San Diego Business Journal

Large Energy Users Could Face Renewed Price Spikes and Drops

BY LEE ZION

Staff Writer

Most consumers will see little or no change in their electric bills from a recent federal mandate that California's energy clearinghouse stop giving the state Department of Water Resources preferential treatment.

However, industrial users that buy their electricity on the open market may be in for another price-related roller coaster ride.

The Federal Energy Regulatory Commission ruled Nov. 21 that the California Independent System Operator can no longer give preferential treatment to the DWR, which now buys most of the electricity distributed throughout the state.

Previously, the DWR received information not shared with other market participants, such as the amount of power the Cal-ISO expected to buy over the next hour, the bid price and volume information.

Gregg Fishman, spokesman for the Cal-ISO, acknowledged that the agency had been sending the DWR that information, but is no longer doing so, in compliance with the federal order.

FERC had acted on complaints from power generators Reliant Energy and Mirant, who said the Cal-ISO's actions tilted the playing field in favor of the state.

Rep. Doug Ose, R-Woodland, also complained to FERC, saying the preferential treatment for the water agency cost taxpayers money. On one occasion, the DWR required the ISO to accept long-term contracts locking in electricity at $400 per megawatt hour, when cheaper coal-fired generation was available from Nevada at $60.

But now that the DWR will no longer receive preferential treatment, how will this affect consumers?

Michael Shames, executive director of the Utility Consumers Action Network, said most electricity consumers will remain unaffected. However, for the small percentage of large customers who purchase their electricity on the open market, this decision could cause prices to drop or rise sharply.

The reason most consumers won't see any change is that all the FERC order does is enable new sources of electricity generation to enter the market. However, the investor-owned utilities are already committed to purchasing electricity through the long-term contracts the DWR already signed, he said.

Meanwhile, the cheap power that does enter the market will go only to large corporations, Shames said.

"Ratepayers are still on the hook for paying off the expensive power, whether we use it or not," he said. "Cheaper power will get into California, but it won't make its way over to most of the customers. It will make it to the hundred or so companies that are trying to buy power from someplace other than from DWR."

A number of ironies are at work here. The first is that the DWR entered into these long-term contracts at a substantial discount, at a time when prices on the spot market were exorbitant. Now, the state is still locked into these contracts, but prices have fallen so far on the spot market that the contracts are now a bad deal in comparison, Shames said.

The second irony is that there really isn't a spot market. The DWR locked up so much energy into long-term contracts there's very little left over, he said.

"They've dominated the market. There isn't a whole lot of power left, and the power that's around is pretty cheap," Shames said.

So a handful of customers will be able to snatch up even more cheap power, he said.

However, Shames cautioned now that the DWR can no longer work as closely with the Cal-ISO, there's a chance that prices could actually go up.

The ISO may have to return to the "out-of market" to purchase electricity. That's where the majority of the abuses occurred at the height of the energy crisis,

Before the state DWR stepped in at the height of the energy crisis, the ISO had to buy its last-minute power needs from out-of-state generators. Prices were jacked up very high, he said.

Now that the ISO is not able to communicate its power needs to the DWR in advance, it may have to return to the out-of market, and prices could go up again, Shames said.

However, since the state's energy needs have all been locked up in long-term contracts, and demand has dropped due to conservation, there's not much room for prices to increase, he said.

Another industry analyst expects little change. Mike Florio, senior attorney for The Utility Reform Network, said the FERC's decision was largely a housekeeping move.

At the height of the energy crisis, the FERC had ordered the Cal-ISO to find a creditworthy buyer, other than the state's three investor-owned utilities, to back its electricity purchases. That role eventually fell to the state's water agency, he said.

The role for the DWR wasn't clear, and in the middle of the crisis, nobody had time to sort out this "strange situation," Florio said.

As a result, the DWR needed help. Florio described the assistance it received from the ISO as on-the-job training as the water agency took on its new role.

That's why the ISO assisted the DWR with additional market information in the beginning, Florio said.

Now that the crisis has eased, attention has turned to how to handle the DWR. The FERC eventually ruled that the water agency should be treated just like any other market participant, he said.