Reliant denies California allegations
A top Reliant Energy Inc. executive denied allegations of profiteering and megawatt laundering during congressional hearings Monday called to investigate the high cost of electricity in southern California. Vice-Pres. John Stout said the market has failed because of too much reliance on purchasing power on the spot market. Rep. Brian Bilbray (R-Calif.) of San Diego requested the field hearing of the Commerce Committee�s Energy and Power Subcommittee.
Ann de Rouffignac
A top Reliant Energy Inc. executive denied allegations of profiteering and megawatt laundering during congressional hearings Monday called to investigate the high cost of electricity in southern California.
Rep. Brian Bilbray (R-Calif.) of San Diego requested the field hearing of the Commerce Committee�s Energy and Power Subcommittee. He was responding to demands from his constituency to investigate why electricity prices in southern California doubled and tripled from 1 year ago.
�The wholesale market has failed because of too much reliance on spot market energy,� explained John Stout, Reliant vice-president asset commercialization at the San Diego hearing. Also scheduled to speak were Federal Energy Regulatory Commission Chairman James Hoecker and other members of the commission; representatives of various regulatory agencies, including the California Independent System Operator (ISO) and California Energy Commission; small businesses in San Diego; and consumer groups.
Recent advertisements placed in southern California papers by Sempra Energy unit San Diego Gas & Electric Co. have blamed Reliant Energy, Houston; Southern Energy Inc., a unit of Southern Co.; and Dynegy Corp. for the high prices.
In his testimony, Stout argued market design in California is at the root of much of the problem as well as the widely recognized shortage of generation. Under California's deregulation rules utilities cannot enter into forward market bilateral contracts for power.
They have to buy from the California Power Exchange. And the utilities divested most of their generation under the rules of deregulation. What generation they did own had to be sold into and then repurchased from the spot market.
Utilities even have to buy base load generation from the California Power Exchange. In most other markets, the base load capacity is purchased through long term forward markets, Stout explained. �California consumers are purchasing half a billion kw-hr/day of base load generation at spot market prices,� said Stout at the hearing. �California residents should not be forced to buy over 40,000 Mw from a market that exhibits peaking volatility.�
Stout noted in his testimony that there is a strong preference to simply point fingers at out-of-state suppliers for causing the prices to be greater than last year.
Reliant, which owns about 4,000 Mw of electric generating capacity in California, did not with hold power from the market in order to drive up prices, he said. Stout explained at least half of this capacity is already sold into the forward market.
Secondly, Stout told the committee, one of its California units can�t generate any more power because it has reached its limit based on existing air pollution permits. And, third some units are kept available for peak periods.
Finally, Stout said, some generating capacity is held in reserve and not bid into the day-ahead markets to protect against potential plant failures. If a unit goes down and the power is not available, the financial penalties are severe. To protect against financial risk, Reliant carries an operating reserve to cover the loss of its largest on-line unit, Stout said. These megawatts are ultimately sold in the real time market where there is no penalty if the unit goes down.
With respect to so-called megawatt laundering, he said, a California generator could sell to a partner out of state and then resell the power back to the ISO during emergencies at prices above the price cap in a sort of laundering scheme. The theory is the ISO would be willing to pay prices above the cap if they were paying an out of state generator.
�The laws of physics don�t allow the exported generation to simply be stored on a shelf until the ISO needs it back. It has to be used to serve load somewhere. To sell the �laundered megawatts� back, someone has to produce a new megawatt for every megawatt the ISO buys back,� he said.
Stout explained the ISO asked Reliant if it could supply additional power during one of its many power emergencies. Reliant called one of its counterparties and asked to buy power back from the company. The party was willing to sell at higher price than it paid for the power, Stout said. Reliant paid the price and offered the energy to the ISO which didn�t buy it after all.
�We didn�t launder megawatts, we simply tried to help and ended up losing money,� said Stout.
Every time demand for power approaches the peak of about 40,000 Mw, the last few megawatts bid are always at high prices, he said. Making matters worse, some California buyers have been waiting until the last minute to buy their last 10,000-15,000 Mw of power in the real-time rather than the day-ahead market.
�What�s causing the apparent �gouging� is simply the fact that the market is actually running out of supply when those last few megawatts are being purchased,� Stout said. �They know what to expect, and yet the market rules and their bidding strategies put them last in line,� he said.