Power price cap immaterial in the West, FERC concludes

By the OGJ Online Staff

HOUSTON, Feb. 1, 2002 — A regional wholesale electricity price cap had little if any impact on the average spot price of power in the West this past summer, the Federal Energy Regulatory Commission said.

Western utilities resold power in the spot market at an average price of $35/Mw-hr-well below the price cap of $92/Mw-hr, the agency staff said a report released Thursday. Prices softened because of lower demand and better than expected supply of power, FERC concluded.

The North American Electric Reliability Council forecast summer 2001 supply in the West and Pacific Northwest would be extremely tight. Consequences of the soft market, which contradicted forecasts for a very tight power market, caused many western utilities to lose money on spot power sales.

NERC predicted California could expect 260 hours of outages over the summer. A severe drought in the Pacific Northwest was expected to put the region in a precarious position. During the previous summer prices vaulted to historic highs suggesting that prices might even spike higher in 2001.

Responding to this dire picture, western utilities bought up enough power to service their projected loads. “Utilities locked in longer term contracts. Once these contracts were executed the costs became sunk costs for serving system loads,” FERC said.

The predicted conditions in the Western power market didn’t materialize and the result was a decline in short term and spot energy prices. Utilities lost money on sales of excess electricity.

FERC based its conclusions on surveys of utilities in the western region. Eight utilities were surveyed but only six provided data. Of those six, four utilities lost millions of dollars selling excess power in the spot market.

These losses varied between $67 million and $310 million. Only two utilities sold excess power at a profit. One netted $105 million and the other $61 million. FERC couldn’t determine why utilities signed long-term forward contracts far exceeding what they needed to serve their loads.

FERC speculated actual loads were lower than the utilities projected, weather conditions more favorable than predicted, or more hydroelectric power was available than originally expected. In addition, FERC pointed to the effect of conservation programs and the deteriorating economic conditions to explain the mismatch.

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