Commentary: Things Get Even Worse in  California
Although it hardly seems possible, the California  wholesale electric market 
is getting worse. And rapidly. Power prices are high  across the board and 
the California Independent System Operator has taken to  declaring 
simultaneous stage one and stage two emergencies every morning, right  along 
with brewing the morning coffee.
On Thursday afternoon, the ISO  declared the first stage three emergency, 
although it was not necessary to  implement rolling blackouts. Demand hit 
31,600 MW during the day, far from a  peak for the state. But planned and 
unplanned outages meant that the statewide  capacity margin was a bare 1,000 
MW.
The chief culprit appears to be the  state's price caps, which are driving 
generation out of the state, and the  politicians appear poised to make 
matters worse. The caps combine with soaring  natural gas prices to drive 
electricity out of the California market. Because of  gas prices in the $7 
per million Btu range, the price caps are simply not  enforceable. They are, 
in short, a joke.
With price caps of $250/MWh in place  through the California Power Exchange, 
and with bids hitting the caps for every  hour of the market, generators are 
fleeing the state. That's because prices in  the Pacific Northwest are 
running in the neighborhood of $375/MWh, and  generators are selling into 
Oregon and Washington instead of California.
Dow  Jones reports that utilities in the Northwest last week showed up as 
buyers in  the Cal PX, buying power at $400/MWh -- $250/MWh for the juice and 
$150/MWh for  transportation. 
Just how wacky has the California market become? In order to  protect 
reliability, the Cal ISO has been quietly purchasing power in bilateral  
deals from out-of-state generators at prices above the cap. The price cap 
rules  apparently allow the ISO to buy above the cap if needed to supply an 
emergency.  But it can only buy from out-of-state companies, not the 
California  generators.
Last Wednesday, the ISO paid some $10 million to buy 1,000 MW --  most likely 
from BC Hydro, although the ISO isn't talking -- or about $900/MWh.  Los 
Angeles Department of Water and Power, sitting in the catbird seat with  
excess capacity, sold the ISO some 1,200 MW at the capped rate of $250/MWh. 
A  civil suit charges that LADWP has been -- shock! -- profiteering by 
selling its  low-cost juice from Bonneville Power Administration into the 
California market  at an order of magnitude above what it paid.
How are the state's politicians  responding? They don't seem to understand 
the short-term consequences of what is  going on. They are talking about 
banning exports of power made in California  (can you say "Commerce 
Clause"?), or forming a state power agency (not in this  decade), or 
re-regulating the utilities (ditto).
There is only one action  that California can take to protect itself against 
blackouts this winter. The  state must get rid of the price caps entirely. 
Immediately.
California's  choice is simple and stark. Does the state want to ensure that 
its citizens have  not enough power at an artificially low price, or enough 
power at a politically  unpopular high price? The need for power trumps the 
price issue.