Resolving the Western Power Crisis

In May 2000 electricity prices in the West rose dramatically, signaling the start of what has been called the "California Energy Crisis." Power Economics has played an important role in the resolution of the crisis. There are many lessons to be learned from this crisis. These lessons relate to:

  • Power acquisition in re-structured markets
    • Differential regulatory treatment of short- and long-term power transactions
  • Recovery of costs
  • System design
    • The role of system design in gaming and market power abuse
  • Regulation of market power abuse
    • Limitations of regulatory protection
    • Importance of structural versus behavioral approaches to mitigating market power
    • Evidentiary requirements to demonstrate market power abuse
  • Business models
    • The importance of a robust business model
    • The frailty of certain merchant generators’ and marketers’ business models
    • Factors contributing to investor confidence
  • Contract modification
    • The process and requirements for contract modification before the FERC
    • Managing throughout the crisis period
    • The role of customers in averting and resolving power crises
    • The importance of creditworthiness
Power Economics actively worked with clients to help resolve the crisis in a number of ways. Specific activities that Power Economics undertook to help resolve the Western Power Crisis include:
  • Power Economics provided economic analysis, counsel and testimony for the leadership of the California State Assembly. Testimony provided for the Assembly encouraged the FERC to expand the geographic and temporal scope of its April 26, 2001 market mitigation order. In addition, Power Economics provided testimony sponsored by the California Assembly successfully challenging the Chief Administrative Law Judge's initial recommendation of gas price assumptions for use in calculating refunds. The FERC's recent change in the gas price assumptions significantly increased the refunds.
  • Power Economics authored a white paper for the Building Owners and Managers Association of California explaining how commercial building owners could contribute to resolving the crisis.
  • In the San Diego Docket (EL00-95-045) the FERC has ordered $3.3 billion in refunds for transactions coordinated through the California Power Exchange and California Independent System Operator. In that proceeding, Power Economics successfully rebutted assertions by sellers' witnesses about the appropriate method for calculating the prices that would serve as the basis for refunds. Power Economics also provided testimony in the refund case for the "California Parties," a coalition that includes the California Electricity Oversight Board, the California Attorney General, the California Public Utilities Commission, Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric.
  • In the Puget Sound Energy case (EL01-10-00, -01) in which refunds for spot market transactions in the Pacific Northwest are being litigated, Power Economics testimony on behalf of the California Parties provided evidence of market power abuse and described the relationship of market manipulation in California on the Pacific Northwest.
  • For the City of Tacoma and the Port of Seattle, Power Economics provided econometric evidence of the linkage between markets in the Pacific Northwest and in California, provided evidence of market power abuse and described the nature of the unattainable regulatory burden imposed by the Administrative Law Judge in the Puget hearings.
  • The FERC is now considering whether to modify long-term contracts entered into during the crisis under section 206 of the Federal Power Act. Power Economics has provided testimony on this issue in proceedings for the California Electricity Oversight Board, the California Public Utilities Commission, the Snohomish County Public Utilities District, Southern California Water Company, and PacifiCorp. The testimony provided evidence on:
    • Market power abuse;
    • Econometric analysis of the relationship between spot and forward prices;
    • An explanation of the FERC's misinterpretation of California ratemaking when it adopted long-term contract benchmarks;
    • A method for adjusting the Commission's five-year-around-the-clock benchmark to multiple products of varying duration;
    • The implications of contract modification on investor confidence.