California Energy Demand Spikes, but Wholesale Prices Remain Moderate
Jul 26 - The Sacramento Bee
Jul. 27--Back when the energy crisis was at its peak, a day like Monday would have cost California a fortune.
Not anymore. Although Californians nearly set another record for electricity
use Monday, wholesale prices stayed moderate.
Spot market power was selling for roughly $70 a megawatt hour through much of
California -- a little more than usual, but a bargain compared with much of 2000
and 2001 when prices were $300 or more and occasionally topped $1,000. Utility
officials say the state was burning through $1 billion a week at times.
A megawatt hour is enough electricity to power up to 750 homes for an hour.
What changed? Plenty, including a fleet of new power plants, a series of
supply contracts, new regulations that curb price spikes and force generators to
make their plants available. In addition, criminal prosecutions loom over the
market.
The new power plants provide enough power to keep millions of homes humming
-- and have enabled California to ride out increasing demand over the past week.
In addition, the majority of electricity is now lined up through long- and
short-term contracts. That's provided greater price stability and enabled
electricity officials to avoid a repeat of the astonishing price spikes of three
years ago when they often bid up the cost of electricity in a frantic effort to
keep lights on.
"We're not having to scramble," said Anjali Sheffrin, director of
market analysis at the Independent System Operator.
The ISO is the quasi-governmental agency that runs the state's electrical
grid and purchases power to cover last-minute shortages.
During the energy crisis, it was buying as much as 30 percent of the state
power supply within minutes before the power was to be used. Nowadays, because
of supply contracts, it only has to buy as little as 2 percent of the power at
the last minute, said Greg Cook, the ISO's manager of market monitoring.
Sheffrin said relatively moderate prices don't mean California has solved
energy problems. Californians set records for peak-time energy usage three
straight days last week, although the state avoided blackouts and didn't have to
declare power emergencies. But population growth, a recovering economy and a
slowdown in power-plant construction have sparked warnings of energy shortages
in the next three years.
"We would like to see new supply," Sheffrin said.
In the meantime, other factors appear to be keeping prices low. Under federal
regulations, power generators must offer all available supply to California if
plants are operating. The rule didn't exist during the energy crisis, which
meant some power plants, depending on their contracts with the ISO, could
legally withhold supply from the market.
Now, all sellers "need to show up in the market," Sheffrin said.
Another reason could be the threat of prosecution, said independent energy
consultant Robert McCullough. Houston-based Reliant Energy Services and four
employees were indicted in April on charges of withholding power to manipulate
prices. Two former Enron Corp. traders have pleaded guilty to price-manipulation
schemes, and a third awaits trial this fall.
"Most of the zany things we were seeing four years ago just aren't on
the map," said McCullough, managing partner of McCullough Research in
Portland, Ore. "It has more to do with the U.S. attorney's office than
anything else."
Gary Ackerman, a spokesman for energy sellers, said a price regulation system
instituted by the ISO in 2002 is playing a big role in keeping prices low.
The system puts in place a complicated formula that prohibits sellers from
charging prices that are substantially higher than they've charged in the
previous 90 days. As a result, prices can rise, but they can't skyrocket
quickly, said Erik Saltmarsh, executive director of the California Electricity
Oversight Board.
"It's adding a measure of discipline to the market that we didn't
have" during the energy crisis, said Ackerman, head of a trade association
called the Western Power Trading Forum.
But the ISO's Cook downplayed the impact of the price regulation. Since the
system went into effect in October 2002, the ISO hasn't seen a single bid that
exceeded the maximum, he said.
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