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How to price energy during a stage 3 alert?
Fortnightly Magazine - April 15 2001

ISO would mitigate prices, but only through active oversight-not with passive price caps.

Is it enough? Many consumer rights groups don't think so. They see producer price gouging in all hours-not just in real time, and not just during capacity emergencies. Yet the power producers have gripes, too.

The producers fear becoming captive to the ISO and California politics. The ISO itself has proposed to force PGA producers to dedicate 70 percent of their output to serving California customers through long-term contracts. It would also force PGA producers to sell any residual output (not locked in by contract) in the ISO's real-time market. These two rules give producers cause to complain, citing, among other things:

  • Emissions Liability. Forced bidding and in real-time markets could make plants run for more hours than allowed under emissions permits.
  • Discrimination. Favoring generators who don't sign a PGA, such as rural cooperatives, municipal utilities, federal power marketing agencies, and investor-owned utilities sited outside of California, who escape price mitigation.
  • Impracticality. Cost profiles won't work because conditions change. Intermittent peaking plant operations call for quick-response fuel purchases on volatile spot markets.
  • Grid Constraints. Don't limit prices for power producers in Southern California, if they can't send capacity across an overloaded interface to Northern California where the real emergency lies.

Many say the plan might not prevent underscheduling, as the FERC wants, and probably won't help cut the load share for real-time markets to below 5 percent. They say it might not even curtail "megawatt laundering," whereby producers export power out of state, knowing that the ISO must re-import the same power in real-time during emergencies at higher out-of-market prices.

Above all, however, power producers say that cost-based rates will deny them the "scarcity rents" they need in order to cover fixed costs and produce a return on investment. Here, Dynegy asks the FERC to set a fixed-cost benchmark for gas turbines of $72 per kilowatt-year, as stated in a recent report from the California Energy Commission.

"TIMES OF TRUE SCARCITY-SUCH AS STAGE 3 EMERGENCIES—ARE PRECISELY THE WRONG TIMES TO IMPOSE MITIGATION." That's from Tim Muller, corporate attorney at Williams Energy Marketing and Trading, which turns the question 180 degrees—to a referendum on market abuse by the ISO itself.

According to Williams, the ISO can be just as guilty of market manipulation as the power producers. "The ISO is likely to abuse stage 3 price mitigation authority in order to depress market prices," argues Muller. And, for evidence, he adds, "the commission needs to look no further than the indiscriminate lowering of the ISO's purchase price cap during summer 2000, at the behest of politicians."

In short, Muller and Williams say the ISO should not declare a stage 3 when power is short in California "if reserve margins throughout the West are sufficient." Williams believes the ISO has called emergencies simply for political reasons because California has blocked new plants within state lines. Williams wants the ISO to stick to its knitting: do your job and make the wires hum, but stay out of generation. Stay out of resource