CalPX:High Summer Pwr Prices Mostly From Fundamentals
By Mark Golden
  
10/04/2000 
Dow Jones Energy Service 
(Copyright (c) 2000, Dow Jones & Company, Inc.) 
NEW YORK -(Dow Jones)- High electricity prices this summer in California were 
the result of market fundamentals and structure, rather than market 
manipulation by particular participants, according to a preliminary report by 
the California Power Exchange. 
Rising demand in the state and in the western U.S. overall combined with a 
lack of new generators to push wholesale prices to levels about three times 
as high as prices last summer, according to the preliminary report obtained 
by Dow Jones Newswires. 
And the price rise was predictable, according to the report. 
Citing hot weather from May to July in California and the Southwest, lower 
hydroelectric supplies in the Northwest, higher natural gas prices, higher 
prices for nitrogen oxide emission allowances, the report says that "reserve 
margins during peak hours in May and June in the Western Systems Coordinating 
Council region dropped to a thin 4% to 6%, compared to the forecast 17% to 
20%." 
"Price movements in California and the WSCC are consistent with analysis by 
Cambridge Energy Research Associates, which has demonstrated a high 
correlation between low capacity reserve margins and high spot prices in 
other regions of the U.S.," the report says. 
While the CalPX recommends changes to its market rules, it says that prices 
were sometimes higher in other parts of the western U.S. than in California 
this summer, further evidence of a genuine market imbalance between supply 
and demand. 
The CalPX market flaws, however, "provided incentives to suppliers to 
speculate on receiving higher prices in the Real-Time and Ancillary Services 
markets (which are operated by the California Independent System Operator) by 
moving their supply to those markets, leaving less supply in the CalPX 
Day-Ahead market. These design flaws need to be addressed," the report says. 
Although suppliers had incentives to move power to the highest-priced 
markets, the CalPX found no "consistent pattern by individual participants or 
participant category. As a result, it is difficult to single out any one 
group as the force driving prices." 
CalPX will send the final report to various bodies investigating the 
California wholesale electricity market, including the Federal Energy 
Regulatory Commission, the California Public Utilities Commission, the 
California Attorney General, the California Electricity Oversight Board and 
the state legislature. 
Its findings may not sit well politically with some of those bodies, 
according to one source. California utilities, Gov. Gray Davis, and various 
legislators and regulators have been blaming independent power generators - 
"out-of-state" companies that bought big generating stations from the 
utilities over the past three years - for market manipulation and price 
gouging. Those groups hope to build a case with the FERC that would force 
suppliers to refund some of their big gains this summer back to California's 
utilities and to the customers in the San Diego area, who have received high 
electric bills. 
Instead, the CalPX's preliminary report proposes corrections that are 
relatively modest, such as increasing demand responsiveness, removing 
barriers to new generation, proportionally allocating out-of-market purchase 
costs to the utilities that underscheduled power purchases and encouraging 
utilities to buy more power in the forward market. 
As ordered by state legislation to deregulate the electric utility industry 
in California, the regulated utility units of PG&E Corp (PCG), Edison 
International (EIX) and Sempra Energy (SRE) purchase the power they need one 
day in advance through the CalPX and make any last-minute purchases through 
the California ISO. 
   By Mark Golden, Dow Jones Newswires 
   201-938-4604; mark.golden@dowjones.com