Why power prices may have hit a new plateau, and what it all means.
The gloves didn't really come off until just after lunch, when Chairman James Hoecker returned at about 1:30 p.m. to take his center seat on the bench at the Federal Energy Regulatory Commission, to open the afternoon session at the FERC's umpteenth (and not last) hearing on last summer's troubles in California's electricity markets.
First Hoecker asked for quiet. The lunch break had been way too short, leaving the audience edgy. Hoecker had let the morning session drag on nearly a full hour past its schedule, as he often does.
Then the chairman fired up those newfangled and enormously expensive full-color flat-screen monitors placed strategically on either side of the hearing room, that give the FERC's hearing room a certain high-tech feel. Time to hear from California Gov. Gray Davis, who had chosen to mail in his testimony by videotape, rather than fly to Washington and explain in person why the feds owe it to his state to fix those skyrocketing prices.
"You are asking us to knuckle under for the next 10 years or so," Davis warned, in a calm but convincing baritone. "You agree that the market is dysfunctional.
You agree that prices are not just and reasonable. But you refuse to do anything about it. Apart from that, you are a fine group of people."
At that point the entire room let loose with a laugh. All, that is, save onethat being the commissioner most likely to take over as FERC chairman under a new administration led by Texas Gov. Bush. I thought it odd. But California state Sen. Steve Peace, next up on the witness stand, had seen it too.
"I note that [Commissioner Curt] Hébert didn't laugh at the governor's joke," said Peace as he opened up.
"But that's OK," he continued, "because he [Gov. Gray] didn't mean to include the commissioner in his comment."
And with that, Sen. Peace (a prime architect of California's power industry redesign) had opened the flood gates to a full afternoon of confrontation from state politicians, utilities, and especially the new independent power plant owners. This fight has caught Hoecker and his FERC entirely off guard. It promises to spiral way out of control.
"ARE WE IN A DIFFERENT PRICE PLATEAU TODAY THAN WHERE WE WERE A YEAR OF TWO AGO?" In asking that question, California Power Exchange CEO George Sladoje suggests that "something happened in May 2000," and that prices "haven't been the same since."
From Southern California Edison, senior vice president John Fielder (regulatory policy and affairs) questioned why wholesale power prices should remain so high as they have on into autumn, especially during off-peak periods.
"There was no reason why the price yesterday (Nov. 8) at 8 p.m. was $147/MWh [14.7 cents per kWh]. That is just unconscionable."
Nevertheless, Dynegy believes that the industry must learn to accept prices like that as normal.
"Short-run marginal costs in California often exceed $100/MWh. With delivered gas costs running at approximately $7/MMBtu [equivalent to $70/MWh at a heat rate of 10,000Btu/kWh] and NOx emissions allowances in the Los Angeles basin running approximately $40-45/lb., these two categories of variable costs alone would total approximately $77-$148/MWh, depending on the efficiency of the generating unit."
Adds Dynegy, "The commission should carefully consider the very real possibility that the rise in prices actually reflects an efficient, market-driven outcome." Such talk has spawned a race among utilities to calculate and present to the FERC a "just and reasonable" power price for a simple-cycle peaking gas turbine, based on typical costs for financing, fuel, and emissions credits, plus a reasonable return on equity.
In fact, it seems that forward markets for next summer already are showing about $140/MWh. They come down to $50-$55/MWh about four to five years out, but California's electric utilities say they won't commit that far in the future because according to state rules, they are immunized against a prudence review for forward purchases from the PX only out so far as March 2002 (i.e., 18 months). Meanwhile, Edison is bleeding money.
"This is a matter of life and death for us," says Fielder. "Our undercollections are $2.5 billion. We added another $100 million last month. We are reducing employment."
And at PG&E, vice president (regulatory relations) Dede Hapner sees no net gain even in hedging against local California prices, since prices are rising all across the West.
"Even if PG&E ... bids $50 per MWh, and submits that bid to the PX as a scheduling coordinator, that bid may go out of state and then come back in. We need to untangle the web," she said, "and put the dollars back where they belong."
"THINK OF YOURSELF AS THE ALAN GREENSPAN OF THE CALIFORNIA MARKET. YOU NEED TO CURB THE IRRATIONAL EXUBERANCE." That came from Diane Jacob, the chairwoman of the San Diego County Board of Supervisors.
"There's no business that wants to come out to San Diego right now," she warned. "We have started studying the feasibility of starting a municipal electric utility."
More threats came from Debra Brown, chairwoman of the state Senate's Energy, Utilities, and Communications Committee.
"If another Prop 9 goes on the ballot again and if the populace sees that the generators are opposing it, then they will vote for it," predicted Brown.
Sen. Peace then raised the ante, suggesting the state could take its $7 billion tax surplus and simply buy up the state's entire electric utility industry.
"Our fear is your fear," warned Peace. "You will see a ballot initiative in 2002 to take the entire ... industry public. ... That would put the majority of generating capacity out West under public ownership [and] outside FERC authority. Where's your RTO plan then?"
And that's hitting where it hurts. You could just see the FERC commissioners stiffen.
In fact, of the 20-30 witnesses who testified before the commission on Nov. 9, not one suggested that grid access or congestion had anything to do with last summer's price spikes in California. In written comments filed Oct. 26, Dynegy explained why transmission markets played no meaningful role, despite arguments (convincing, I think) that the state should move to nodal-based, locational marginal pricing.
"During the past 12 months total congestion costs (only a fraction of which is being uplifted) were just $211 million in a $26 billion market (about eight-tenths of 1 percent). Even if the current zonal structure needs work, price signals sent by LMP would have done nothing to hide the underlying problem with supply-demand imbalance."
So far federal and state regulators have bet everything on transmission accessthat with enough regional transmission organizations to ensure a smooth flowing grid without discrimination by price or access, that electricity competition will flourish. But now comes the call to cap wholesale power prices, which would put FERC in the business of setting a rate base for every single power plant.
Fifty years ago we tried to do the same thing for natural gas, when the Supreme Court's Phillips decision sent the Federal Power Commission (the FERC's ancestor) on a wild goose chase to regulate natural gas prices at the wellhead by production cost. All that did is nearly kill off the natural gas industry for some 30 years.
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