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---------------------- Forwarded by Carla Hoffman/PDX/ECT on 08/08/2000 11:45
AM --------------------------- Enron Capital & Trade Resources Corp. From: "Pergher, Gunther" <Gunther.Pergher@dowjones.com< 08/08/2000 11:34 AM To: "Leopold, Jason" <Jason.Leopold@dowjones.com< cc: (bcc: Carla Hoffman/PDX/ECT) Subject: DJ Power Price Cap In Calif Puts Brinksmanship On Grid 17:25 GMT 8 August 2000 =DJ Power Price Cap In Calif Puts Brinksmanship On Grid By Mark Golden Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--California's new, lower cap on the price of wholesale power is intended to bring relief to consumers burned by this summer's high-flying electricity rates. But it has also set the stage for a game of chicken between utilities and power producers - with the operator of the state's power grid caught in the middle and a major blackout the consequence if both sides hold their course on a hot day. By creating incentives for power producers and power buyers to wait on the sidelines, the price cap has put the California Independent System Operator in the position of covering much of the state's power demand at the last minute - something the grid operator was never intended to do. "It's not designed to handle a third of the load, and it's not designed to be the arbitrage tool for either those buying electricity or those supplying it," Jan Smutny-Jones, chairman of the ISO's board of governors, said of the ISO's real-time power market. "For the ISO to find 15,000 MW of power on any given day is a huge undertaking that puts a tremendous amount of pressure on the real-time operation of the grid. We're going to be in trouble." Thanks to a break in this summer's high temperatures in California, the ISO managed to find the power it needed Monday and bought it under the new price cap of $250 a megawatt-hour. It also looks to be able to make it through Tuesday. But the real test could come with higher temperatures forecast for Wednesday and Thursday - or whenever the next heat wave comes. The state's power grid is run by the ISO, established by the state's legislature to ensure that California's utilities were getting enough power to meet their customer needs. Utilities typically buy most of the power they need a day in advance based on weather forecasts and system capacity. A different state-chartered organization, the California Power Exchange buys most of the power the utilities need one day ahead of time. The ISO is supposed plug unexpected gaps by purchasing marginal amounts of power on a last-minute basis as necessary. But the price cap is changing the way the game is played. Prices in the ISO's real-time market are capped at $250 a megawatt-hour. But prices in the CalPX's day-ahead market are uncapped and free to skyrocket. As a result, California's main utilities - PG&E Corp. (PCG) unit Pacific Gas & Electric, Edison International (EIX) unit Southern California Edison and Sempra Energy (SRE) unit San Diego Gas & Electric - will buy only those supplies available on the day-ahead market that are bid at the ISO cap or less. That policy makes sense - electricity is widely regarded as the most volatile commodity in existence, prices can rise 100-fold in a matter of days and California's prices are about four times their level last summer. But it isn't the most sustainable. Grid Operator Left To Cover Large Shortfall On Monday, for example, the California PX reported that the utilities bought all the power suppliers bid in below the price cap, a total of 27,500 megawatts of supply for peak afternoon hours. But as the sun rose over the California sky and air conditioners ramped up, the three utilities needed 40,000 megawatts of power to meet demand - leaving the ISO not just to tweak the system, but to buy almost a third of what was required. "It makes it a lot harder for our people to operate the system," ISO spokesman Patrick Dorinson said. On Monday, the ISO had to leave its official, computer-based market and scramble to secure needed power supplies from neighboring utilities by telephone, as it has done numerous times this summer. The question for California is whether independent generating companies and utilities outside the state will sell their power to the state at or below the $250 price cap, or whether they'll be able to sell their output for a higher price elsewhere. Like much of the rest of the country, the western U.S. now needs more electricity during summer afternoons than it can generate. The booming electricity-driven new economy has been met with almost no additions to generating capacity. Companies that have generating capacity are looking for top dollar. "Our real-time folks' job is to optimize revenue and get the highest price for that energy that they can," said Larry Bryant, spokesman for the Public Service Co. of New Mexico (PNM), which regularly sells power to California. "There is no preference of customer. There's preference for maximizing the revenue that hour of that day." The $250 cap, half what it was until Monday and a third of what it was until July 1, is well under prices the western wholesale power market has seen frequently this summer. The ISO has the authority to break its own cap if necessary to keep the lights on, but doing so could make a shambles of the state's official power market. Traders at utilities with excess power to sell say they will have no incentive to bid in supply on the ISO's computer system at prices under the cap if they know the ISO will be picking up the phone later with sweeter deals. "At 10 a.m. the ISO operators have to run around and find a sufficient amount of capacity in the West to serve our needs, and on some days there really is only a limited amount of capacity to go around," Smutny-Jones said. "We're going to have figure out a better way of managing this," he added. -Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com Copyright © 2000, Dow Jones & Company Inc G_nther A. Pergher Senior Analyst Dow Jones & Company Inc. Tel. 609.520.7067 Fax. 609.452.3531 The information transmitted is intended only for the person or entity to which it is addressed and may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you received this in error, please contact the sender and delete the material from any computer. <<Gunther Pergher (E-mail).vcf<< - Gunther Pergher (E-mail).vcf
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