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News Analysis

Industry experts debate whether so-called "price mitigation measures" miraculously solved the California crisis.
Fortnightly Magazine - January 15 2002

News Analysis


Industry experts debate whether so-called "price mitigation measures" miraculously solved the California crisis.

Wholesale electricity prices are a darn sight lower in California these days than they were last May, before the Federal Energy Regulatory Commission (FERC) implemented price caps in May and expanded them in June. But, there is widespread disagreement over whether the caps were the cause, or merely coincidental with other downward pressures, such as moderate weather and generally increased supply. Get the answer right, and you have the long-term fix for California. Get it wrong, and California will likely see high wholesale prices again in 2005-if not before. And, FERC has until September 2002 to decide.

In the weeks before FERC implemented what it calls price mitigation measures-what most others call price caps-dire warnings were issued by generators that the caps would cause yet more blackouts in beleaguered California. On April 23, the Western Power Trading Forum predicted that price caps "will cause more blackouts in the West, chase away much-needed new generation, and jack up wholesale power costs." After FERC applied caps to California on May 29, but before applying them to the entire western region, Reliant Energy intoned that "[t]he current price caps, which send inaccurate market signals, are actually decreasing supply and increasing demand thus worsening an already dire situation."

In California, the average price per megawatt hour for May was $275; and for June, $104. The real-time average decreased another 40 percent in July, dropping to $63; in August, the slide continued, with the average price at $46. September and October wholesale prices dipped slightly, to $42. California has not suffered a single blackout since the caps were implemented. Perhaps even more striking is the fact that average megawatts offline dropped from 14,911 in April, to 5,044 in July. Something has indeed changed a market that saw frequent three- and four-figure megawatt hour prices and rolling blackouts earlier in 2001.

Whether that something is price caps, or other factors altogether, depends on whom you ask.

Market Magic Sends Prices Down

"It is absolutely not true that the caps caused [wholesale] prices to drop" in the California market, says Gary Ackerman, executive director of the Western Power Trading Forum, a group of 35 energy buyers and sellers. Prices were already coming down of their own volition before the caps, he maintains. At the beginning of May, megawatt hour prices were $300 to $400, and by Memorial Day, were down around $100 to $120. He terms the notion that the caps caused downward price pressure "laughable. It's simply not true."

Ackerman firmly believes that the caps cause deviations in the market, and distort the allocation of power supply. He points to a 45-minute, 100-megawatt outage in Las Vegas last July as evidence that price caps do indeed cause market inefficiencies. That outage was directly related to the cap, he says, because prices were then at or above the capped price.

What has saved California thus far is the weather, according to Ackerman. Regulators are "banking on the fact that weather won't be extreme-which