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CalPX:High Summer Pwr Prices Mostly From Fundamentals
By Mark Golden 10/04/2000 Dow Jones Energy Service (Copyright © 2000, Dow Jones & Company, Inc.) NEW YORK -(Dow Jones)- High electricity prices this summer in California were the result of market fundamentals and structure, rather than market manipulation by particular participants, according to a preliminary report by the California Power Exchange. Rising demand in the state and in the western U.S. overall combined with a lack of new generators to push wholesale prices to levels about three times as high as prices last summer, according to the preliminary report obtained by Dow Jones Newswires. And the price rise was predictable, according to the report. Citing hot weather from May to July in California and the Southwest, lower hydroelectric supplies in the Northwest, higher natural gas prices, higher prices for nitrogen oxide emission allowances, the report says that "reserve margins during peak hours in May and June in the Western Systems Coordinating Council region dropped to a thin 4% to 6%, compared to the forecast 17% to 20%." "Price movements in California and the WSCC are consistent with analysis by Cambridge Energy Research Associates, which has demonstrated a high correlation between low capacity reserve margins and high spot prices in other regions of the U.S.," the report says. While the CalPX recommends changes to its market rules, it says that prices were sometimes higher in other parts of the western U.S. than in California this summer, further evidence of a genuine market imbalance between supply and demand. The CalPX market flaws, however, "provided incentives to suppliers to speculate on receiving higher prices in the Real-Time and Ancillary Services markets (which are operated by the California Independent System Operator) by moving their supply to those markets, leaving less supply in the CalPX Day-Ahead market. These design flaws need to be addressed," the report says. Although suppliers had incentives to move power to the highest-priced markets, the CalPX found no "consistent pattern by individual participants or participant category. As a result, it is difficult to single out any one group as the force driving prices." CalPX will send the final report to various bodies investigating the California wholesale electricity market, including the Federal Energy Regulatory Commission, the California Public Utilities Commission, the California Attorney General, the California Electricity Oversight Board and the state legislature. Its findings may not sit well politically with some of those bodies, according to one source. California utilities, Gov. Gray Davis, and various legislators and regulators have been blaming independent power generators - "out-of-state" companies that bought big generating stations from the utilities over the past three years - for market manipulation and price gouging. Those groups hope to build a case with the FERC that would force suppliers to refund some of their big gains this summer back to California's utilities and to the customers in the San Diego area, who have received high electric bills. Instead, the CalPX's preliminary report proposes corrections that are relatively modest, such as increasing demand responsiveness, removing barriers to new generation, proportionally allocating out-of-market purchase costs to the utilities that underscheduled power purchases and encouraging utilities to buy more power in the forward market. As ordered by state legislation to deregulate the electric utility industry in California, the regulated utility units of PG&E Corp (PCG), Edison International (EIX) and Sempra Energy (SRE) purchase the power they need one day in advance through the CalPX and make any last-minute purchases through the California ISO. By Mark Golden, Dow Jones Newswires 201-938-4604; mark.golden@dowjones.com
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