Reliant executive calls for a 'benchmark' price in California

Setting a 'benchmark price' of 7.5�/kw-hr for retail electricity rates would help resolve problems in the California market, say executives at Reliant Energy Inc., one of several big power wholesalers in the state. It would provide an incentive to recover power expenses for utilities, keep electric bills stable and reasonable for consumers, encourage new generation, and reduce the volatility on the spot market, says John Stout, Reliant Energy vice-president, asset commercialization.


Ann de Rouffignac
OGJ Online

Setting a "benchmark price" of 7.5�/kw-hr for retail electricity rates would help resolve problems in the California market, say executives at Reliant Energy Inc., one of several big power wholesalers in the state.

�Given the current pricing of the fuel used to generate electricity, the frozen rates which were put in place in the mid-90s are no longer realistic and need adjustment,� said John Stout, Reliant Energy vice-president, asset commercialization.

Establishing a new benchmark price slightly above the projected market price to be charged all customers served by the default utility for 2-4 years would provide an incentive to recover power expenses for utilities, keep electric bills stable and reasonable for consumers, encourage new generation, and reduce the volatility on the spot market, Stout says.

If a realistic benchmark price is established, utility providers would also have an incentive to hedge purchases in the forward markets. Under a benchmark price, utilities serving default customers (those that don�t choose other providers) would be prohibited from passing through wholesale costs which exceed that price. This would put providers who rely totally on the real time markets or the California day-ahead markets at risk of not recovering their supply costs.

Stout argues setting a benchmark price will encourage electricity retailers to manage risk by entering into multiyear transactions with new low-cost generation projects. That in turn will foster power plants construction.

Stout adds market rules should require retailers to buy peak power in the forward markets. The existing obligation of utilities to purchase or sell all their power to the California Power Exchange should be eliminated immediately, he says.

This would allow utilities to use their own generation as a physical hedge against spot market prices and reduces reliance on the spot market by at least 50%, Stout says. Changing the rule would encourage construction of new generating capacity and would also mean that firm imports of power would be arranged ahead of time to mitigate the strain at peak, he says.

Stout adds that setting a benchmark price would also allow sufficient room for new energy providers to enter the market, cover costs, make a reasonable profit, and compete against the incumbent utility provider.

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