Price Volatility Must Be Better Managed to Address California's Electricity Woes
Guest Column in California Newspapers and Trade Media
Randy Hickok
Managing Director, California Operations
Duke Energy North America
Natural gas that fuels the majority of California’s power plants costs up to 17 times more than last year’s average, making the cost of producing wholesale electricity double the current price cap of $250 a megawatt hour. Wholesale electricity prices in the Northwest have reached $5,000 a megawatt hour vs. last year’s average of $27 a megawatt hour. SDG&E’s retail electricity customers are furious about electricity bills that in some cases have tripled since last year. PG&E and Southern California Edison are piling up millions daily in debt they say could force them into bankruptcy. Californians have been asked to postpone turning on their festive holiday lights to conserve electricity.
Has the Grinch stolen Christmas?
It may seem like it, but the reality is that California is facing an electricity crisis that can only be fixed if all parties work together. This includes our team at Duke Energy and other power plant owners; Governor Gray Davis; members of the legislature and the state public utilities commission; the investor-owned and municipal utilities; consumer advocates; and federal energy regulators.
California is facing high wholesale electricity prices because of supply and demand imbalance, which has caused the California Independent System Operator to call an unprecedented 27 “Stage Two Electrical Emergencies” so far this year when available electricity supplies have fallen below five percent. On December 7 the Cal-ISO called its first Stage Three Emergency when supplies fell below one and a half percent. Amazingly, rolling blackouts were averted.
The primary causes for the shortfall are the state’s extraordinary economic growth, no major power plants being built in California for 15 years, and electricity imports from neighboring states being less available. The state’s electricity supply and demand imbalance is expected to get worse until the summers of 2002 and 2003.
What can be done in the meantime?
The risk that comes with all volatile markets must be better managed by utilities using “forward contracting” for more of their electricity purchases. This basically means they would purchase power in bulk over a long period at a fixed price rather than exposing themselves and their customers to the daily volatility of the market by purchasing power only 24 hours before it is needed.
This behavior is what responsible money managers do when they diversify their customers’ stock portfolio. And, since electricity deregulation started in March 1998 and due to certain state regulatory conditions, the utilities have done just the opposite. This worked fine when power prices were low in 1998 and 1999, but today and over the next two years or so, power prices will continue to be high because of the shortage of power throughout the West.
Governor Gray Davis and state regulators are now encouraging this kind of forward contracting, and that’s great. Duke Energy was the first to offer large contracts to utilities last August and recently we signed several contracts with utilities. The current high prices show these have been good deals for the utilities and their customers. But, more of these contracts must be signed if there is to be any real effect on retail prices. We also fully support the governor’s efforts to promote more electricity conservation during peak demand.
The majority of California’s power plants are 30 to 40 years old and they have been working overtime since last summer to meet the growing demand for electricity. In Duke Energy’s case, our four plants produced 9.5 million-megawatt hours of electricity in 1999. In 2000, these same plants will produce almost 17 million-megawatt hours. This demand will continue to go up, which is why we are investing up to $1.6 billion to upgrade existing units, replace others, and add capacity. The best part is that the new plants now under construction and being permitted are cleaner, more reliable and produce about 40 percent more electricity using the same amount of natural gas.
In order for these huge long-term investments to go forward we must all work together in a spirit of cooperation to develop solutions that get results. There must also be greater certainty that the rules of the market will not be changed for short term solutions that do not address the supply problem—or could make things worse. California deregulated its electricity market in 1998 because it had some of the nation’s highest power prices. Prices will only come down if there is regulatory stability so the supply problem can be addressed.
We stand ready to continue to work to develop solutions to California’s electricity crisis. For more information about this or our operations in the state, see our website at duke-energy.com/California.
