---------------------- Forwarded by Greg Blue/HOU/Dynegy on 01/05/2001
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"Golden, Mark" <Mark.Golden@dowjones.com> on 01/05/2001 01:27:25 PM

To:   "Pergher, Gunther" <Gunther.Pergher@dowjones.com>
cc:

Subject:  POWER POINTS:For The Record, Price Cap Follies Of 2000


POWER POINTS:For The Record, Price Cap Follies Of 2000
By Mark Golden
A Dow Jones Newswires Column

NEW YORK (Dow Jones)--Significant facts in the California electricity
crisis
of 2000 have been lost in the high-pitched political response to a genuine
economic problem.
That's too bad, because some of the lost truths are humorous, others are
enlightening.
The year began with California State Senator Steve Peace, who was one of
the
chief architects of the state's 1996 deregulation law, boasting that
California
had fooled merchant power companies into paying too much for the power
plants
they bought from the state's utilities.
The deregulation law was "a bet that most of the industry nationwide
would
misperceive what we were doing and overbid on the power plants," said
Peace,
as
reported by Intelligence Press in January.
"When the California legislature entered the debate on electricity
competition," Peace went on to say in January, "the assumption was that you
had
to accept some level of compromise on reliability. But what is
fundamentally
different in what we did, compared to the national debate, is that we said
absolutely, categorically you cannot compromise reliability. We led with
reliability."
Now, of course, this view of things is laughable. By late June even,
Peace
was
foaming at the mouth before the California Independent System Operator
about
the
new power plant owners and how they were gouging the state. He demanded -
and
eventually got - the ISO board of governors to cut their price cap to $250
a
megawatt-hour from $750/MWh.
For the record, the ISO's lower price cap was a complete failure. Not
only
didn't the price cap protect the state's utilities from financial ruin, it
contributed to their losses. During the week of Dec. 4, when western U.S.
wholesale power markets were well above $250/MWh, the ISO staff was buying
massive amounts of juice at an average price of $700/MWh in "out-of-market"
purchases that were allowed under the price cap rule, but not publicly
reported.
The ISO staff was allowed to make these out-of-market purchases only from
utilities outside of California. So California's independent power
producers
were selling to out-of-state utilities for about $400-$500/MWh, and the
utilities were selling power back to the ISO for up to $1,100/MWh.
Some Northwest utilities even started buying power from the plants PG&E
Corp.
(PCG) and Edison International's (EIX) Southern California Edison still own
through in the California Power Exchange's day-ahead market at $250/MWh,
and
then selling it back to the utilities through the ISO's real-time market at
$700/MWh. That was pretty cheeky, but market participants always take
advantage
of stupid rules if they can make a big profit.
At this point, the ISO asked the U.S. Federal Energy Regulatory
Commission
for
permission to dispense with its failed price cap and move to the
FERC-recommended "soft" price cap, which requires only that sellers
document
costs that justify power sold for more than $150/MWh.
On Dec. 8, the FERC approved the emergency measure.
Prices fell, but one would never know that listening to the California
Public
Utilities Commission. "The elimination of wholesale electricity price caps
by
FERC on December 8 as confirmed by its order on December 15 and the
resulting
five-fold increase in wholesale electricity prices has expanded the
crisis,"
the
CPUC said in its rate-case ruling Thursday.
This is false, and the CPUC staff knows it. The CPUC wants to blame the
FERC
for the crisis, because the FERC has said that the CPUC is to blame for
discouraging PG&E and Southern California Edison from purchasing power on a
long-term basis.
What Sen. Peace lacks in perception, the CPUC lacks in integrity.
The highest price in the four-year history of western electricity markets
was
recorded the morning of Dec. 8, about 12 hours before the FERC killed the
price
cap. Power for Monday at the mid-Columbia River hub traded over-the-counter
Friday morning at a high $4,400/MWh, because a cold front was expected to
arrive
over the weekend. The lowest prices paid in the Northwest that day were
$3,000/MWh.
The cold front never fully materialized. As a result, the California
Power
Exchange, which trades Monday power on Sunday rather than Friday as the
over-the-counter market does, priced Monday, Dec. 11 power at $654.22/MWh.
This
was above the old price cap of $250/MWh, but not bad considering where
other
western utilities had been trading Monday power two days earlier.
When the CPUC and California Gov. Gray Davis talk about "a five-fold
increase"
in prices after the FERC lifted the price cap, they are talking about the
CalPX's clearing price index of $1,407.07 on Dec. 13. But the CalPX went on
record later calling that clearing price "meaningless."
It was the result of a computer problem instituting the new "soft" price
cap
rules. No electricity was bought or sold at that price in California that
day,
and hours later the prices were refigured at $250-$310/MWh.
The over-the-counter market had drifted down to $450-$500/MWh in the
Northwest
and to $320-$350/MWh in the Southwest.
And prices have been drifting down ever since. Northwest power traded
Friday
at $135-$155/MWh and Southwest power traded at $121-$130/MWh. Generators
are
coming back on line from fall maintenance, and the weather is warmer than
expected. Pretty fundamental stuff, but Steve Peace, the CPUC and Gov.
Davis
are
still convinced they can simply dictate prices.
Sure. And Alan Greenspan can save the Nasdaq.
-By Mark Golden, Dow Jones Newswires; 201-938-4604;
mark.golden@dowjones.com

(END) Dow Jones Newswires  05-01-01
1845GMT(AP-DJ-01-05-01 1845GMT)