FERC, echoing others, sees few summer power problems

FERC, echoing others, sees few summer power problems

Washington (Platts)--18May2006

While it has continuing concerns about certain key load pockets, US
Federal Energy Regulatory Commission staff on Thursday offered a somewhat
brighter assessment of market and operational conditions in place as the
country enters the summer cooling season.

Tight generation and transmission capacity into Southern California and
certain Northeast markets, "where investment has not kept up" with growing
needs, make those areas vulnerable to price spikes and supply curtailments,
said Stephen Harvey of the Office of Enforcement.

The FERC report follows by three days the North American Electric
Reliability Council's annual summer power assessment that also concluded that
most parts of the US would see few supply problems this summer, with the
possible exceptions of Southern California and southwest Connecticut.

The commissions finding also echo the late-April findings of the
Northeast Power Coordinating Council, which said portions of New England and
New York could experience a very limited number of times when use of
interruptible power contracts, voltage reductions and/or reductions in reserve
requirements may be required.

But thanks to strong and growing stocks of gas and coal in place for
power generation across the country, a greatly improved hydropower situation
in the Pacific Northwest, and effective demand response and emergency pricing
programs now in place in the Northeast, California and elsewhere, the market
"at the onset of summer appears to be stronger than last year," Harvey said in
presenting the staff's summer assessment.

Southern California is facing "another summer of tight supply" in the
face of "fast-growing demand," Harvey said, noting that the region will remain
"heavily dependent on imports" from Northern California, the Pacific Northwest
and the Southwest, "particularly to meet peak demand."

Additional generation capacity in the regional will "barely cover" load
growth, he added, making it vulnerable to both high peak demand from unusually
hot weather and unplanned generation outages. According to Harvey, Southern
California will import roughly one-third of its power supply, with peak demand
expected to total as much at 29,500 MW. The California Independent System
Operator and Public Utilities Commission earlier this year warned of potential
supply problems in the southern half of the state, particularly if industry
experiences problems on any of the major north-to-south transmission lines.

If loads or unexpected outages are high, the California ISO "will call
on interruptible demand and demand response to maintain adequate operating
reserve margins," Harvey noted, adding that the ISO "might need to shed load
through rolling blackouts" in Southern California this summer.

This "extreme" scenario is "fairly unlikely," Harvey emphasized.
"Nevertheless, such a scenario is possible; electric systems experienced
combined heat and equipment failures in the past, and the likelihood of such a
combination this summer is as great in Southern California as anywhere," he
told the commissioners.

Another region "that has concerned us for several years now," Southwest
Connecticut, "once again faces extreme tightness in its supply/demand
balance," Harvey reported. Combined local generation and import transmission
capacity "are not sufficient to meet both expected demand and reliability
requirements." In effect, he continued, "transmission capacity for imports now
operates at its limit," having not been expanded significantly since 2004.

As on the West Coast, extended periods of summer heat and unplanned
outages "could result in limited supplies available" into Southwest
Connecticut.

"Overall," said Harvey, "the fragility of the infrastructure into and
within the region makes high prices and problems possible and maybe even
likely."

Resulting price impacts in the region are "difficult to assess," said the
official. Demand is unlikely to be "much affected" by wholesale price signals
because the current retail standard offer rate, used by 97% of retail
customers in the state, will not change until the end of the year, said
Harvey.

Turning to Long Island and New York City, Harvey remarked that
circumstances have markedly improved in the city but remain somewhat
precarious for the island. Recent generation investments "appear to have
relieved some reliability concerns" in New York City and given the price of
gas-fired generation at the margin, "market prices are expected to remain
relatively high in the city, through reserves appear adequate," he noted.

On Long Island, however, "supply/demand balances remain tight" and the
area "remains exposed to the same kinds of risks associated with the other
load pockets we've considered--mainly, heat and unexpected generation and
transmission outages," Harvey warned.

As a result, the island this summer figures to experience "continued
volatility in day-ahead and real-time electric prices...with very high
prices when supply is tight." The New York Independent System Operator
scarcity pricing program "is likely to continue to generate high prices at
those times when tight markets mean reserves are being used for energy."

The Canadian province of Ontario, due to its location adjacent to the US
grid, plays a pivotal role in certain US markets, Harvey noted in reporting
that similar tight power and transmission conditions in the province could
produce "ripple effects" for PJM Interconnection and New England this summer.

While last year FERC staff expressed deep concern about "relatively poor"
hydropower conditions in the Northwest, "this year the situation is quite
different," said Harvey, noting that "snowpack levels are quite robust." As of
May 12, average snowpack in the mountains feeding the Columbia River Basin was
about 6% above the historical average, while snowpack in California was
roughly 66% above average, he reported.

Overall, hydropower generation in the Pacific Northwest has been strongly
above last year's levels, said Harvey, adding that "spring electric prices in
the Northwest have been relatively low, and conditions for the summer are much
improved over what we expected last summer."

Harvey also reported that coal stockpiles for electric generation "are
well above last year's levels" and are "likely to continue building." The same
is true of gas in storage, he said.

He also said staff has "begun to see some of the first indications
of fuel switching away from oil and toward natural gas" for power generation
and other uses. For instance, over the past few weeks, gas delivered into
Florida has averaged about 50%, or roughly 1 Bcf/d, above the same period last
year. While the state "has seen some growth, a large part of this increase
appears to be related to fuel switching away from residual fuel oil."

Staff has confirmed this switching in Florida "and has observed a
similar, though lower-volume, trend in New York State," Harvey related. If the
trend continues, "oil may play a smaller direct role in electricity prices
this summer than we've seen in the recent past."

---Chris Newkumet, chris_newkumet@platts.com

For similar news, take a trial to Platts Inside FERC at
http://insideFERC.platts.com.

Please visit: www.platts.com

Their coverage of energy matters is extensive!!.