FERC Filings
MOTION OF THE ELECTRIC POWER SUPPLY ASSOCIATION-Docket No. EL01-1-000
B. Market Fundamentals, Not Abuse of Market Power, Have Produced Higher Prices This Summer
In its pleading CMUA points to the fact that prices in California were significantly higher this summer than last as evidence that markets are not working. Brushing by weather, load patterns, the cost of emission credits, availability of hydro power, aging power plants and gas prices, CMUA concludes that the market has not adequately disciplined prices. In fact, the market fundamentals CMUA ignores have driven prices in California and the West this summer. Consider the following facts:
First, California is facing rising electricity demand accompanied by a severe shortage of generating capacity and supply availability. From 1996 to 1999, peak demand increased by 5,522 megawatts, while only 672 megawatts of net capacity were added. Electricity demand in California has increased dramatically -- approximately two percent each year since 1990, or an average increase in demand of 1,000 megawatts a year.
Second, natural gas prices this year roughly doubled from 1999, adding $25-$35 per megawatt hour to the cost of gas-fired generation. Third, the cost of emission credits has risen from $2.50 to $4 per pound in 1999 to $40 -$50 per pound this summer in the Los Angeles Basin, and fewer credits are available at any price. The combined cost of fuel and nitrogen oxide (NOx) credits for a natural gas-fueled peaking unit in the Los Angeles Basin is now approximately $147 per megawatt hour. Fourth, 61 percent of the California generating fleet is more than 30 years old, leading to a greater risk of forced outages and requiring more maintenance than newer plants. In addition, these older facilities have the potential for lower availability factors.
Finally, 1999 was the coolest year in Southern California in over 50 years, making comparisons to 2000 overly dramatic. These market fundamentals have driven prices significantly higher in California this summer.
EPSA is not alone in reaching this conclusion. In an October 11, 2000 “Study of Western Power Market Prices, Summer 2000,” the Northwest Power Planning Council (NWPPC) concluded that the “market prices seen this summer are a tangible manifestation of the fundamental problems identified in the Council’s power supply adequacy study of last winter.” The Council goes on: “This summer, the system, which already is facing tight supplies, has been further stressed by combinations of unusually high loads, poor hydropower conditions, and forced outages of thermal units.”
Specifically, the NWPPC attributes rising prices the physical factors, such as unusually high weather-driven demands throughout the west, an unusual pattern of hydropower availability, high gas prices and planned and forced outages of thermal generating plants, as well as market and transitional factors.
It is also misleading to attribute price spikes, or in the case of California, higher prices, to abuse of market power. When the fundamentals of the market change as outlined above, prices will rise, even in a perfectly competitive market. In an efficient competitive market, those higher prices will signal new entry, which has been seen in California with the numerous announcements of new planned merchant plants.
In addition, CMUA appears to be echoing the argument that bids above short-run marginal costs are evidence of market power abuse. In a competitive market, there may be a number of legitimate bidding strategies that do not involve either marginal cost bids or abuse of market power.
In its Third Report on Market Issues, the California PX addresses the difficulty of determining the actual operating costs of a given unit at a specific point in time, concluding that:
even a non-strategic price-taking owner of a generation unit might find it unprofitable to operate in some hours when the hourly price exceeds the unit’s marginal generation costs. Similarly, because of these constraints on the responsiveness of generators, it can be optimal for a unit to sell into a market even when the price is below its apparent short-run marginal costs, calculated ignoring these factors.
Despite its conclusory comments, the CMUA has failed to show that markets have failed in California or that the draconian remedies it recommends are warranted. CMUA wholly fails to recognize the actual reasons for higher prices this summer.