Price Spike Tsunami: How Market Power Soaked California

Last year saw no shift in fundamentals. Then why was the ISO so willing to be deceived?
Last year saw no shift in fundamentals. Then why was the ISO so willing to be deceived?
Fortnightly Magazine - January 1 2001
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Last year saw no shift in fundamentals. Then why was the ISO so willing to be deceived?

Last summer, on May 22, the power market across the Western United States and Canada saw a one-time shift in market economics roughly equivalent to the removal of 8,000 megawatts of generation that cannot easily be explained by changes in the fundamentals of electricity markets. Hydroelectric streamflow was about average on the West Coast. Loads were somewhat higher, but California peaks actually registered lower than those in 1998 and 1999. Why this shift in wholesale prices by a factor of five?

Investigations are underway at the federal and state levels, but one thing already is clear: A large amount of the blame can be laid at the feet of the California Independent System Operator. The ISO's complex and secretive operations have provided a petri dish for collusive behavior.

This shift had an enormous impact on prices throughout the region. Statistical estimates through July 31 indicate that higher prices cost consumers at least 9.48 cents per kilowatt-hour during on-peak periods, and 3.3 cents per kilowatt-hour at off-peak times. Given these extraordinary events, many are asking a simple but confounding question:

After May 22, a number of explanations were put forward to explain why prices had increased so markedly. Favorite explanations argued that the price spike was due to shifts in natural gas prices, the runoff on the Columbia River, and increases in loads.

Yet almost all explanations for the price spike based on supply and demand concerns turn out to be exaggerated. Hydro conditions were average in 2000, peak loads (only ISO peak loads are currently available) were lower in 2000 than in 1999 and 1998. Gas prices were higher-considerably so-but that would explain only a portion of the price changes. Overall capacity margins appeared sufficient to meet loads across the region. In fact, one can readily see how ordinary the summer was-in terms of load, fuel prices, and hydro generation-by a casual look at the de facto competitive bulk power market that has been operating in the Pacific Northwest for the last 20-odd years.

All in All, An Ordinary Year

Twenty years of competitive markets?

Yes, in a very real sense, organized competitive bulk power markets got their start on the West Coast some 20 years ago, in 1980, with the passage of the Pacific Northwest Regional Power Act. That date marks a watershed in Western power markets-when the Bonneville Power Administration turned away from its historical practice of simply allocating its hydroelectric surplus, and began an active marketing program to implement the new law.

Just as we see today, California and the Pacific Northwest soon began fighting over the appropriate price for this marketed hydro surplus. This conflict was resolved only when the Federal Energy Regulatory Commission approved the Western States Power Pool as an experiment in 1987, and later granted its final OK in 1991. These actions effectively recognized the status quo as it had existed since 1980-an unregulated bulk power market where prices largely were governed by the cost of the