Shortage brings conspiracy theories

JOHN STARK, THE BELLINGHAM HERALD

The spot market for electric power is the kind of complex, mysterious economic institution that gives an adrenaline rush to conspiracy theorists.

Just where is this spot market, anyhow?

That's one of the things that makes it mysterious: You can't go there and look at it.

The spot market for electricity across the Western states is established by means of daily telephone and e-mail transactions between public and private power producers, the utilities that need the power for their customers, and brokers who serve as intermediaries.

So who sets the value of energy?

Energy economist Samuel Van Vactor, president of Economic Insight Inc. in Portland, provided this explanation:

The power industry relies on price indexes produced by Dow Jones & Co. Inc., the people who bring us the Dow Jones industrial average.

Power is traded at a variety of prices, and the indexes -- like the Dow Jones industrials -- are supposed to represent an average. Power traders participating in the price indexes report their deals to Dow Jones to enable the company to make its calculations.

Spot market power prices vary widely from coast to coast, as Dow Jones calculates a whole series of regional power indexes.

On a recent day in February, for example, the Dow Jones Pennsylvania, New Jersey and Maryland Index reflected prices of about $30 a megawatt. The Mid-Columbia Index -- reflecting the price of power sold by hydroelectric plants in Washington state between Spokane and Pasco -- was well above $200.

Bottlenecks in the nationwide power system and the very physics of electric transmission make it impractical to transmit electricity across the continent, making supply and demand different in each region.

Prices raise suspicion

Because spot market prices surged to previously unimaginable levels early last summer, the idea of a conspiracy by power producers has grown increasingly respectable. Charter members of the conspiracy believers' club include officials of power-hungry industries, Western governors and legislators, members of Congress, and officials of the big California private power companies.

The superintendent of Seattle City Light and the California Public Utilities Commission also see evidence of market manipulation, and attorneys general of Washington, Oregon and California have launched investigations.

At first, many observers thought the record-setting summer prices were mostly due to a California heat wave. Few residential customers were affected. But when an unexpected regionwide power shortage developed in November and stretched through the winter, the impact of the market prices began to spread.

The big California utilities lurched toward bankruptcy because state regulators refused to let them pass on their spot power costs. But in several other areas, Seattle and Tacoma being prime examples, utilities that found themselves forced to buy part of the power on the costly spot market, were able to pass the cost along to angry ratepayers. And ranks of conspiracy believers grew.

"It now appears to me that there are way too many plants that are not operating," Seattle City Light Superintendent Gary Zarker said recently. "You make more money by creating the artificial shortfall than you do by operating the plants."

Not everyone is convinced.

The list of those who scoff at a conspiracy is short but powerful and not limited to those who have made handsome profits selling power at high prices. Some economists see the prices as the natural and healthy reaction of the market to a real shortage of a vital commodity.

The Federal Energy Regulatory Commission has not been convinced that something is wrong. The commission has legal authority to maintain power prices that are "just and reasonable," but has refused repeated entreaties from West Coast governors who want a price cap on wholesale power prices.

Economist Van Vactor argues that several factors combined to create a shortage that is driving the market:

-Growth in power consumption.

-Sharp increases in the cost of natural gas used to drive power turbines.

-Lack of new generating plants.

-A drop in hydroelectric production in a dry year.

-Normal plant shutdowns for maintenance or breakdowns.

Swings are natural, some say

When power supplies are short, utilities bid up the price to avoid blackouts on their systems.

"It's the nature of energy markets," Van Vactor said. "Unfortunately, it's the way they work."

But energy economist Robert McCullough of McCullough Research in Portland mocks the notion that spot markets are behaving naturally, saying economists like Van Vactor have trouble abandoning a deep faith in the benefits of market competition.

He labeled them "competophiles" and calls himself a "recovering competophile."

McCullough said his "competophilia" was shaken by his analysis of market behavior last May 22, when spot prices took their first bounce upward, although they would not become news for another month.

On that day, McCullough said, there was no heat wave and the shortage of hydropower had yet to develop. Electricity demand was well below levels easily met the previous summer.

But 8,000 megawatts of generating capacity disappeared from the California system -- enough to power six Seattles.

McCullough says there is strong circumstantial evidence that several power producers got together to create the shortage and drive up prices.

"We don't know if it was a conspiracy where they all walked into a dark room and exchanged notes, but the numbers are amazingly outrageous," McCullough said. "Why did everyone decide to raise their price for electricity on the same day -- not moderately higher -- massively, inexplicably higher?

"It's the kind of thing that you don't want to tell your mother you did," he said.

McCullough said May 22 established a pattern. Ever since, unexplained shutdowns or curtailments of California power plants caused shortages that pushed up the price of power, up and down the West Coast.

Financial reports of power companies have done nothing to quell the criticism.

One producer, Calpine Corp., reported fairly typical financial results: a 176 percent jump in income for the second quarter of 2000.

Company spokesman Bill Highlander has no apologies. "California has been a good market for us," he said.

Highlander said the appearance of collusion -- with power plants out of service even during severe shortages -- stems from so many California plants being old and unreliable; more than 100 of the state's 971 generators are more than 40 years old.

"The answer is more generation, and a truly competitive situation," he said. "That's the way the consumer is going to benefit in the long run."

The Olympian Copyright 2000

http://news.theolympian.com/stories/20010226/HomePageStories/4950.shtml

-- Martin Thompson (mthom1927@aol.com), February 26, 2001