Price Spike Tsunami: How Market Power Soaked California

 

Last year saw no shift in fundamentals. Then why was the ISO so willing to be deceived?

Last summer, on May 22, the power market across the Western United States and Canada saw a one-time shift in market economics roughly equivalent to the removal of 8,000 megawatts of generation that cannot easily be explained by changes in the fundamentals of electricity markets. Hydroelectric streamflow was about average on the West Coast. Loads were somewhat higher, but California peaks actually registered lower than those in 1998 and 1999. Why this shift in wholesale prices by a factor of five?

Investigations are underway at the federal and state levels, but one thing already is clear: A large amount of the blame can be laid at the feet of the California Independent System Operator. The ISO's complex and secretive operations have provided a petri dish for collusive behavior.

This shift had an enormous impact on prices throughout the region. Statistical estimates through July 31 indicate that higher prices cost consumers at least 9.48 cents per kilowatt-hour during on-peak periods, and 3.3 cents per kilowatt-hour at off-peak times. Given these extraordinary events, many are asking a simple but confounding question:

After May 22, a number of explanations were put forward to explain why prices had increased so markedly. Favorite explanations argued that the price spike was due to shifts in natural gas prices, the runoff on the Columbia River, and increases in loads.