 alert. The plan would cover power producers who sign a participating generator's agreement (PGA) with the ISO.
Those PGA producers would then file a confidential standing order with the ISO showing the variable operating costs (cost of fuel and emissions permits) for each generating plant. That would allow regulators to limit the prices that generators receive to the marginal cost of the highest-priced generating unit called to sell in real time during emergencies.
The plan would do more, of course. It would allow the ISO to override a generator's decision to pull a unit out of service for repairs. Morgan Stanley opposes that rule, arguing that the ISO "should bear some of the risk." But overall, that's the nut of it. The FERC and the