California ISO defeats $250 price cap

Ann de Rouffignac
OGJ Online

By a vote of 12 to 9, the California System Operator's board Thursday evening narrowly defeated a motion to lower to $250/Mw-hr from $500/Mw-hr the price cap on wholesale power prices. The motion to lower the price cap to $250/Mw-hr required at least 13 votes to pass.

�It was a close vote. This issue won�t go away,� says Kenneth Randolph, general counsel at Houston-based Dynegy Inc., an independent power producer which sells electricity in the California market. The board last met on the issue June 28, when it first approved the $500/Mw-hr cap.

The underlying problems in the California power market that contributed to the call for even lower price caps are still there, he says. California has experienced increased demand for electricity from rapid economic growth and unseasonably hot weather recently. But yet little new generation is expected to be operational before the summer of 2002.

These conditions have led to volatile wholesale electricity prices and price spikes in the hundreds of dollars contributing to the pressure for even lower price caps.

�The positive thing to come out of this entire matter is the focus has shifted to trying to solve these problems,� says Randolph. �Very simply, there needs to be increased investment in generation, additional investment to upgrade transmission and the need for utilities to have the tools to participate in the forward markets.�

Forward markets
Indeed, the California Public Utility Commission quickly passed an order tacked on to their agenda late Thursday that would allow the major utilities to participate in the forward markets and hedge against sharp price increases, says Armando Rendon, spokesman for the commission.

Pacific Gas and Electric Co. and Southern California Edison Co. for regulatory reasons were still prohibited from completely participating in the forward price markets. But the new order passed yesterday will now allow those utilities to hedge prices.

San Diego Gas & Electric Co. was already allowed to hedge electricity prices going forward because it was further along in the deregulation process. Ironically, San Diego�s customers have been feeling the impact of the higher spot market prices. Customer bills have increased appreciably as that company did not take steps to protect adequately from the volatility of the summer peak prices, outside observers say.

Generators selling power to that utility are not unsympathetic.

�We recognize San Diego�s customers are getting hurt and we are having discussions on a resolution,� says John Stout, vice-president, asset commercialization, Reliant Energy Inc. Stout claims San Diego had the opportunity to buy June forward contracts at 4�/kw-hr but didn't and now is paying is excess of 12�/kw-hr.

He notes that Reliant, as well as other suppliers, including Enron Corp., are involved in talks to try and help resolve San Diego's price problems.

Price caps are not the answer, he says. Indeed, California is not out of the woods with its $500/Mw-hr caps.

Power could still flee the state during an intense heat wave should wholesale prices spike above $500/Mw-hr in neighboring markets. About 20% of the generation in California can be sold out of state, says Randolph. And the caps could also impact the ability of California to import power as well.

Political fallout
�The price caps in California could lead to less power coming into the state,� says Joe Ronan, regulatory affairs executive at Calpine Corp. �Anything could happen.�

The politics of price caps have intensified and with such a close vote, industry observers are concerned this issue could crop up again, if prices spike too high and the political fallout is too great.

Randolph says that some state legislators may push for changes in the board composition of the California ISO making it more responsive politically.

As it is, the emergency meeting and effort to lower the price caps was already very political.

Williams Energy Trading and Marketing, a unit of Williams, filed an emergency motion with the Federal Energy Regulatory Commission before the ISO�s meeting asking FERC to prohibit the ISO from lowering the price cap. Sources close to the ISO, said certain board members were pressured by political players and utilities to vote to lower the price caps. This type of pressure was mentioned in the filing.

Williams did not comment on the filing.

�When FERC authorized the California ISO to issue price caps, it didn�t intend that the process be political,� says Randolph. Despite the heat independent power producers are getting for high-priced electricity, Stout says, incumbent utilities still control more than one-half the state's generating capacity, including 10,000 Mw of qualifying facilities under contract.