Price caps, electricity exports top California ISO agenda

Short supply, high temperatures, and high electric bills continue to roil the California power market. The California Independent System Operator is scheduled Tuesday to reconsider price caps and how to compensate California merchant electricity suppliers who sell power outside the state, in the event the ISO declares an emergency and halts scheduled exports.


Kate Thomas
OGJ Online

Short supply, high temperatures, and high electric bills continue to roil the California power market.

In the latest developments:

� The California Independent System Operator, which has issued a power "warning" for Monday and Tuesday and asked for bids for supplemental power, is also scheduled to take its third vote in a month Tuesday on lowering a price cap on electricity to $250/Mw-hr from $500/Mw-hr. Observers say this time it appears the proponents of the lower price cap will have enough votes to pass the proposal.

� In addition, the board is scheduled to consider how to compensate California merchant electricity suppliers who sell power outside the state, in the event the ISO declares an emergency and halts scheduled exports.

� Responding to the crisis and in an effort to ward off political repercussions, Duke Energy North America (DENA) Monday proposed to sell 2,000 Mw of electricity to the incumbent utilities at $50/Mw-hr for a 5-year period beginning Sept. 1, 2000. The Duke Energy Corp. unit also offered to build 3,000 Mw of new supply through the construction of generation facilities.

The California ISO said increased demand for electricity is forecast to put a strain on power reserves within the state on Monday and issued requests for bids of up to 2,000 Mw. The peak demand on the ISO-controlled grid is expected to reach 45,391 Mw Tuesday afternoon, the ISO said. The record peak was 45,884 megawatts on July 12, 1999.

The California ISO is projecting high power demand because of the heat. On Friday, the ISO issued its 12th Stage 1 emergency since May 1. A Stage 1 emergency takes effect when electricity operating reserves fall below 7%. A Stage 2 is declared when reserves drop below 5%.

Earlier this summer, the California ISO ordered rotating block outages in portions of the San Francisco Bay Area because of the extreme heat conditions and limited resources. Electricity reserves continue to be short supply from the Pacific Northwest through the Southwest. The imported power California normally counts on from its neighbors is severely limited because high demand is straining resources within those states.

Export to be Halted?
With the extremely high loads being forecast, this could be the week the ISO invokes its emergency power to halt electricity exports from California to other states, says John Stout, Reliant Energy Inc. vice-president for asset commercialization.

"They can recall that power," he says, but "nowhere in that tariff does it say what the compensation will be." If the buyer�who has a firm contract for power�is forced to purchase power on the spot market to replace it , he could be paying thousands of dollars over his contract price, Stout says, and he will look to the seller for compensation.

Merchant power suppliers are taking the position the California ISO will owe them full compensation, says Stout, even though the ISO appears to be saying the problem is a market risk to the independent power companies.

"We will pursue all available recourse for our out-of-pocket costs," Stout warns. Moreover, he warns if the California ISO takes such a step "it will kill the ability of anyone to sell forward outside of California. It will have a devastating impact on Palo Verde as a trading hub."

California's high electricity prices during peak-demand periods result from insufficient supply to meet the demand, says DENA chief executive Jim Donnell. Despite a rise in peak demand to 10,000 Mw in the past 10 years, no significant new power generation facilities have been built in California. This combination has caused the state's reserve margin to fall to less than 2%, he says.

Under current procedures, it takes more than 4 years to deliver new power generation in California. To add substantial incremental generating capacity to California, DENA proposed Gov. Gray Davis use his existing authority under the California Emergency Services Act to streamline the permitting process to speed up generation construction.

The company said it will begin construction on 1,000 Mw at its Moss Landing facility within 2 months and upon receiving final regulatory approvals. The expansion of the current 1,478 Mw facility will be in commercial operation by summer 2002. And, with an expedited permitting process, DENA said it could deploy its available resources to construct an additional 500 Mw for commercial operation in 2001 and 1,500 Mw for 2002.

DENA also asked the governor to use his current authority to allow California utilities to enter into bilateral contracts with energy providers, so they could better manage their exposure to high energy prices.

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