Federal Caps Didn't Deter Higher Prices
Power: Cal-ISO study says suppliers continued to charge as much as five times more than the imposed limits.
By NANCY VOGEL
TIMES STAFF WRITER

July 27 2001

SACRAMENTO -- After federal regulators limited wholesale electricity prices last month, big private sellers of power in California continued to ask as much as five times more for electricity than the federal cap, according to a confidential study by state grid operators.

The analysis by the California Independent System Operator covers only the first week after the caps were imposed June 20. Cal-ISO has submitted the data to federal regulators for potential investigation. The report is a summary of what Cal-ISO calls possible anti-competitive behavior by Duke Energy, Williams Cos., Mirant Corp., Reliant Energy and Dynegy Corp.

"In a truly competitive market we would expect these suppliers to bid very close to their actual operating cost," said Greg Cook, senior policy analyst with Cal-ISO's Department of Market Analysis. The state did not necessarily purchase any power at the high prices being demanded. Instead, the significance of the bids is that they show how California could find itself paying exorbitant prices for electricity again if hot weather returns and conservation slackens, said Frank Wolak, a Stanford University economist who studies the California electricity market.

"The bottom line is that the generators are putting out these bids in expectation of high demand," he said. "If weather all of a sudden gets really hot from Southern to Northern California, the bids submitted by generators could be very costly to California."

Cal-ISO calculated the cost of production for each company based on the efficiency of its power plants and estimates of what each paid for natural gas to fuel the plants.

The average cost for the five was $105 per megawatt-hour, which closely matches the federal price limit in California, which now stands at $101 per megawatt-hour. According to the power bidding procedures, companies that bid at or below their cost of production often still get paid a higher price, allowing them to make a substantial profit.

On average, four of the five companies submitted bids either slightly below or slightly above their cost of production. But with the exception of Atlanta-based Mirant, each company at times submitted bids that were substantially higher. Houston-based Reliant, for example, bid as much as $540 per megawatt-hour, more than five times its estimated cost. Overall, Reliant's average bid was close to costs, according to the analysis.

Cal-ISO identified companies by code in its report. Sources familiar with the study identified the companies for The Times.

The Cal-ISO report singled out "Supplier 5," identified by sources as Charlotte, N.C.-based Duke Energy, saying the company "continues to bid significantly in excess of its operating costs."

Duke owns two large power plants on the central coast. It marked up its bids an average of 88% beyond its cost to produce electricity, according to the analysis. For example, it cost Duke $85 to $121 to generate a megawatt-hour of electricity in the time period studied, the report shows, but the company offered to sell a megawatt-hour from $149 to $195.

Duke spokesman Tom Williams on Thursday said, "The use of the data in some cases doesn't appear to add up and in all cases appears to be selective and could easily be misunderstood." Duke sells nearly the entire output of its power plants under long-term contracts, and not on the spot market, which the Cal-ISO report studied, he noted.

Reliant spokesman Richard Wheatley said, "We're looking at the data, and we question whether or not it is correct."

A combination of cool weather, heavy conservation, the start-up of new power plants and recently signed long-term power contracts that guarantee supplies have eased the state's electricity crisis in recent weeks.

Market prices that as recently as May averaged $271 per megawatt-hour have dropped to less than $100 per megawatt-hour.

The more abundant power supplies have freed grid operators to ignore higher-priced bids. But they will have to consider paying such prices to avoid blackouts if supplies tighten, Wolak said.

Such a scenario would test the effectiveness of the Federal Energy Regulatory Commission order issued June 19, he said.

The bids of the five companies analyzed were offers of sales to Cal-ISO, a Folsom-based agency that manages the electrical transmission grid serving 75% of California. Cal-ISO buys power on short notice to smooth the flow on the state's electrical freeway and avert blackouts.

As California's fledgling market began to go haywire last fall, Cal-ISO workers struggled to purchase as much as 30% of the state's power demand with just hours to spare. Since then, the market has stabilized, and Cal-ISO's purchases now amount to roughly 5% of the electricity California consumes.

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Copyright 2001, Los Angeles Times <http://www.latimes.com> 

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