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Money, Power and Trade: What You Never Knew About the Western Energy Crisis

Fortnightly Magazine - May 1 2001

at a price up to $750 per megawatt-hour, and could pay up to $750 per megawatt-hour if the energy was called upon. As load migrated to ISO markets, however, unscheduled demand became highly volatile. That only increased the need for reserves, taking energy out of day-ahead markets where the extra supply would have dampened prices. Moreover, the ISO possessed authority to make "out-of-market" purchases from out-of-state suppliers at whatever prices the market would bear. It did not take in-state suppliers long to discover that they could sell higher-priced power to marketers in Oregon and Arizona, which could then be resold to the ISO. (Some have called this practice "megawatt laundering.")

Normally power flows south from the Pacific Northwest to meet summer air conditioning loads. In the summer of 2000, day-ahead schedules indicated huge congestion differentials for moving power north instead of south. This effect was "paper" congestion, however, because the day-ahead contracts were resold to the ISO in real time and the power never actually left the state.

Misallocation. The ISO attempted to clamp down on such market aberrations by lowering the cap paid for reserves. Reserve margins declined as a consequence, signaling successive stage 1 and stage 2 emergencies. These dwindling margins led, in turn, to other unintended impacts.

For example, hydropower capacity remains an excellent reserve facility, because it can generate almost instantly without the ramping-up time of thermal units. Yet hydro generators could not offer reserve capacity to the ISO, because in the event of an emergency, they would be forced to generate even if reservoir levels dictated that the water be held back. As a consequence, bids into the ISO reserve market tended to come from thermal capacity. When that thermal capacity went unused, it took available energy out of the market.

In an effort to make up thermal shortfall and maintain reliability, the Northern California hydroelectric system became significantly overused. During November and December 2000, the ISO complained that some of California's reservoirs were drawn down to the intake valves, providing a vivid picture of sputtering sand and mud. These facilities, however, did more than just provide energy. Their location helps balance load and generation centers in the grid. The lack of balance increased congestion on "Path 15," the major transmission line running between Northern and Southern California, once again reducing available energy.

Regional Disruptions. The chaos in California disrupted normal trade flows throughout the West, causing at least one major transmission facility to become underused, thus undercutting regional trade.

When the new California power market opened in April 1998, its two principal load zones were Northern California and Southern California. Path 15, which connected the two zones, was seldom congested. And what little congestion occurred was usually restricted to a few off-peak periods, in a south-to-north direction. (The northerly flow allowed hydro reservoirs in the north to be refilled during off-peak periods by thermal units in the south). However, Path 15 was not the only way to move power from Southern to Northern California. Oregon is interconnected to California through the high-volume DC line that runs