Energy Traders Warn New Caps Will Raise Prices for Utilities, Customers
California energy traders warned Friday that new wholesale price caps will cost utilities and their customers more money, not less.
Unsettled by the state’s latest change in market rules, industry executives said the new price caps will deter the long-term sale of electricity at fixed prices--the very kind of agreements that utilities say they need to hold down and stabilize prices.
Indeed, on Friday, only 24 deals were cut in the “forwards” market of California’s main electricity marketplace, compared with 850 such transactions in the four previous days. Those deals involve the sale of electricity from one day to five years ahead.
The slowdown came one day after the California Independent System Operator, which oversees California’s electricity grid, voted to overhaul price caps on wholesale electricity in response to growing problems with the state’s deregulated electricity industry.
“The traders were dumping their long-term contracts because they claim too much uncertainty has been created in the California market,” said Jesus Arredondo, spokesman for the Alhambra-based Power Exchange, the nonprofit digital marketplace where prices for wholesale electricity are set through bidding by buyers and sellers.
Executives with Southern California Edison interpreted the slowdown in trading differently. Gary Stern, chief of market monitoring for the Edison International subsidiary, speculated that fewer long-term deals were signed Friday because prices are dropping--a good sign for a utility that this summer paid $2.4 billion more for electricity than it could pass on to customers protected by a Legislature-imposed rate freeze.
Electricity purchased Thursday on the Power Exchange for delivery in the first three months of 2001 sold for $68 a megawatt-hour, Arredondo said. By Friday, the price for electricity to be delivered in the same time period had dropped to $58 a megawatt-hour.
(A megawatt-hour is roughly enough electricity to supply 1,000 homes for an hour.)
Stern took that as a sign that at least some players in the market believe the new caps will lead generally to lower prices--even though the caps are not yet in effect and would apply, in any case, only to emergency purchases by the California Independent System Operator.
Edison’s representative on the board of the California Independent System Operator voted for the new price caps.
Cal-ISO was created by lawmakers under the 1996 law that deregulated California’s electricity industry. The agency, based in Folsom, has authority to make last-minute purchases of electricity to stabilize the state’s high-voltage grid. This summer, contrary to what the designers of deregulation expected, an unusual amount of electricity was sold in Cal-ISO’s last-minute market. Generators could often earn more money there than by bidding their electricity at least a day in advance into the Power Exchange.
Under pressure to control an extraordinary rise in wholesale electricity prices that began in May, the Cal-ISO board voted several times this summer to adjust price caps. That cap now stands at $250 a megawatt-hour. The new system of price caps will range from $250 to $100 a megawatt-hour and will vary based on the demand for electricity and the price of natural gas, which fuels most power plants.
John Stout, vice president of Houston-based Reliant Energy Inc., said Friday that the price caps “grossly underestimate” the cost of producing power from natural gas. Reliant bought four of Edison’s power plants in 1998 when deregulation rules forced the utility to sell off assets.
The Cal-ISO staff has estimated that the staggered system of price caps would have saved utilities and other buyers of electricity $1.1 billion this year if it had been in place instead of a straight price cap of $250 a megawatt-hour.
Before it takes effect Friday, the new system of price caps could be rendered moot by the Federal Energy Regulatory Commission, which is set Wednesday to release the results of an investigation of the California wholesale electricity market. The FERC has the authority to revoke the Cal-ISO board’s ability to impose price caps.
