Similar to the California energy crisis of the early 2000s, the pricing fallout from the blackouts of August has landed at the door of federal energy regulators, and there is potential that tens of millions of dollars in transactions will be unwound and buyers refunded.
Tyson Slocum, director of advocacy group Public Citizen's energy program, said the matter "is extremely important—it's totally under the radar screen."
"It's totally ridiculous, these charges are totally unsubstantiated," Slocum said. He called the estimated tens of millions of dollars in transactions "the first confirmed case of climate change price gouging."
The transactions in question occurred in mid-August, when power reserve shortages resulted in blackouts and price spikes. The rolling blackouts were the first called in California since the energy crisis of 2000-2001. A preliminary root-cause analysis issued by state agencies in October cited climate change-induced high temperatures, failure to meet planning targets, and certain practices in the day-ahead electricity market as causes (see CEM No. 1611).
At least 19 Western power sellers are seeking justification from the Federal Energy Regulatory Commission for selling electricity in August at wholesale prices above a $1,000/MWh price cap. California's market monitor, some investor-owned utilities and a public advocacy group are opposing or raising concerns about the requests.
The power sellers in August sold power in portions of the Western Electricity Coordinating Council that are outside the California electricity grid above a federally mandated price cap of $1,000/MWh. Some argue that the high prices might have exacerbated the blackouts by preventing load from being served within the California Independent System Operator, which since April 2011 has had the $1,000/MWh price-offer cap along with the rest of WECC.
Since August, the 19 power sellers have been making cost-justification filings to FERC for selling above the price cap. CAISO's Department of Market Monitoring, Southern California Edison, Pacific Gas & Electric and Public Citizen filed comments or protests to FERC on the matter.
PacifiCorp, one of the sellers in question, recently told FERC that none of the commenters were counterparties in the sales, and that they had provided no justification for asking FERC to unwind the transactions [ER21-60].
The parties "fail to identify any reasonable basis for the Commission to administratively cap these sales (and, indeed, the sales of many other jurisdictional sellers in WECC), which occurred at valid, prevailing market prices," PacifiCorp said. The company said the prices reflected power supply and demand during the blackouts.
PacifiCorp said the commenters are seeking to have bilaterally negotiated sales executed at prevailing market prices refunded. FERC should deny these attempts "to create a windfall for counterparties where, as with respect to the sales at issue, the Commission's underlying purpose for adopting the WECC Soft Cap is maintained," it said. Limiting the justification for the sales to a generating unit's costs ignores pricing signals in the market and the benefits they bring, like scarcity pricing, PacifiCorp said.
FERC does not have set rules in place for how a seller might justify sales above the cap, reasoning that it cannot anticipate all situations under which the cap would be exceeded. The filings by the sellers for justification to FERC were based on nongenerator costs such as the price of purchased energy from an unspecified generating source, regional market prices, costs associated with risk of curtailment, or other nongeneration transaction costs, CAISO's DMM told FERC. The commission should review a "host of issues" associated with cost justifications that are based on nongenerator costs, it said.
"DMM recognizes the complexity of issues facing the Commission in these proceedings for energy markets throughout the west under tight market and system conditions," the department said in Oct. 28 comments. "However, DMM is concerned that accepting cost-justification for sales over the $1,000/MWh soft cap simply based on a seller's reported purchase price or its assessment of 'prevailing market prices' or conditions would essentially render the soft cap meaningless—and undermine market power mitigation provisions in the CAISO markets."
DMM said FERC's response will set an important precedent and recommended the commission develop clear guidance on what constitutes valid justification to exceed the cap, regardless of its decision on the recent filings. Before FERC approves any nongenerator costs as valid cost justification, it should consider the implications on market power mitigation in CAISO and the rest of WECC, DMM said.
SCE requested that FERC reject all the cost-justification filings and require refunds to the buyers in all the sales.
"While prevailing prices and market conditions likely contributed to the transaction prices in excess of $1,000/MWh, the Commission has recognized such conditions are the precise circumstances that bid cap rules were meant to limit," SCE said. If FERC accepts the sales based on the buyer's willingness to pay, the soft-cap rules are meaningless, it added.
PG&E when protesting PacifiCorp's filing on Oct. 28 told FERC that while PacifiCorp did the transaction at its customer's elected price, that does not excuse PacifiCorp from having to provide a basis for its sales above the soft cap.
"Nothing in the Soft Cap Decision exempts sellers who enter into transactions at the direction of another party. PacifiCorp fails to provide actual verifiable operating costs incurred to supply electricity or demonstrate any cost basis to justify the sales prices," PG&E said. Using prevailing market conditions to justify the prices is circular logic because the above-cap sales helped create the market conditions, it said.
According to Public Citizen, the 19 power sellers in question are ConocoPhillips; Tenaska Power Services; Exelon; Mercuria; Tucson Electric Power (Fortis); UNS Electric (Fortis); BP Energy; Public Service Company of New Mexico; Mesquite Power (IIF); El Paso Electric; Guzman Energy; Shell Energy North America; TransAlta Energy Marketing; Brookfield Renewable Trading and Marketing; PacifiCorp; Uniper Global Commodities North America; Macquarie Energy; Tri-State Generation and Transmission Association; and EDF.
Unrolling the transactions would be a major decision regarding Western wholesale markets, and would likely lead to extensive debate and possibly litigation, creating unwelcome memories of California's power market woes two decades ago.