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Anatomy of California’s Electricity Crisis (How to Make a Bad Thing Worse)

Anatomy of California’s Electricity Crisis (How to Make a Bad Thing Worse). Dr. John L. Jurewitz Director, Regulatory Policy Southern California Edison Company Massachusetts Electric Restructuring Roundtable Boston, Massachusetts January 29, 2001. “That’s why I never walk in front.”.

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Anatomy of California’s Electricity Crisis (How to Make a Bad Thing Worse)

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  1. Anatomy of California’sElectricity Crisis(How to Make a Bad Thing Worse) Dr. John L. Jurewitz Director, Regulatory Policy Southern California Edison Company Massachusetts Electric Restructuring Roundtable Boston, Massachusetts January 29, 2001

  2. “That’s why I never walk in front.”

  3. The Making of California’s Electricity Crisis Restructuring Rules Market Fundamentals Market Rules and Market Power Regulatory and Political Inaction

  4. Key Restructuring Rules • CPUC’s requirement that utilitiesbuy all power through Power Exchange and ISO • Generation divestiture without buy-back contracts • Retail rate freeze Over-exposure to the spot market

  5. Why Did CPUC Initially Insist that Utilities Buy Everything Through the PX and ISO Spot Markets? • Wanted transparent pricing to assure against self-dealing • Did not want utilities incurring long-term obligations and potentially stranded costs in their role as default provider • Wanted to encourage independent retailers • Customers wanting price hedges should seek them from ESPs

  6. % Market Hedged Unhedged (long-term forward contracts, Spot Market self-owned generation) Comparison of Forward Contracting/Hedgingin Other Electricity MarketsRegulatory Constraints in Forward Contracting in CAISO Market Was a Key Source of High Costs in Summer 2000 CAISO 40-50% 50-60% PJM 85-90% 10-15% New England 80% 20% Australia 90% 10%

  7. 200 0 Min/Max Zonal Avg PX SoCal Day-Ahead Electricity Prices 1000 800 600 $/MWh 400 Jul-99 Jul-00 Oct-99 Oct-00 Jun-99 Jun-00 Apr-00 Jan-00 Mar-00 Nov-99 Nov-00 Feb-00 Aug-99 Aug-00 Sep-99 Dec-99 Sep-00 Dec-00 May-00

  8. California Market Prices have Skyrocketed in 2000Comparison of Average Cal PX SP15 Monthly* Prices $/MWh • Actual prices for last six months of 2000 averaged more than four times 1998 and 1999 prices *Simple average of all hourly prices within the month

  9. Comparison of California Electricity Costs • Estimated cost to serve all load in the CA ISO’s control area • Cost includes energy and ancillary services • 1998 cost is for nine months Source: ISO Board material, January 2001

  10. Cumulative Cost of California Electricity • Estimated annual cumulative cost to serve all load in the CA ISO’s control area • Cost includes energy and ancillary services Source: ISO Board material, January, 2001

  11. ISO Emergency Operations Occurrences Summer 1999 Summer 2000 Nov/Dec 2000 Jan 2001 • Stage 1 Emergency 3 32 11 12 • Operating reserve below 7% • Stage 2 Emergency 1 17 9 12 • Operating reserves below 5% • Interruption of voluntary customers • Stage 3 Emergency 0 0 1 10 • Operating reserves below 1.5% • Possible involuntary interruptions(rolling blackouts) • Rolling blackouts were initiated on 1/17, 1/18 • January 2001 are through 1/23/01

  12. Stage 1 Stage 2 Stage 3 Blackouts ISO Emergency Operations in 2000/2001 Blackouts 3 Emergency Stage 2 1 05/22/00 06/05/00 06/19/00 07/03/00 07/17/00 07/31/00 08/14/00 08/28/00 09/11/00 09/25/00 10/09/00 10/23/00 11/06/00 11/20/00 12/04/00 12/18/00 01/01/01 01/15/01 • Rolling blackouts were initiated on 1/17, 1/18 • Date is through 1/23/01

  13. Market Fundamentals • High rate of demand growth • Virtually no new plants sited • Reduced availability of imports • Skyrocketing gas prices • Pipeline capacity shortages • Air emissions limitations and high priced emission credits

  14. SCE Sales Growth Rates(Weather Adjusted) Growth Rate Percentages

  15. Natural Gas Prices in 2000 • Prices peak at an unheard level of $60/MMBtu • Gas prices for the second half of 2000 were more than four times higher than 1998 and 1999 prices

  16. $600 $500 $400 $300 $200 $100 $- Jul-99 Jul-00 Oct-99 Apr-00 Oct-00 Jun-99 Jan-00 Feb-00 Mar-00 Jun-00 Aug-99 Sep-99 Nov-99 Dec-99 Aug-00 Sep-00 May-00 Summer/Fall 2000 Electricity PricesDisconnect From Natural Gas Prices $60 SP15 On-Peak Avg $ MWH $50 CA Border Avg $/MMBtu $40 $/MMBtu $/MWH $30 $20 $10 $-

  17. Recent Electricity and Gas Prices • ISO implemented its $150 soft cap on 1/1/01 and has made significant “out-of-market” (OOM) purchases • ISO Real-time Average Price is a weighted average of OOM and real-time energy purchases • Gas prices have dropped significantly from a high of over $50/MMBtu but remain 5-10 times higher than last year

  18. Market Structure, Rules, and Conduct • Flawed ISO/PX market protocols • Large amount of unhedged power purchases • Underdeveloped demand-side responsiveness • Exercise of supply-side market power

  19. High Prices Persist During Modest Loads(Sunday) • Markets do not produce competitive prices • Under similar medium load conditions, 2000 prices have increased 700% over 1999 levels

  20. The ISO’s Market Surveillance Committee Has Consistently Concluded That Market Power Has Been Exercised • MSC’s September 6, 2000 report “An Analysis of the June 2000 Price Spikes in California ISO’s Energy and Ancillary Services Market” concludes: • Extraordinary amount of market power was exercised in June 2000 • Energy costs were 182% above the competitive benchmark

  21. Percent by Which Actual EnergyPrices Exceeded Competitive Benchmark Percent 200 150 100 50 0 -50 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 1998 1999 2000

  22. California Independent System Operator California Market Produced Two Years of Moderate Prices and Low Mark Up Over Competitive Benchmark • 1999 average mark-up was lower than 1998. • Price spikes in summer 2000 was due to both higher cost, market power during tight supply conditions, and scarcity rent 22.

  23. FERC’s November 1 Report • California market is “seriously flawed” • Rates have been “unjust and unreasonable” • “California market structure and rules provide the opportunity for sellers to exercise market power when supply is tight” • Insufficient study to determine the exercise of market power by individual sellers • FERC acknowledged its responsibility under FPA § 206 to ensure future rates are just and reasonable, subject to refund

  24. Joskow/Kahn Study • Summer wholesale prices far exceeded competitive benchmark prices • No evidence that wholesale price caps caused higher prices • Many price-setting units were withheld from production even though the market-clearing price well exceeded their marginal costs • This gap cannot be explained by ISO’s demand for reserves

  25. Substantial Output Gap for Most New Owners of Price-Setting Units (Joskow/Kahn) (Difference between Maximum Output and Average Actual Output for High Priced Hours for June 2000, EPA data) MW Duke Southern AES/Williams Duke Dynegy Reliant NP 15 SP 15

  26. Capacity Outages or Withholding? 12,000 Forced 10,000 Scheduled 8,000 6,000 Ave. Daily Outages (MW) 4,000 2,000 0 Oct 1999 Oct 2000 Nov 1999 Nov 2000 • October 2000 total outages (MW) are 4 times higher than October 1999 • November 2000 total outages (MW) are 5 times higher than November 1999 Source: “Market Analysis Report” by the ISO on December 1, 2000 26.

  27. How Can Rolling Blackouts Be Needed in Winter?ISO Load Conditions During Recent Blackout Summer 2000 Peak Load levels when rolling blackouts implemented • This winter, the ISO initiated rolling blackouts at a demand of only 65% of last summer’s peak • On 1/23/01 PG&E reported it has exhausted its interruptible program (about 400MWs)

  28. Generators and Marketers Reported Huge Profit Increases in the 3rd and 4th Quarters(Enron is one good example) Profits Reported by Enron’s Gas and Electric Trading Division $538 Million $151 Million

  29. Regulatory and Political Inaction • FERC’s inability or unwillingness to regulate its “just and reasonable” standard • CPUC’s inaction in approving long-term contracts and setting reasonableness standards • CPUC’s unwillingness to end the retail rate freeze

  30. 6.2¢/kWh Seven Months of Red Ink Average Wholesale Electricity Prices (SCE) 2000 JUN JUL AUG SEP OCT NOV DEC 30 25 22.3 Costs Absorbed by SCE in ¢/kWh (Approx. $4.5 Billion as of 12/00) 20 15.3 15 13.0 11.7 10.5 10.3 10 8.6 Existing Customer Rate Freeze 5 Customer Rates 0

  31. 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 .5 0 Procurement Undercollections (SCE) $Billions $1,288 Million $4.5 Billion $561 Million $283 Million $387 Million $870 Million $457 Million $644 Million June July Aug Sept Oct Nov Dec Total

  32. The Regulatory Bankruptcy Squeezeand Its Consequences Immediate Shortages and High Prices • Reluctance of suppliers to supply • Bankruptcy “risk premium” in wholesale prices • No retail price signal to conserve • Threat of bankruptcy-induced natural gas shortages and “risk-premium” prices Loss of Summer 2001 Resources • Depletion of Northwest hydro • Exhaustion of options on 2,000 MW of interruptible customers Cascading Broader Economic Impacts • Impacts on banks and financial markets • Loss of utilities’ ability to invest in needed T&D infrastructure • Shift of business out of California • Economic recession FERC inaction to regulate wholesale prices Imminent utility bankruptcies CPUC inaction to raise retail prices and assure recovery of undercollections

  33. Other Western States Have Found the Political Will to Raise Retail Rates to Reflect Current Wholesale Markets(Examples) Tacoma Power 50% Approved Seattle City Light 28% Approved BPA 30% Proposed Snohomish County PUD 35% Approved Clark County PUD 20% Approved Portland General Electric 27% Proposed Idaho Power 32% 8% Approved 24% Proposed Pacificorp (Oregon) 21% Proposed Utah Power & Light 19% Proposed

  34. California 2001-2004 Approved/Under Construction 6,273 MW In Licensing 7,716 MW Proposed 5,780 MW Total 19,769 MW Is There Long-Term Relief ?New Generation In California Generation Scheduled for Summer 2001

  35. California ISO Load/Resource Forecast 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2000 2001 2002 2003 2004 2005 2006 2007 Max Import Capacity 11,260 11,260 11,260 11,260 11,260 11,260 11,260 11,260 Max Avail. Gen. Capacity 45,565 45,602 50,011 62,861 62,878 62,861 63,190 63,180 Load Forecast + OR 49,209 50,188 51,463 53,602 54,462 55,306 56,177 57,928 Source: California Independent Operator

  36. What’s Needed in the Near Term? • Reasonable long-term wholesale contracts • CPUC/legislative approval needed • FERC enforcement of its “just and reasonable” standard • Reasonable retail price increases • Assurance of recovery of past and future procurement undercollections • Very serious statewide (and West-wide) conservation program • Continue to foster development of new generation

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