Watching the juggling and plate balancing in California

By Bam Boschee, Managing Editor

The California electricity market is taking on the character of a three-ring circus. Except, as the old joke goes, it’s not as organized.

The dollar figures are flying-and so are accusatory words-as the various parties weigh in to try to make sense of something that seems to be spinning out of control. There are enough charges of greed, manipulation, incompetence, bankruptcy and finger-pointing to keep the clown with the broom and dustpan busy for the duration of the show.

State legislators were trying to stabilize the cost of California’s electricity at 5.5 cents per kWh. Prices were running at 30 to 80 cents per kWh for nonutility companies, 17 cents for alternative energy providers (solar, wind, etc) and 2.5 to 3.5 cents for utilities. With most of the electricity available only from nonutility generators, the state took matters into its own hands.

The state Department of Water Resources was charged with soliciting bids in an auction to buy electricity. The hope was that it could use its leverage as the only sizable credit-worthy buyer in the market (since Pacific Gas & Electric and Southern California Edison were teetering near bankruptcy) to hold down costs and wrest control of prices from generators.

However, prior to the auction (not completed at press time), the water board was paying an average of about $400 per MW, certainly more than the $55 per MW targeted by Gov. Davis and legislators.

Owners of natural gas-fired plants asserted they needed $80 per MWh to cover fuel costs. They claim a price of around $300 per MWh isn’t unreasonable given other costs, including air pollution credits.

Doesn’t this demonstrate an interesting twist to the concerns raised about market power as we approached deregulation in the early days? Monopolistic utilities were said to have too much market power resulting from their vertical integration. The concern was that they would unfairly retain this power, even after deregulation, by virtue of their pre-existing market reach and other intangible advantages such as branding.

California taxpayers faced with the state’s estimate of a whopping electric bill of $5.4 billion in the next three months probably aren’t too connected with any one brand right now. A perpetual motion machine, if it could deliver some juice at about 6 cents per kWh, would be embraced with unwaivering loyalty. And PG&E and Southern California Edison aren’t being viewed as powerhouses, internally or by consumers (or by rating agencies, for that matter).

Market forces were supposed to discipline the market better than what regulators could do. But if somebody has market power, or if market forces are weak, suppliers have the ability to control prices, or at least influence them. Because generators are now out of the state’s jurisdiction, the state retains little recourse.

The outages have raised suspicions that generators may be deliberately withholding power from the market either to hike up prices or due to their concerns they won’t get paid for power they produce. With up to 11 GW of generation shut down at one time when blackouts are rolling across customers with sometimes only five minutes warning, questions are emerging from the dark.

Gov. Davis signed a law requiring that the California Independent System Operator (ISO) disclose the names and locations on the Internet of out-of-service plants (planned or unplanned outages). Up to now, generators considered the information commercially sensitive and the ISO did not offer such public disclosure.

However, the rules have changed and continue to be defined. In the process, there are bound to be several balls dropped and a good number of plates shattered.

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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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