Electricity prices soar as changes take hold: Tab skyrockets under rule 
easing wholesale controls
By Carrie Peyton
Bee Staff Writer
(Published Dec. 12, 2000) 
Some wholesale electricity prices on California's Power Exchange nearly 
tripled between Friday and Monday and others nearly quadrupled, while 
officials declared another electric emergency. 
In the first full business day under new, sharply disputed trading rules 
aimed at averting blackouts, prices of electricity on the Power Exchange, 
where the bulk of California's electricity is bought and sold, surged far 
above Friday's $250 per megawatt hour. 
The day's first PX auction produced average prices of $904 per megawatt hour, 
and a second auction used to adjust transmission line use produced prices of 
$668. 
One year ago, the average PX price was about $30, Power Exchange spokesman 
Jesus Arredondo said. 
"Prices were crazy yesterday and they're crazier today," Arredondo said. 
"This will be the most expensive month ever in California, I'm sure of it." 
The California Independent System Operator blamed high natural gas costs and 
strong electric demand throughout the West for Monday's price run-up, but 
critics suggested it was early evidence that the new trading rules have 
backfired. 
At the ISO's request, the Federal Energy Regulatory Commission late Friday 
gave permission to lift a $250 price cap and replace it with a requirement 
that power sellers who set prices higher than $250 must explain them later. 
The ISO said the changes would improve the grid's stability by attracting 
more power to California, repaying plant owners for high natural gas costs 
and reducing last-minute deals. 
The rules were immediately attacked by Gov. Gray Davis and state regulators, 
who argued that the rules would drive up prices without solving the other 
problems. 
That's just what happened Monday, said Steve Maviglio, spokesman for Davis. 
"Price gouging has reached a new level," he said. "It's not surprising. It's 
exactly what the governor predicted." 
In addition, a "glitch" in the way the ISO and the PX use two-stage 
electricity auctions to ease congestion on transmission lines will 
temporarily spur more last-minute trading instead of less, according to power 
plant owners and the ISO. 
ISO officials, who have long warned that last-minute deals can hurt the 
stability of the electric grid, said the effect will be minimal, but Power 
Exchange officials predict it could be massive. The test will come today. 
In an effort to solve the problem, the PX late Monday asked FERC to make 
another emergency change in trading rules, lifting caps on the second round 
of power auctions, which are used to set "congestion" pricing. 
The PX buys electricity from power plant owners and sells it to buyers, 
almost universally the utilities, which then turn around and supply 
Californians power. The ISO was created to control the transmission grid, but 
it has emerged as the buyer of about one-fourth of California's power when 
stability problems arise, and it then resells that power to utilities. 
Meanwhile, the ISO declared another "stage two" electric emergency Monday 
afternoon -- the 12th since Nov. 1 -- and pleaded for continued conservation. 
Some big power users were told to reduce consumption, although the ISO said 
generally the outlook has improved slightly. 
About 8,700 megawatts of power were off line Monday, compared with a high of 
more than 11,000 last week. A megawatt can supply about 300 to 1,000 
households, depending on season and location. 
The ISO blames the almost unheard of cold-weather emergencies on an unusual 
number of power plants down for repairs and growth in other regions that 
compete with California for electricity. 
"It's a very tough problem right now," ISO spokesman Patrick Dorinson said. 
"I almost could look back and say summer was fun." 
The governor, PUC president Loretta Lynch, consumer advocates and others 
blame the deregulated electric market for the cold-weather power crunches. 
As that controversy raged on, state officials who are monitoring the 
increasingly chaotic electricity situation began toting up the costs of last 
week's runaway prices. 
On Friday alone, according to the California Electricity Oversight Board, it 
cost $212 million to deliver power through the ISO-controlled grid, which 
serves about three-fourths of the state's electric consumers. 
That would be enough to fully pay for a new, cleaner-burning 500-megawatt 
power plant about every two days. 
Monday's bill won't be fully computed for another few days, but it appears 
that it will be significantly higher, according to the oversight board. 
"We have a huge transfer of wealth going on, and we're not getting anything 
for it," Pacific Gas and Electric Corp. spokesman Gregg Pruett said. 
Meanwhile, financial analysts Monday warned investors that the state's two 
largest utilities are finding it increasingly difficult to bridge the gap 
between frozen rates and power costs that escalate nearly daily. 
Credit rating agency Fitch Inc. on Monday lowered its long-term and 
short-term debt ratings for PG&E and Southern California Edison, as well as 
the latter's parent company, Edison International. Fitch cited "increased 
liquidity pressure" and uncertainty about the utilities' ability to recover 
the costs of their power purchases. 
The rating downgrades mean it will be more expensive for the utilities to 
borrow money in the future. 
Also on Monday, Morgan Stanley Dean Witter & Co. and Banc of America 
Securities lowered their ratings on PG&E Corp.'s stock, which fell Monday to 
$21.94 a share, down $1.63, nearly 7 percent. The firm also lowered its 
rating for Edison International, whose stock closed at $18.63 a share, down 
$1.81, nearly 9 percent. 
Moody's Investors Service put the securities of PG&E and its parent PG&E 
Corp. on watch for a downgrade. 
PG&E estimates that at the end of November it had paid out $4.6 billion more 
for power than it has been able to collect, although consumer advocates 
disagree, pointing out that that number is significantly offset by utility 
revenues in other special accounts. 
Before the December run-up in wholesale prices, PG&E had requested a 17.5 
percent rate increase, which state regulators put on hold. Now the rate 
increase needed to cover its costs appears to be increasing daily, Pruett 
said, but he declined to say how much PG&E might seek. 
Although consumer advocates oppose a rate increase, some are beginning to 
talk quietly about increases being inevitable if wholesale prices cannot be 
brought back down. 
"It's not sustainable," said Mike Florio, an attorney for The Utility Reform 
Network and a member of the ISO board. "It has to stop." 
Bee staff writer Andrew LePage contributed to this report.
Copyright , The Sacramento Bee