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E-Commerce; Section H BUSINESS TO BUSINESS Step Right Up and Buy a Megawatt! By MATTHEW L. WALD 09/20/2000 The New York Times Page 15, Column 1 c. 2000 New York Times Company MANY Web sites scream about what they will sell you for next to nothing, or less. But how about a site that pays you not to buy? A strange notion, but one that has more solid economic underpinnings than many of those desperate give-it-away dot-coms. Then again, the commodity in question is not the typical stuff of e-commerce transactions, like a plane ticket from Cincinnati to Nashville next Thursday or a vintage Barbie doll or 20,000 widgets of a certain shape. This promising new business is using e-commerce for a commodity that absolutely everybody needs: electricity. As it turns out, one kilowatt may look like another, but its price may vary by a factor of more than 100 in a single day. At night a kilowatt-hour -- the amount of electricity needed to light 10 100-watt bulbs for an hour -- may sell for a penny or two, because most of the generating capacity is unused. But on a hot afternoon, in places where the market is deregulated, the same amount of power could cost $1 or $5, or even more. Traditionally, though, utilities charge most customers pretty much the same price for the kilowatt-hour no matter what they pay to buy it or if they generate it themselves. Even companies with time-of-day rates are charging a price that varies by only a few pennies from peak to off-peak. But as California approached a summer of tight electricity supplies this year, Pacific Gas and Electric started an e-commerce marketplace where customers could be paid not to buy. In theory, the system would work with any customer, but it is only practical with big consumers, mostly businesses, because otherwise the number of transactions becomes hard to manage. As the state danced on the edge of rotating blackouts, the company quickly applied to regulators for permission to expand its program, called E-Bid. The system works like this: every afternoon, the utility gets an estimate of what power will cost on the wholesale market the next day. When the price is high, the utility notifies big customers that have signed up for its program, alerting them to log on to a secure Web site. There, according to Ronald K. Lowe, a company spokesman, the estimated price is posted. If the customer, generally a factory, is willing to cut its consumption 20 percent from its normal level, then it accepts the bid, and the utility pays the customer the posted price, minus the normal retail cost per kilowatt-hour. If the bulk price is $250 a megawatt-hour, for example, that makes electricity 25 cents a kilowatt-hour, compared with a typical price to the factory of 5 cents or so. For every kilowatt-hour that the factory does not use on the next day, the company pays 20 cents. The transaction has two functions. It cuts the risk of the grid running short of power and causing a blackout. And by reducing the peak demand, it takes a few buyers out of the market and makes the price lower for the remaining buyers. As the summer ended, proponents of this kind of marketing said that the unanticipated price swings, especially in places like San Diego, where some customers faced bills that had tripled, showed the necessity for making hourly prices obvious to electricity users, so that they would not blithely continue with normal consumption patterns at times of extraordinary price spikes. But the California program is still small; on one tough day this summer, July 31, 29 customers participated, cutting demand by 40 megawatts, compared with a peak demand of 21,000 megawatts. Pacific Gas and Electric charges customers $600 to enter the program and requires that they be able to cut demand by at least 500 kilowatts, which is enough to run about 100 big houses. But it has applied for permission to cut the entry fee to $100 and take applicants who can cut demand by only 250 kilowatts. Such transactions are only possible through electronic commerce, but by setting just one price in a 24-hour period, P.G.& E.'s system is hardly taking full advantage. Wisconsin Electric Power began a more flexible system this summer in which it invites big customers to log on to a site, where it offers a price per kilowatt-hour not used. If it does not attract enough bidders to meet its needs, it can post a new bid price a few minutes later. Such transactions could apply the market forces that already exist at the wholesale level to the level of the electricity user, possibly even a homeowner. ''There's been a whole lot of debate over the years as to whether or not an average consumer will ever shift consumption based on price principles,'' said Scott A. Weiner, a senior vice president of Sithe Northeast, an independent power producer. ''On the other hand, people who run large office buildings or factories can get those price signals in a very strong way,'' said Mr. Weiner, a former environmental commissioner for New Jersey. BUT, he said, at the moment, there is a supply curve -- a changing level of the amount available, depending on the price offered -- but no real demand curve, because the buyers do not know what the price is and thus cannot respond. Demand is therefore not affected by price. ''In the absence of a demand response, nobody can ever say, 'The price is too high, I'm not going to pay that,' '' Mr. Weiner said. ''As load response programs come into development, it's clear the Web will play a very vital part of making that real and accessible.'' A second form of e-commerce is emerging on a business-to-business model, and it's one of the few forms that the government has required. It is called Oasis, for Open Access Same-Time Information System, ordered by the Federal Energy Regulatory Commission. Oasis gives companies that build free-standing power plants a way to market their power and for companies that consume electricity a way to see the market. Oasis systems are increasingly operated by new entities called Independent System Operators, which have been formed on the East Coast and in California to run the transmission grids that were formerly controlled by electric utilities. The systems vary from place to place, but are supposed to show the price of electricity, sometimes broken down by location, to take account of transmission bottlenecks. At the California Independent System Operator, William H. Simmons, the manager of market applications, development and support, said that some aspects of electricity trading existed years ago on electronic bulletin boards. But the ability of users to identify available transmission links and schedule their use depended on the Web. ''It could not have happened if it were not for the Internet,'' he said. The Independent System Operator works with the California Power Exchange to arrange delivery of the power that generators and customers contract for on the exchange. Both Oasis and programs like E-Bid have the potential to adjust electricity use to reflect costs, experts say, and that would be one way to hold down peak demand and thus make the system less prone to overload. Eric Hirst, an energy consultant in Oak Ridge, Tenn., and a former scientist at the national laboratory there, speaking at a conference in Washington this spring on reliability problems, said the result would contrast with the former pattern of electricity use. When people know the price of a product they are consuming, they behave differently, economists say; in the case of electricity, they will consume it in relation to its seasonal price or even hourly price. As Mr. Hirst said, ''When people used to pay 5 cents a kilowatt-hour, it didn't matter to them whether electricity was free or $2 a kilowatt-hour.'' Graph: ''Lights Out'' Californians use so much electricity that the state is flirting with blackouts. And because of deregulation , prices are sharply higher, especially in peak periods. Now, utilities are paying some big customers to cut their consumption during those periods. Below, the California Power Exchange's output and prices for one day last June. Graph shows output compared to price. (Source: California Power Exchange) Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved. Report: US Transition To Competitive Pwr Markets Muddled 09/20/2000 Dow Jones Energy Service (Copyright © 2000, Dow Jones & Company, Inc.) (This article was originally published Tuesday) WASHINGTON -(Dow Jones)- The U.S. electricity sector is mired in a "prolonged and muddled transition" from regulated monopolies to competitive markets, and the political arena offers little hope of fixing the problem, according to the authors of a new report from Cambridge Energy Research Associates and Arthur Andersen. The report, "Electric Power Trends 2001," paints a picture of inefficiently structured and balkanized power markets hampered by inelastic demand and a gridlocked power grid. With myriad special interests involved in framing the debate, politicians at neither the state nor the federal level are likely to resolve the problems anytime soon, said Cambridge Energy's Lawrence Makovich and Arthur Andersen's Jon Wierda. "Unfortunately, the power industry right now is muddling through," Makovich said. "There isn't an effective political process to sort this out." "We don't see this as something that's going to have a quick fix," agreed Wierda. The solution to the problem is "expert design," rather than the political process, Makovich said. The report assesses the status of electric industry competition two years after California became the first state to deregulate and open up its retail power market. And with California's ill-designed and flawed market restructuring causing a headline-grabbing power-supply crisis, there is an increasing risk that a backlash will cause policymakers to re-regulate the industry, Makovich said. Already a half-dozen states have moved to slow down previously approved plans to open up power markets to competition, Makovich said, citing New Mexico, North Carolina and Oklahoma as among those. "There are right ways and wrong ways to put a competitive market together," he said, critical of the "serious flaws" in California's approach, which contributed to a dearth in investment in generation and transmission capacity. The report identified a number of what it deemed surprises in the wake of California's first-in-the-nation deregulation experiment. Among them, the report cited: - A patchwork quilt of restructured markets has developed, the result of the failure of Congress to issue a top-down restructuring mandate providing "immediate and sweeping changes." As of 2003, only half of U.S. electricity consumers will have a choice among competitive power providers, the report found. - In states where customers do have a choice among competitive providers, they are choosing not to choose. "Less than 1% of electric customers switched from a traditional supplier in 1999, even though more than 20% of retail customers could choose among alternative power suppliers," the report found. - The lack of investment in transmission interconnections has contributed to balkanized power markets with "sharp locational price differentials," the report said. - Volatility in power markets once deemed abnormal is rapidly becoming the norm, despite flourishing competitive spot markets for wholesale power. - This market volatility has prompted what could become "an electric supply tsunami," as proposals have been advanced to build 240,000 megawatts of generation capacity, an amount equivalent to one-third of the existing capacity in the U.S. - Transmission capacity has declined and bottlenecks aren't being resolved, contributing to increased threats of blackouts and brownouts. The Federal Energy Regulatory Commission's order on regional transmission organizations puts the issue at "center stage," the report said. "However, the order is not a bold move to confront gridlock." Many of the surprises identified in the report are interwoven with one another. For instance, the potential for supply to overwhelm demand, represented by the large number of new power plant proposals, is exacerbated by the economics of the industry that provide an incentive to keep older plants operating. There are 40,000 megawatts of new power plant capacity now under construction, and another 30,000 megawatts for which developers are seeking permits to build, Makovich said. Even with a 50% failure rate, that represents two to three times the amount needed, he said. And the surprise doubling in natural gas prices over the past year complicates those development plans, since 93% of the planned projects involve gas-fired plants, the report said. The report attributed the doubling in gas prices to a lack of coordination between investments in natural gas supply and power generation. "High gas prices make old plants all the more valuable," said Makovich. Further, the surprising value of divested power plants, many of which are more than 30 years old, and which sold for as much as four times book value, has resulted in utilities' stranded investment being much less than anticipated. The gridlocked transmission network complicates the "misalignment geographically" of much of the planned power plant development, Makovich said. He noted that California, where there is a severe supply crisis, hasn't built a new plant in a decade, while Texas is overbuilding. Makovich credited ill-designed markets with the failure of retail customers to switch power suppliers. A key component of California's supply crisis was the "well-intentioned" decision to impose a rate freeze for retail customers until the state's three investor-owned utilities paid down their stranded investment, Makovich said. But without retail customers receiving a price signal allowing them to react to growing market volatility, there was no demand response, and the volatility was exacerbated. The California market design left San Diego's consumers subject to spot-market pricing just as the supply crisis caused by the price freeze erupted, he said. "The companies with active management able to react to surprises are the companies that will survive" the transition, said Wierda. The "tsunami" of power plant investment will require a portfolio approach to asset management, he said. Successful companies will be headed by chief executive officers who act as "chief risk officers," he said. -By Bryan Lee, Dow Jones Newswires; 202-862-6647; bryan.lee@dowjones.com Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved. THE WALL STREET JOURNAL / CALIFORNIA What's News: California 09/20/2000 The Wall Street Journal Page CA1 (Copyright © 2000, Dow Jones & Company, Inc.) Escaping Rate Freeze PG&E Corp. is banking on the proposed sale of its extensive Northern California hydropower operations to help it get out from under a consumer-rate freeze that the company says has cost it $2.2 billion this summer. The San Francisco-based company's utility unit, Pacific Gas & Electric Co., wants to sell the 4,000-megawatt hydroelectric system -- the largest network in North America -- to an unregulated fellow affiliate. Such a move would generate upward of $2.8 billion in cash and allow the utility to pay off its so-called stranded costs, principally expensive nuclear-power plants. Once that happens, the utility said in filings with the U.S. Securities and Exchange Commission, it intends to seek permission from state regulators to end the consumer-rate cap. Under the state's 1996 electric- deregulation law, PG&E would then be free to raise rates and recoup losses caused by this summer's spike in the wholesale electricity price. Metro; Metro Desk COMMUNITY NEWS / COVERING ORANGE COUNTY'S 33 CITIES COSTA MESA Jennifer Kho, (949) 574-4275 09/20/2000 Los Angeles Times Orange County Edition Page B-5 Copyright 2000 / The Times Mirror Company Representatives of Costa Mesa and Santa Ana businesses will meet for lunch today to discuss electricity conservation and the possibility of power outages. The South Coast Metro Alliance will present a meeting titled "If the Power Goes Out: A Hot Topic as Temperatures Increase," from 11:45 a.m. to 1:15 p.m. at the Westin South Coast Plaza, 686 Anton Blvd., Costa Mesa. Presentations will include information about the availability of electricity, rolling power outages, the impact of the electricity situation on businesses, deregulation legislation and conservation efforts. Information: (714) 435-2109. Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved.
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