Out-of-state generators pull plug over uncertainty on price controls

By Dale Kasler Bee Staff Writer (Published July 3, 2001)

Confused by the federal government's new controls on electricity prices, generators withheld so much power from California on Monday that the state was nearly plunged into rolling blackouts, state officials said.

The confusion began when the state's electric grid operators declared a Stage 1 power alert in the early afternoon, triggering the price caps for the first time since they went into effect June 21.

Out-of-state generators pulled about 1,500 megawatts of electricity off the table at midafternoon, enough to power about 1.1 million homes, because of uncertainty about how much they could charge under the new Federal Energy Regulatory Commission pricing system, said Oscar Hidalgo, spokesperson for the state Department of Water Resources. The department buys electricity for the state's financially distressed utilities.

"They didn't understand what they were going to be paid; there was confusion over the FERC order," Hidalgo said. "We saw 1,500 megawatts disappear."

The problem was exacerbated by a heat wave across the West, which forced California to compete with other states for scarce electricity, he said. Rolling blackouts hit southern Nevada.

Most California officials credit the FERC system, which is based on a variable price cap, with reining in what had been a runaway wholesale power market. But power generators have complained that the price caps, by limiting profits, could discourage the production of critically needed electricity. And as Monday's episode suggested, even the uncertainty about where the cap will fall could lead to unexpected shortages.

"That's the risk that you run (with price controls)," said Arthur O'Donnell, editor of the newsletter California Energy Markets. "People want any kind of certainty at all."

Hidalgo said the state avoided blackouts only because of last-minute imports from the Bonneville Power Administration, the federal agency that markets government-produced hydroelectric power in the Pacific Northwest. The state went into a Stage 2 power alert, the next-to-last level before blackouts are ordered. The alert was canceled in late afternoon.

The blackouts would have been the first in California since May 8.

FERC imposed a round-the-clock ceiling on power throughout the West. The price fluctuates and is tied to the production costs of the least-efficient plant operating in California during a "power alert" declared by the Independent System Operator, which runs the state's power-transmission grid. When there's no alert, prices can't exceed 85 percent of the cap that was established during the latest alert.

Until Monday, the maximum price held steady at about $101 a megawatt-hour in California. But when the ISO declared a Stage 1 power alert in early afternoon, signifying that reserve supplies had dwindled to less than 7 percent of demand, confusion set in, Hidalgo and others said.

Because of a steep drop in the price of natural gas, which fuels many California power plants, suppliers knew the cap would fall. But no one knew by how much until the price was posted by the ISO.

The ceiling for California fell to about $77 at 3 p.m. but was back up to $98 in two hours, according to the ISO. Those prices include the 10 percent premium that sellers can charge California because FERC said there's a credit risk in selling to the state.

O'Donnell said it's likely suppliers will pull back from the market every time the ISO declares a power alert.

In-state generators have to operate their plants if summoned by the ISO. But out-of-state suppliers can withhold supplies, and on Monday it was the out-of-staters that were pulling back, Hidalgo said.

http://www.capitolalert.com/news/capalert03_20010703.html

-- Martin Thompson (mthom1927@aol.com), July 04, 2001

Answers

Why is BPA selling power when they NW is in big time drought?

They drained the dams dry during the winter and cried woo-is-me, we're at 65% snow pack, and can't run the fishies and can't supply the farmers water. But CA cries and they get the juice?

-- (perry@ofuzzy1.com), July 04, 2001.

It's called equalization. Under this stupid 11-state power price cap dictum, whichever area has the greatest immediate need for the energy gets it. Which means, simply, with California's ravenous appetite for energy, a sudden surge of need there, combined with a seconds-later sudden need in the state of Washington, for example, could mean blackout in the Northwest while California slips the noose yet again. If BPA is required by regulation to divert energy in this manner a free market no longer exists. It remains to be seen what kind of carnage will ensue.

-- Billiver (billiver@aol.com), July 04, 2001.