Re-regulation not the answer in California, experts say

Ann de Rouffignac
OGJ Online

Don�t re-regulate. The California power markets can be fixed, executives from the California Independent System Operator and Enron Corp. testified at a congressional hearing on the California power markets in San Diego Monday.

�We must not delude ourselves into believing that all will be right if we simply superimpose the former regulatory model onto today�s industry structure,� said Terry Winter, president and chief executive officer of the California Independent System Operator (ISO). �It will not work.�

Uncertainty discouraged planning and investments in new generation and transmission facilities, he said.

�I and my staff must wage a near-daily battle just to keep the lights on in California because of that uncertainty. And it is because of the consequences of that uncertainty that more consumers face rate shock,� he says.

Most observers agree that California has a supply problem. But during the restructuring debates, supply was largely ignored, says Winter. California has always imported 4,000-8,000 Mw-hr to meet peak load from neighboring western states that enjoyed a hefty 25% reserve of extra capacity beyond what they required to meet local peak demand. But that margin has fallen to below 10% and these states have less power to export.

Design of the restructured California market did not specify who would be responsible for acquiring the resources necessary to meet load. Among other problems, utilities, who still control most of the residential load in the state, were restricted in their ability to hedge, said Enron executive Steven J. Kean. Even when offered power at fixed rates for 4-5 years at costs below this summer's prices, utilities' ability to consider the offers were restricted, he said.

Keeping the lights on is what the ISO is charged with doing, Winter said. It has the responsibility of operating the transmission facilities that are owned by the state�s three big utilities. The ISO also is charged with maintaining reliability, including acquiring operating reserves that are critical to system reliability. To keep supply in balance with actual demand, the ISO operates a real-time spot market.

This spot market was designed to fine-tune the supply to meet at most 1-5% of the normal demand.

�Over the past few months it has not been unusual for the ISO to have to scramble in real time for 20-30% of the energy supply to meet demand,� Winter said at the hearing. �Until this over reliance on the real time market is resolved, there will continue to be reliability and price impacts.�

During real-time operations the ISO must pay what the market requires or it must sacrifice reliability, he said. Winter said the solution lies in expediting licensing of more new generation, encouraging distributed generation, allowing hedging by utilities, improving and investing in transmission infrastructure, and committing to more energy efficiency and conservation.