Kyros - Interesting counterpoint to FERC staff report criticizing ipp's in Calif:
Dow Jones Business News
Consulting Group Blasts FERC's Report on Energy Crisis
Thursday May 15, 5:14 pm ET
By Mark Golden
NEW YORK -- The Federal Energy Regulatory Commission's final report to Congress on the western U.S. energy crisis is thoroughly flawed and could lead to policies that may create new shortages, according to a new study by energy consultant Cambridge Energy Research Associates, or CERA.
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The FERC staff's investigation didn't distinguish the effects of market manipulation from legitimate scarcity of electricity and natural gas, or from abnormal events like El Paso Corp.'s pipeline explosion, says CERA. FERC delivered a report on its investigation to Congress March 26 and released it to the press. FERC staff blamed almost all market participants, except California's two main investor-owned utilities, for taking inappropriate advantage of an energy shortage and a poorly designed electricity market in California.
The report, according to CERA, "fails to substantiate and support its major premises, conclusions, and recommendations; and if acted upon, its recommendations could lead to exactly the kind of scarcities and disruptions that the report criticizes and seeks to avoid."
CERA's study, "Price Revision in Western Energy Markets," is getting passed around energy experts just as FERC commissioners are hearing oral arguments on whether to cut prices on long-term electricity contracts that the state of California signed in the middle of the crisis. CERA doesn't plan to release publicly the analysis but gave it to clients Wednesday, said a CERA spokeswoman. A copy of of the analysis was obtained by Dow Jones Newswires. The study wasn't paid for by a specific client or clients; it was done as part of general research.
CERA acknowledges the big challenge to FERC staff in figuring out exactly what caused California's 15 months of high prices and occasional rolling blackouts, but FERC's commitment of significant time and resources made the final report highly influential. If FERC commissioners or Congress now base their decisions on the FERC staff's recommendations, the result could be disastrous, CERA says.
"The resetting of prices two years after the fact for natural gas, power, and possibly even long-term power contracts sets a precedent of market intervention with low standards of market analysis," CERA says.
The FERC staff completely failed, according to CERA, in its ultimate task: to determine how much of the western energy crisis of 2000-2001 was due to market manipulation. FERC's report failed to distinguish between legitimate price speculation required in all markets from attempted price manipulation. The FERC recognized that some market manipulation attempted to push energy prices lower, which would have reduced the impact of traders trying to push prices higher, but then proceeded as if those trying to raise prices were all-powerful. Investigators concluded that they couldn't quantify what part of higher prices was due to true scarcity, says CERA.
But then the staff goes on to recommend - and FERC Commissioners have begun to do so - dispensing with actual market outcomes, and repricing gas and power based on economic theory. The risk of regulators repricing a market years after the fact discourages investment in power plants, gas production and pipelines, which could lead to energy shortages across the U.S., CERA says.
In response to the staff report, FERC commissioners immediately voted to change the basis for refunds due to California for spot purchases made during the crisis. The change is expected to raise the total refund amount from $1.8 billion to about $3 billion. To determine the refund, FERC had been using published index prices for natural gas in California as a basis for determining electric generating costs, but it has now rejected those because some traders reported fake prices to the publishers. FERC is using published gas index prices in producing areas plus a regulated pipeline cost, though generating companies in California that actually paid prices higher than that will be allowed to recover their costs.
"The proposed results are extreme: adoption of staff's methodology would trim $7.03 per million British Thermal Units, or 54%, from the average price levels that prevailed in the Southern California market over the October 2000 to June 2001 period," CERA says.
"It penalizes those who would properly hedge risk by committing to capacity and rewards gas consumers who didn't hold sufficient firm transportation to meet their needs," claims CERA.
Ironically, the FERC has said many times that California's refusal to hedge electricity price risks was one of the main causes of the financial fallout.
By failing to allow spot prices to signal the need for new infrastructure, FERC's market intervention will thwart new pipeline, gas storage and power generation development, according to the analysis.
This, according to CERA, "is an example of the strong temptation for regulators to try to have it both ways: that is, supporting competitive market prices when market forces drive gas and power prices down in periods of oversupply, but overruling competitive market prices during periods of undersupply, when prices rise and reflect a value for capacity."
Although the FERC said that the crisis was fundamentally caused by a real shortage and an inefficient centralized market in California, that assertion was overshadowed by hundreds of pages documenting wrongdoing by energy companies. Those companies insist, supported by their own documents, that they didn't do most of what they are accused of. Some of the FERC staff's allegations are uncontested. Reliant Resources , for example, agreed to pay a fine for withholding capacity from the spot market in an attempt to raise forward prices, which worked briefly.
A FERC spokeswoman didn't return a phone call seeking a response to the CERA critique.
Apparently, according to CERA, federal regulators are moving away from the market-based industry that the FERC created. With no clear path back to cost- based regulation, recovery of capital is unclear, so investments aren't being made.
"Over time," the CERA analysis concludes, "markets could become increasingly undersupplied with capacity, creating scarcity, another shortage causing either price fly-ups or curtailments, and, if the cycle is allowed to reach its conclusion, market failure. These are not the intentions, certainly. But they could well be the likely result of this methodology and of the recommendations that flow from it."
-By Mark Golden, Dow Jones Newswires; 201-938-4604;
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