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

Fortnightly Magazine - May 1 2001

from the Celilo Station to Los Angeles, and by AC lines (alternating current) that run from the Oregon border to Northern California. These lines can be used to bypass Line Path 15 and wheel power to Northern California. As the regional power crisis has unfolded, this bypass has seen less and less use, not for technical reasons, but to avoid the risk of default or underpayment. Power can only move on this path by changing title through multiple owners, which of course compounds financial risk. As the credit risk of selling to California's utilities increased, trade in the WSCC dried up, exacerbating the crisis and pushing Northern California into rolling blackouts.

Missed Opportunities. The response of regulators and politicians to the unwinding crisis has been astonishing. The gas and power price increases in May could have been taken as a signal of looming infrastructure problems. Instead, the nearly universal reaction was to accuse suppliers of gaming, withholding supplies, conspiring, and jacking up prices. Obviously new generating units could not be built in a few months, but California could have implemented conservation measures, industry buy-back programs, lifeline rates, or any number of policies aimed at bringing the market back into better balance.

Even if suppliers were responsible for the price spikes, they would have far less leverage following the implementation of conservation programs. Instead, industrial interruptible programs were over-used in 2000 and early January 2001, and suspended altogether as the tariffed limit on disruption time was exceeded and customers reacted to the penalty charges. The PUC had changes finally underway as of early April, but given the time needed for customers to set up response efforts, the turmoil will damage the effectiveness of the interruptible programs for 2001.

Meanwhile, the price spikes experienced in November and December were unexpected. They provoked a political response that led to a financial crisis.

In late fall and early winter it became evident both to SCE and PG&E that they would be unable to continue purchasing high-priced power if the costs could not be passed along to the retail market. Summer peak purchases already had exhausted most liquid funds; borrowing capacity was rapidly reaching its limit at the two companies. In November and December, SCE and PG&E applied for rate increases in excess of 30 percent, the minimum they believed would be necessary to reassure lenders and allow them to continue purchasing power. The PUC turned down the requests and instead granted a temporary rate increase of approximately 7 to 15 percent, depending on customer class. The rate increase was so modest that it unraveled the tenuous finances of SCE and PG&E.

Contract Price Creep. As regulators moved slowly in allowing SCE and PG&E to recover wholesale power costs, other events conspired to ratchet up prices for purchased power, even when secured by contract.

To understand this situation, recall that California's utilities have three sources of supply: (1) their own resources not sold off in the restructuring, (2) long-term purchase contracts previously approved by the PUC, mostly with QFs, and (3) outright purchases from independent power producers