High gas and power prices dog California market

Ann de Rouffignac
OGJ Online

With reserve margins falling to 7%, the California Independent System Operator called a Stage 1 emergency early Tuesday and is expected to declare a Stage 2 later in the day. If that happens, customers with interruptible load will be called on to shut off their electricity for the second day in a row.

�Today could be the day for a Stage 3,� says Patrick Dorinson, spokesman for the California Independent System Operator (ISO).The ISO calls a Stage 3 emergency if reserve margins fall below 3% and will implement rolling blackouts to prevent a total system collapse.

California is teetering on the verge of blackouts because of generation outages and fewer imports from the Northwest. Unprecedented gas prices are contributing to the problem because merchant generators cannot generate power for less than the $250/Mw-hr price cap, says Tom Williams, spokesman for Duke Energy North America.

In California, every megawatt counts. The ISO is trying to keep the lights on without 11,000 Mw down for scheduled maintenance or forced offline for emergency repairs. With 38,000 Mw of in-state generation, the California ISO counts on imports to make up for a shortfall.

�Yesterday we got 5,300 Mw from the Northwest. Today we are getting only 2,600 Mw from there,� says Dorinson. �Guess who gets caught flat-footed. The state that imports 20% of its power.�

The Pacific Northwest, a major exporter to California, is preparing for an �Arctic event� later this week, reducing the amount of power available for export. With nearly 35,000 Mw of hydroelectric power, the Northwest usually has enough to spare.

But with the �Arctic event� in the forecast, the utilities' primary concern is serving their native load customers. The region is expecting weather later this week to be the coldest in 20 years.

�When we see cold weather that�s imminent, we position ourselves to get ahead of it,� says Rich Nassief, an engineer with the Northwest Power Pool. �We have huge reservoirs of water that must be positioned in the right place. We have some water in reservoirs maybe 300 to 400 miles north of us. We need to start moving that water into position. Usually the Arctic fronts slide to the east of us,� says Nassief. �And it might this time. But forecasters are warning that it might hit us.�

Without imports, interruptible load becomes crucial in California. Both spokesmen for the ISO and the utilities appealed to the public via radio and television to conserve energy. Southern California Edison Co. asked interruptible customers to shed 1,400 Mw of load Monday, but many elected not to.

"We only got a 30 to 40% response,� says Steve Conroy, spokesman for Southern California Edison. �It�s difficult to focus on interruptible, because it�s not air conditioning. It�s the lights.�

Winter demand peaks when people come home from work and turn their lights on, he says. Holiday lighting has worsened the tight supply situation. Conroy says holiday lighting adds 1,400 Mw to Southern California Edison's system load.

With gas selling for $26/MMbtu on the cash market in California, merchant generators say they cannot recover their variable costs and produce and sell electricity at $250/Mw-hr. They can and will get higher prices by selling power outside of California.

�The cap has become an issue because of natural gas prices,� says Lori O�Donley, spokesperson for the California Independent System Operator. �They (generators) can�t produce and sell under this cap.�

Indeed, power prices in the Pacific Northwest for the balance of December hit $650/Mw-hr Tuesday and for the month of January prices are $575/Mw-hr, according to the Duke Energy North America Salt Lake City trading office.

In Arizona, lower Nevada, and New Mexico power prices for the balance of December surged to $300/Mw-hr.

Natural gas prices are sky rocketing because of tight supply of gas and huge withdrawals from storage in the West.

�This is very early in the season for storage to be this low,� says Wayne Andrews, analyst with Raymond James & Associates in Houston. Andrews says two factors have contributed to the tight gas supply situation.

El Paso Energy Corp. has shut down sections of its pipeline system serving southern California for maintenance. Also, the new Alliance pipeline which is supposed to bring gas from Canada is taking gas out of the pipeline system rather than adding new gas. That gas is being diverted to Chicago and the US East.

�Not much new gas came on line with the Alliance pipeline, it just takes gas out of the other lines,� says Andrews. �The tight gas market in the West is not going away soon. There is no short-term solution.�

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