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Très Riches Heures

 

How to price energy during a stage 3 alert?

You know the painting. Les Très Riches Heures du Duc de Berry. You probably saw it first in Janson's "History of Art", in a college survey course.

It's a flat landscape, rather devoid of perspective. Peasants toil in a field before a huge ivory-tower castle. It's one of a series of 12 medieval calendar scenes, representing the liturgical book of hours, believed to have been painted by the Limbourg brothers Paul, Hermann, and Jean, sometime between 1412 and 1416, on commission for Jean, Duc de Berry, a noted art lover in 15th century France.

Now jump forward a six centuries, to the very generous hours of California's power market. Lacking much evidence of wrongful conduct by power producers, but generally feeling ripped off, when should regulators limit power prices?

(A) All the time, since markets have gone haywire pretty much around the clock, or

(B) Only in certain hours, when prices become exceedingly , and when the California Independent System Operator (ISO) finds it necessary to declare a "stage 3 alert," which it does whenever the available power supplies drop so low as to exceed customer demand by a bare margin of only 1.5 percent?

"AS THE BEER COMMERCIAL SAYS, 'IT DOESN'T GET ANY BETTER THAN THIS.'" So warns Sempra Energy's corporate attorney Don Garber, who asks why the regulators would limit price oversight to certain hours, covering only a "minuscule amount" of transactions serving California.

"All these transactions—pooled or bilateral, real-time or short—forward, emergency or not-are contaminated to some extent," he adds. "The message to suppliers is unmistakable: you may charge whatever the market will bear, as long as the ISO has reason to believe that available power supplies at any price will exceed expected demand by at least 1.5 percent."

The California Oversight Board agrees. It wants the regulators to apply price controls "more broadly to all hours."

In essence, the staff of the Federal Energy Regulatory Commission (FERC) proposed a one-year plan to mitigate high power prices in California. But, here's the catch. Regulators would monitor prices only in the real-time market (the FERC hopes to trim that share to a bare 5 percent), and then only for transactions that occur when the ISO declares a stage 3 alert. The plan would cover power producers who sign a participating generator's agreement (PGA) with the ISO.

Those PGA producers would then file a confidential standing order with the ISO showing the variable operating costs (cost of fuel and emissions permits) for each generating plant. That would allow regulators to limit the prices that generators receive to the marginal cost of the highest-priced generating unit called to sell in real time during emergencies.

The plan would do more, of course. It would allow the ISO to override a generator's decision to pull a unit out of service for repairs. Morgan Stanley opposes that rule, arguing that the ISO "should bear some of the risk." But overall, that's the nut of it. The FERC and the 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 planning.

"An emergency does not exist," says Muller, "if power is available and the only issue is price. The refusal on the part of the buyer to buy available power at a certain price must not be construed as an emergency."

Project Neptune: All Wet? Demise was exaggerated, say developers.

This just in from E. John Tomkins, professional engineer and director of Atlantic Energy Partners LLC, developer of Project Neptune, the plan to build an undersea electric transmission line (high-voltage, direct current) along the Atlantic Coast from the Canadian maritime provinces to landfalls in Boston, Connecticut, New York City, and New Jersey, as described in this column two months ago. (). Tompkins buzzed me recently to say that his project is still very much alive—even though the New England Independent System Operator may have suggested otherwise in its queue of proposed grid interconnections. "We have received many calls," says Tompkins, "about the problem that the queue listing for ISO New England indicates 'withdrawn' for our previous filing, which is misleading. Our revised filings are posted as of March 19, 2001," he adds. "We have told ISO-NE that we believe our previous filing should indicate 'refiled' - not 'withdrawn.'" —B.W.R.

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