Reliant asks FERC to drop California price caps

The natural gas 'proxy' price used to determine electricity fuel costs in California is 'distorting' the market and should be rescinded, Reliant Energy Inc., Houston, said in a petition filed with the Federal Energy Regulatory Commission. In an emergency filing Monday, Reliant asked FERC to drop or amend the price caps on electricity in California.

Jun 6th, 2001


By the OGJ Online Staff

HOUSTON, June 6 -- The natural gas "proxy" price used to determine electricity fuel costs in California is "distorting" the market and should be rescinded, Reliant Energy Inc., Houston, said in a petition filed with the Federal Energy Regulatory Commission.

In an emergency filing Monday, Reliant asked FERC to drop or amend the price caps on electricity in California. Reliant said the price caps first applied May 29 send inaccurate market signals and are actually decreasing supply and increasing demand.

Joe Bob Perkins, president of Reliant Energy Wholesale Group, said the reported dispatch costs in southern California during emergencies are far below what the actual financial settlements will be under FERC's final market mitigation order.

He said the proxy price used for natural gas doesn't reflect how the gas market actually works in California. The blended fuel cost index which averages gas costs in northern and southern California is an "impossibility" in the real market, he said.

As a result, the California Independent System Operator (ISO) can require "generators dispatch power at reported market clearing prices well below actual cost when back-up generation capacity begins to dip below 7.5%," Perkins said.

Moreover, he said, price caps distort dispatch signals on peaking plants, which in some cases may be run only a few days of the year because of emission regulations. Current FERC price controls encourage the ISO to purchase power from emergency peaking plants before it is really needed, even in the absence of a Stage 3 emergency, Perkins said.

Earlier, Gov. Gray Davis singled out Reliant for charging $1,900/Mw-hr for electricity. Reliant responded the power came from a peaking plant that could only be run a few days a year and the company used the high price to discourage the ISO from utilizing it.

Running peaking plant depletes supplies that will, by law, run out when blackout season intensifies later this summer, Perkins argued. He asserted power from peaking units should only be purchased when blackouts are imminent, not during Stage 1 or 2 emergencies.

With no legal obligation to dispatch power to California, suppliers outside the state are not likely to sell into the state if reported market clearing prices are below their cost of production, Perkins said. During emergencies, utilities across the western region are not likely to take on additional risks and costs if they don't believe they will be fully compensated, a situation the current price caps create, he said.

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