Briefing on Issues

How we got to where we are.

• The electrically-separate Western Interconnection is the relevant geography.

• Economic and population growth in the Western Interconnection have spurred demand. The West, outside of California, has many of the fastest growing states in the country.

• Demand for electricity increased. The first pie chart shows the 1999 summer peak demand by each of the four subregions of the Western Interconnection. The second pie chart shows where peak demand growth occurred from 1995 to 1999. (Source: Northwest Power Planning Council)

Summer Peak Demand and Demand Growth in the West

WSCC Regions: Northwest (I); Rocky Mountain (II); Arizona-New Mexico (III); California-Mexico (IV):

• Construction of new power generating capacity has not kept up with growth in demand.

• Nationwide, utility energy efficiency investments have declined from $2.74 billion in 1993 to $1.4 billion in 1999. (Source: EIA)

• The federal government has encouraged a move to competitive generation markets and offered market-based pricing of generation (as opposed to the traditional cost-based pricing). The federal government effort to foster a competitive generation market began with the enactment of the Public Utilities Regulatory Policies Act in the 1970s. The effort was significantly expanded under the Energy Policy Act of 1992 and under FERC’s open transmission access order issued in 1996 and Regional Transmission Organization order issued in 2000. The move to a competitive generation market has been spurred by new generation technologies, especially efficient gas-fired turbines.

• California restructuring that was implemented in 1998 required investor-owned utilities to sell their power generation into the Power Exchange and to buy power from the PX. There was little opportunity to hedge spot market prices with long-term contracts and utilities did not fully utilize the minimal long-term contract option that was available.

Where we are today.

• Demand is outstripping supply and reserve margins are shrinking. See the following tables and graphs from the Western Systems Coordinating Council.

• According to a more up-to-date data base maintained by the California Energy Commission, 62,600 megawatts of power plants have been announced, planned or are under construction in the western region, nearly all of which are gas-fired plants. There is no assurance that all of these plants will be built.
• Click here for an up-to-date overview of power plant construction in California: http://www.energy.ca.gov/sitingcases/backgrounder.html
• Click here for the California Energy Commission’s database of announced, planned, permitted and under construction power plants in the Western Interconnection http://www.energy.ca.gov/electricity/wscc_proposed_generation.html
• Click here for a map and graph showing planned power plants in the Northwest. This information is part of the Northwest Power Planning Council’s study of the summer price spikes. http://www.westgov.org/wieb/power/nw.htm

• There have been unprecedented electricity prices this summer during peak demand periods.

• There has been a surprising acceleration of prices in the normally low-priced period of the Fall. The graph shows on-peak firm electricity prices since the Governors initial emergency electricity conference call on December 5. Data is from the Wall Street Journal.

• Prices in California in the first half of December are nearly fourteen times higher than the average of the last two years.

* Average for 18 days.

Soaring national natural gas prices and extreme natural gas prices at the California border are major contributors to the current high electricity prices. Electricity markets in California continued to operate in a near emergency situation and citygate natural gas prices in southern California traded at record highs on Monday, December 11 as prices spiked above $59.00 per MMBtu. As weather eased, prices spiraled down Tuesday and Wednesday on the SoCal system to fall below $21.00 per MMBtu for the first time since December 1. In the Midwest and the East, citygate prices also rose sharply but then moved down to $7.92 per MMBtu in Chicago and $9.26 in New York on Wednesday. Last year’s average citygate price in California was $2.34 per MMBtu (Source: EIA).

• A dry November has curtailed hydroelectric production and exports from the Northwest and Canada.

• Since the spring, 32 Stage 2 Alerts (less than 5% reserves that trigger calls for conservation and shedding of interruptible load) and one Stage 3 Alert (less than 1.5% reserves, rolling blackouts) have been declared in California. A Stage 2 Alert is called when operating reserves dip below five percent or are expected to dip below five percent within the next two hours.

• On December 5, the first Potential Alert 2 was declared in the Northwest. Click here for the December 5 press releases from Washington (http://access.wa.gov/news/article.asp?name=n0012032.htm) and Oregon (http://www.governor.state.or.us/governor/press/p001208.htm). Click here for the proposed Pacific Northwest Winter 2000-01 Energy Emergency Plan www.westgov.org/wieb/power/plan.pdf

• Beginning with the summer price spikes and expanding in the fall, a number of utilities have adopted demand bidding or demand exchange programs under which large utility customers can bid to receive money in exchange for lowering their load. Companies that have such programs include: the California ISO, Pacific Gas & Electric, Southern California Edison, San Diego Gas & Electric, Portland General Electric, Avista, and PacifiCorp. The Avista program was approved in December and the PacifiCorp program was also approved in Washington and Oregon this month. Due to the short existence of these programs, information concerning their effectiveness is limited.

• On Thursday, December 14, Energy Secretary Richardson issued an order under the emergency provisions of the Federal Power Act requiring most generators in the western states to provide power to the California Independent System Operators (ISO) during shortages, provided the company has power in excess of its needs. Click here for the order: http://www.westgov.org/wieb/power/202order.html

On Friday, December 15, FERC approved an order (click here for the order www.westgov.org/wieb/power/ferc.pdf):

• Ending a requirement that California investor-owned utilities (IOUs) buy and sell all their power through the California Power Exchange (PX). The order returns to California PUC jurisdiction 25,000 Mw of generation still owned by the IOUs. The order allows the IOUs to execute bilateral contracts to hedge the cost of spot power purchased in the PX. FERC believes that this action is the most important element in its order to mitigate the electricity crisis.
• Imposing penalties for underscheduling load. The intent is to discourage companies from trying to schedule load in the real-time ISO market.
• Imposing a “soft cap” of $150 per megawatthour. Under the order, accepted bid less than $150 will receive the market clearing price. Any accepted bid more than $150 will only receive the price they bid (not the price of the highest market clearing bid) and will have to report certain information to FERC (e.g., plant heat rate, cost of NOx emission allowances, fuel cost). The soft cap is only in effect until April 30.
• Replacing the ISO stakeholder board with an independent board that will be organized in coordination with the State of California.
• Directing the ISO and the three California IOUs to submit procedures for interconnecting new generators.
• Establishing a technical conference to “facilitate the prompt negotiation of long-term power contracts at reasonable rates.”
• Setting in motion a more comprehensive market monitoring activity.

FERC did not elect to impose region-wide price caps. In the order, FERC said:

“Although we agree with the commenters that the Western region of the U.S. is an integrated electricity market, 128 we will decline to adopt a region-wide price cap at this time. There are no organized electricity markets outside of California to which a price cap could be applied, i.e., with the exception of California, there are no ISO or PX markets currently operating anywhere in the region. The majority of transactions that occur in the region do so on a bilateral basis.” 129

“Moreover, under the Federal Power Act, upon complaint or on our own motion, the Commission may establish new rates only if it first has a record to determine that the existing rates are unjust, unreasonable, unduly discriminatory or preferential. Further, once such a finding is made as to existing rates, the Commission must have a record to support the new rate it establishes as just and reasonable. The record in this consolidated hearing proceeding only extends to sales into the ISO and PX markets; thus, the Commission has little or no evidence on which to assess prices of bilateral transactions either within California or elsewhere in the Western region. While the issue of generation supply availability in California is an important one, no commenter has submitted evidence that conclusively demonstrates that the adoption of regional price cap would beneficially influence the availability of supplies in California. In addition, no commenter has documented a single instance of a seller outside of California exercising market power during times of scarcity. In sum, the commenters have not met the burden of showing that a price cap on all sellers supplying energy and ancillary services in the Western region is justified and in the public interest.”

In a concurring opinion, Commissioner Bill Massey said,

In this order I would have preferred to open a section 206 investigation into wholesale prices in the entire western interconnection. We have a number of requests before us to do this, based upon the theory which I support that the entire western interconnection is one big machine that ought to be dealt with as a whole. A number of public officials from the Pacific Northwest in particular are very concerned about both the volatility and level of wholesale prices. I share those concerns, and would have opened a formal investigation in this order. I am told by our legal counsel that such a formal investigation is probably a necessary precursor for any type of region-wide price relief.

• FERC also scheduled a meeting with California parties on Tuesday, December 19. Click here for the Order Establishing Conference, issued December 18, 2000.
Click here for information on the December 19, 2000 Conference.

• On December 15, California Gray Davis issued a press release critical of FERC’s order and citing actions underway in California. Click here for the press release: http://www.governor.ca.gov/briefing/pressreleases/dec00/pr003341215.html
• On December 14, Washington Governor Gary Locke issued a press release stating that DOE and BPA have endorsed the call for energy price caps in the West. Click here for the press release.

Optional actions suggested by various parties.

• Impose hard caps on the price of wholesale electricity in California.
• Impose price caps for the entire U.S. portion of the Western Interconnection.
• Appeal for conservation during critical shortage times.
• Allow waivers of environmental requirements during crisis (e.g. allow NO_x emission limits to be exceeded, waive hydro operations restrictions that are designed to protect fish)
• Require all utilities to allow their customers to bid to reduce their load in exchange for money.
• Implement near-term energy efficiency measures.
• Build power plants and transmission.
• Accelerate longer-term energy efficiency measures.
• Develop energy policies that avoid similar crises in the future.