Mother nature K-Os San Diego market, price cap fervor stings like a bee

It seems Mother Nature is a fierce political machine. In the past few months, her heat-induced, statewide energy emergencies have given way to votes and re-votes by a California ISO trying to juggle reliability and prices. It seems that California power is as much on a fault-line as the state itself. The fear that low price caps may divert needed surplus generation from out of state—that power will simply “follow the money” in a Columbo-like search for the largest buck per bang—is fighting the concept that high-end capped wholesale pricing will be passed on to consumers and cause economic hardship. And the fight is getting down and dirty.

Floats like a (toasted) butterfly

Our story starts in San Diego, where the average power user saw his electricity bill nearly double between May and June due to market fluctuations—San Diego Gas & Electric (SDG&E) being the first major open market utility in the country. The state’s two other large utilities, Pacific Gas & Electric and Southern California Edison, are still in the transition period, with customer rates frozen until completion or 2002—making market glitches nearly imperceptible to the average Californian planted in front of his air conditioner to survive the soaring temps.

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First and foremost, there’s this daunting series of heat waves (which has created more stage one and two emergencies in California the last few months than hits Baywatch in an average episode). Combine that with both the constant influx of new residents into the Southern California landscape and the increase in technology-based industry, and the need for extra summer power seems rather obvious—especially in light of the well-known fact that California feels the need for generation, having not built a single power plant in over a decade. In fact, it is true that every summer California must go outside the state to get its fill of electricity, which leads us right to the hot potato debate over price caps occurring at the California Independent System Operator (ISO).

“I think there’s a direct relationship between the unanticipated heat wave and the price cap issue,” stated Jan Smutny-Jones, chairman of the California ISO board of governors, in an interview with EL&P.

Supply kisses the canvas

This thirst for excess energy is exactly why San Diego residents are forking over so much more to keep the air conditioner on. It’s the law of supply and demand working at basic, high school economics level: an open market plus a high demand equals a higher price. But, understandably, the residents are not happy. And unhappy residents mean unhappy constituents to state senators like Steve Peace, an avid proponent of lowering the price cap for wholesale power to $250.

“If California were not so short on supply, we would hardly notice these high peak price swings because they would only happen a few hours in an entire year,” Peace wrote in a statement released just days after the second California ISO vote on caps. “But, because we have been at the margin so often, the prices in this ‘ancillary’ market are not only high, they are affecting prices in the core market as well. The result: ridiculous price spikes which simply cannot be tolerated.”

And the soaring prices have led to a scramble: SDG&E going so far as to ask the California Public Utilities Commission (PUC) to facilitate the planned return from their transition cost balancing account which had been scheduled for late summer or early fall. (The numbers were officially tallied in July.) According to SDG&E sources, this would lower the August and September residential electric bills by $34 or $17 a month.

And then there’s the “power summit” of July 12th, which has been alternately labeled both productive and a waste of time—depending on the source. Generators, marketers and the like gathered to discuss San Diego’s ballooning energy bills. One thing that has been agreed upon: There was a lot of talk. But talk doesn’t necessarily mean action.

And cap supporters like Peace want action. He elaborated on his own monetary debate by drawing a line from prices to his position on rate caps. “This is why I have argued strenuously to keep reasonable market caps in place until more generation capacity can be built in the state. Unfortunately, last year the ISO Board raised the market cap from $250 per megawatt/hour to $750 per megawatt/hour. This high cap, in my opinion, creates severe price distortions in the California market when it is stressed by peak demand,” he commented.

And California has certainly been under the thumb of peak demand as of late. But, the ISO has not simply snubbed its nose at the issue. It has acted on a price cap, lowering the $750 cap to $500 in a June 28th vote, after a deadlock over the $250 cap. Even then, they publicly recognized that such an act could compromise reliability.

Smutny-Jones fears that any further dip in the cap could send needed power following the Pied Piper of profit. “During the ISO board deliberation, our management team indicated that, in real time, they believed it would be more difficult to acquire generation needed for reliability at $250,” he said. He added that those findings “certainly helped me decideellipsethe right course of action.” He went on to say that he didn’t want California to “overcorrect” in the short term for what is essentially a long-term supply problem.

Peace, ISO come out swinging

Peace himself admitted that states such as Nevada have paid prices as high as $1,300 per MWh for wholesale power, but would not budge on his position. He continues to campaign for the $250 cap, leading to characterizations in the press of Peace being angry, even livid, and going so far as to label the ISO a “cabal of insiders.”

“In resisting lowering price caps to $250, generators and marketers have essentially threatened California with a blackout, But, this is not only an empty threat, it is a stupid one,” he wrote. “These generators and marketers have as much at stake in keeping the lights on as do customers. In addition, the ISO has the power to call on all in-state generation to protect reliability.”

And they have. In the past few months, California power companies have patently begged customers to adjust their power usage, to turn up their air conditioners, to curb their ebay addictions. But, the next step after the pleas is rolling brownouts and blackouts—a step neither Peace nor the ISO wants to rear its ugly head again.

“The problem is, on extremely hot days—when it’s hot in the Northwest, hot in the Southwest, and hot in California—there really isn’t a significant western surplus to speak of. If there is any generation ‘out’ [as in blackout or shut down], in any area outside of California, there isn’t enough to go around at $250,” Smutny-Jones stated.

And it isn’t all about keeping the lights on. Smutny-Jones says there is an issue of trust at stake as well. He told EL&P that the ISO has been updating the market, conveying to them that, while the cap would be raised to $750 last year, it had the potential to be once again reduced to $500 if hurdles appeared this summer, which they did. However, the extra reduction to $250 was never on the table.

“So, I think it is reasonable to believe that people in the market have—or should have—prepared for the potential of the cap being reduced to $500. In none of the previous discussions was it talked about reducing it to $250. And my concern is that there are entities out there which have, in fact, engaged in responsible risk management and that second drop could create problems,” he commented.

And so the debate continued, converging in a second vote July 6th, where the $250 cap was rejected once again—but by a very narrow margin: 12 to 9 for the $250 cap, just one vote shy of the needed majority. So, the $500 cap remains perched on its unstable throne, but not without casualties.

The ISO lost Camden Collins, a non-industry board member, in the fray. Referring to exterior attempts to control the board, she resigned before the second vote.

“To me, the suggestion that the ISO management does not have as its first interest and priority keeping the lights on, or does not have the best operational perspective on the regional market dynamics, and should be removed along with the Board for having a different opinion of the likely outcome [emphasis hers] is an accusation that is incredibly unfair, particularly if it comes from those who will not be blamed or held accountable for an outage,” she said in a written statement to the ISO board.

Collins added, “The very idea that one person could ‘take down’ the whole Board and the CEO over a difference of opinion on the appropriate wholesale price cap is truly stunning.”

Rematch on the horizon?

But even this second vote may not be the end. At press time, reports of a possible third vote at the scheduled August 1st meeting abound, although it’s not on the official run-down according to Smutny-Jones.

“There are rumors running that it will be requested to be put back on the board, and, at that point, my concern is that we begin to look silly out here,” he commented. “This issue’s been up twice. We did take definitive action to bring the price cap from $750 to $500; management also included some reforms in terms of how we are purchasing replacement reserves—which should have a significant impact,” he said.

He added, “Terry Winter, our CEO, at that meeting [June 28th] indicated that, for replacement reserves for the week in question, we spent $160 million, which—had the reforms been in place—would have been $50 million. So, from a rate impact issue, I think the issues have been addressed.” Smutny-Jones also stated that the ISO is working on both short- and long-term proposals to deal with insufficient generation.

But, if the vote does somehow sneak onto the agenda, cap supporters like Peace and California PUC president Loretta Lynch may get that number lowered to $250 after all. If not, Peace is advocating the return of a fixed rate, stating “the PUC must act quickly to re-impose the rate freeze in San Diego if the market doesn’t produce a better deal. And, it must do so retroactively until the market flaws, which allow market participants (both generators and utilities) to ‘game’ the system when the grid is stressed, have been fixed; and until more generating capacity has been built.”

And he also advocates emotional reactions—in an arena already brimming with tension. “I encourage consumers to be angry,” he wrote. “I know my wife and I were when we got our June bill.”

But, no matter which emotions turn the tide, it’s the flow of electricity that counts: power in, rather than power out. And this fight is about more than reducing the cap another $250. As the Vasco Da Gama of the open market (or so labeled by those on the verge of deregulation) California remains a beacon—however accurate or inaccurate the gazes may be in their choices to either fawn or finger—and, right now, the light is fading to black.

The chairman of the ISO board of governors is fighting to keep that light from blinking out completely. He believes that the lack of both adequate supply and robust competition have fueled this all-consuming debate, but that California’s open market isn’t a “failed experiment,” as some have labeled it. In other words, when competition and new generation even out the choppy waters, the market should work as expected—if the mere appearance of a sinking ship doesn’t lead to the real thing.

“My biggest concern about monkeying around with the price caps is that it’s sending a signal of regulatory instability, and I don’t think we can afford that,” Smutny-Jones commented. But, he has hope for keeping the boat afloat, “once the hysteria dies down.”

“The magic answer is not a $250 price capellipseI think, if we stay the course and complete the mission we started out on—which is the restructuring of the California market—the long-term prospects for significant investments in generation in California are very, very high,” he finished.

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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