Fortnightly Magazine - July 15 1998

THE LAST FEW TIMES I'VE HIT THE ROAD FOR A INDUSTRY conference or speaking engagement, someone invariably has come up to tell me how my picture on this page seems to be getting younger. OK, I confess. Like many other columnists, I've probably carried on too long with the same old photo.

But before we let go of that thought, wasn't it clever how, at the annual meeting of the MidAmerica Regulatory Conference in Kansas City, June 21-24, former NRECA attorney Susan Kelley found a way to connect male aging with electric utility stranded costs in her delightful talk, "Securitization and Viagra: What's the Link?"

Leave it to Kelly, the former senior regulatory counsel for the National Rural Electric Cooperative Association, who lately jumped to the private sector at the law firm of Miller, Balis and O'Neil, P.C., for the genius to recognize that we're all slowly losing interest in stranded costs. But she had the remedy:

"Securitization," Kelly explained, "like Viagra, can be a win-win prescription for some utility/ratepayer couples." But take care, she said, "Securitization, like the drug, should be used sparingly -- only for those patients who fit the profile."

Price Gouging?

Where were you on the night of Wednesday, June 24, at say, 8:45 p.m.?

According to Brant Eldridge, executive manager of the East Central Area Reliability Coordination Agreement, that was the moment when a tornado knocked out the three major 345-kilovolt electric transmission lines that serve the Davis-Besse nuclear plant in Ohio (one line had 11 towers on the ground), throwing bulk power markets into chaos in the Midwest, with prices reaching for the sky.

The day after, at his annual summer press luncheon in Washington, D.C., CMS Energy CEO William McCormick opened his talk with the news that ECAR power had jumped overnight to $4,000 per megawatt-hour. On Friday, Cinergy, Western Resources, Dynegy (formerly Natural Gas Clearinghouse) and NP Energy filed a petition describing the events and asking the Federal Energy Regulatory Commission to convene an emergency conference to examine the matter: "Many thousands of megawatts of generating capacity (possibly up to 15 percent of capacity in ECAR alone) were out of service in either forced or scheduled outages. Transmission constraints may also have impacted commodity price and availability.

"As prices increased, several market participants defaulted on their commitments. Others were exposed to paying liquidated damages in lieu of providing physical delivery." (FERC Docket No. EL98-53, filed Jun 26, 1998.)

By Tuesday, June 30, Illinois Power had joined the fray, upping the ante. Not only did it move to intervene to support the Cinergy petition, it also asked the FERC to issue an interim order imposing a cap of $200 per MWh on wholesale power sold during system emergencies.

In its motion, Illlnois Power said it "was forced to pay" as much as $4,000 per MWh, but that seller using their market-based rate schedules reportedly were demanding prices as high as $10,000. "Desperate buyers needing to serve firm retail load reportedly paid up to $7,500 per MWh," said the company in its motion.

In fact, Illinois Power went so far as to lay blame with the FERC for approving market-based pricing for bulk power: "The Commission found that the sellers lacked market power ... This finding, however, did not take into account ... a system emergency, in which the franshised utility -- with a legal obligation to serve firm retail load -- has deficient generation within its control area to meet that load. In this circumstance sellers plainly have market power, and as we have seen last week, will price gouge." (Motion of Ilinois Power Co. to Intervene, Docket EL98-53, June 30, 1998.)

Rumor and Hearsay

When asked to comment on allegations of price gouging, Director John Anderson, of the Electricity Consumers Resource Council, replied, "That's typical when there is no retail competition."

"It's amazing to me," said Anderson, "that we're having brownouts this time of year. It's not as if utilities didn't know it was going to get hot in June and July. This clearly demonstrates the need for federal legislation and the establishment of independent system operators."

Actually, from what I hear from utilities and from officials at the reliability councils, the utilities have not had to resort to rolling blackouts, whether in Ohio, ECAR or the eastern U.S.

Steve Brash, spokesman for Cinergy: "We did not conduct any voltage reductions. We've gotten very good cooperation from our customers on our requests for voluntary conservation."

"And even though we filed the petition, we're not specifically criticizing anything at this point. We felt that with all the conjecture, rumor and hearsay that's out there, it would be better to launch a fact finding."

Why did Dynegy, a prominent power marketer, join the Cinergy petition? It seems that Dynegy wants in to keep the utilities honest, to make sure they don't sabotage competition, according to Dynegy spokesperson Maripat Sexton.

"We believe that an examination of the facts will reveal that the runup in prices was caused not by deregulation, or by retail wheeling, or by customer choice programs, but instead by the lack of deregulation, transition access and customer choice."

Julie Simon, policy director for the Electric Power Supply Association, who spoke with me on July 2, voiced concern over price controls.

"Price caps are really problematic," Simon declared. "They distort the market. Nobody wants to see wild swings, but ... the market worked. Within two days we had prices returning back down.

"Nevertheless, part of the problem is that the current regime sends very mixed signals. We have members that would love to build power plants, but there are regulatory structures in place, particular in the Midwest, that don't permit that at this point."

By late Thursday afternoon, July 2, FirstEnergy had restored two of the downed lines and Davis-Besse was back up to 15-percent power. At ECAR, Brant Eldridge could find no reason to open a special investigation. He saw the matter as a shortage of generating capacity, caused by a number of outages (whether forced or unforced) at units at plants such as Gavin, Beaver Valley and Zimmer. When I spoke with him on July 2, he could not confirm any rumors of unwarranted denial of transmission access. But then again, ECAR doesn't operate any control areas. Grid operation is run by ECAR member companies.

"I'm not aware of any particular problems with the transmission system last week. All of our member companies were taking the necessary steps. But they were getting well down the list of emergency procedures.

Simon added, however, that EPSA was still digesting the events of the week of June 22, and would not rule out the need for the FERC to take some narrow "pro-market" steps to guarantee transmission access.

Said Simon, "We are not suggesting that the FERC simply close its eyes to real problems." F


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