Too hot a market: How energy producers manipulate California 


(Published Sept. 22, 2000) 
The priciest place to shop this August in California was in Pasadena. There 
at the California Power Exchange, where much of the state's electricity is 
bought and sold, prices that utilities paid for power (an average $166 per 
megawatt) were up fivefold from the previous August ($32). What is happening? 
Among other things, too much power on hot days is being purchased in the 
near-panic environment that develops in the hours before a possible crisis. 
Too little is being purchased as it should be -- days, or even months, in 
advance. 
How was this new market-based system of buying electricity supposed to work? 
Much of the action was supposed to take place at the Power Exchange. There 
vibrant trading was supposed to exist in a variety of markets. Some utilities 
would be busy shopping for electricity the next day. Others, depending on 
their needs, would be squirreling away supply a month, even a year, in 
advance. 
Selling this power are private companies that have been busy purchasing 
fossil-fuel burning generators from the state's investor-owned utilities. 
Under the state's restructuring of electricity, these utilities were 
obligated to sell their fossil-fuel burning plants, but not necessarily their 
nuclear or hydroelectric generators. 
On any given day, up to 95 percent of the power needed to fuel California was 
supposed to be already purchased. The idea was to leave just a little bit for 
the last minute. Headquartered in Folsom, the state's entire grid is managed 
by an agency known as the Independent System Operator. The ISO's job is to 
buy whatever extra power is necessary to keep the lights on. With literally 
only hours to work with, the ISO is ill-suited to drive hard bargains. The 
ISO pays up to $250 per megawatt. 
The problem is that the ISO's spot market is way too big, and too pricey. It 
is buying up to 30 percent of California's power on some days, particularly 
hot ones. This August, less power is being purchased in those struggling 
futures market down in Pasadena. More was being bought in Folsom. This is a 
telltale sign that California's electricity market is working for those who 
own power plants, not those who pay the bills that are poised to rise.