Western Markets: An Investor's Minefield

 

In the Jan. 15, 2003, edition of , Ben Richardson, senior consultant at Platts Research & Consulting, described efforts under way to improve transmission capability between systems in the Western Electricity Coordinating Council (WECC). These efforts aim to improve power exchange and to increase reliability. Along with greater coordination of transmission operation, these outcomes would foster a better investment climate for new generation in the West. However, even if all economically sensible investments in transmission occur, the West is likely to be far short of functional competition for wholesale and retail supply. Many barriers exist.

State control of California's generation. In California, more than 16 percent of supply is controlled by the state in the form of contracts for output administered by the California Department of Water Resources (CDWR). CDWR's efforts to renegotiate its over-priced agreements, combined with California's fitful efforts to recreate a wholesale power market, are likely to stifle investment for the next several years. Ultimately, CDWR intends to assign these contracts back to California's utilities.

Artificially low price cap. Tight reserves in California triggered price caps of $91/MWh throughout the WECC in 2002. Efforts are under way to raise these caps to $250/MWh, which would still be 75 percent below caps set by ISOs in the Northeast United States.

Highly variable hydroelectric flow. Finally, uncertainty over annual levels of hydroelectric generation creates large swings in the market that deter merchant investments. Platts analyzed monthly hydroelectric generation in the West from 1995-2001. This data indicates that in peak months the difference in generation available from the lowest to the highest years during this time represents a swing of nearly 14,000 MW of baseload hydro capacity. Private developers are justifiably reluctant to invest in a market that may (or may not) include the equivalent of 14 nuclear power plants in any given year competing for load, much of that generation under the control of the Bonneville Power Administration (BPA) or the Western Area Power Administration (WAPA).

In fact, state and federal control of generation is a dominant feature of Western markets. Between BPA, WAPA, and contracts managed by the CDWR, government agencies control approximately 30 percent of the West's generating capacity and transmission mileage.

Participation of all of these agencies in deregulation, either at the federal or state level, is purely voluntary. With so much of the West's asset base up in the air, private developers are likely to view new investment as a risky proposition. It would seem that less federal and state control of generation might be a precursor to meaningful competition.

Government divestiture of generation and transmission is likely too fraught with complications to be considered anything other than a long-term measure. Near-term solutions likely will require an acknowledgement that only an increment of the West's load can be served competitively. Just as California's supply is backed up by firm contracts, it probably would be useful to back up hydroelectric supply with firm contracts, and with thermal resources to cover years when hydro generation falters. This would tend to stabilize Western markets