Nearly three months on, and the causes and implications of the massive electricity price spike experienced in the US Midwest in the week of 22 June remain unclear but the consequences are still being sharply felt.
An indication of the uncertainty that still surrounds this episode – which saw wholesale electricity trading at several thousand dollars per MWh compared with an expected $30-40 dollars per MWh – is that some people are using it to demonstrate that deregulation has gone too far, while others point to it as conclusive evidence of exactly the opposite argument, insisting that the process of deregulation must go much further to avoid such problems in the future.
A clear picture of what happened, and why, will probably not be available until around the end of September, when FERC, the Federal Energy Regulatory Commission, is due to present its analysis before Congressional hearings. In its 24 August request for information FERC has asked utilities and electricity traders for hour by hour data on their electricity sales and purchases from 1 am on 22 June to 12 midnight on 26 June. “The hourly data…will identify the sellers and buyers, the actual price and amount of energy purchased and sold and whether there were any attempts on the part of some market participants to manipulate the market during late June,” says FERC.
FERC – the body that introduced deregulation into the US wholesale electricity sector two years ago – appears to have been taken aback by the events of June and is now giving the issue high priority. As Commissioner Vicky Bailey of FERC said at a 14 August public meeting, price volatility of the sort experienced in June “is definitely unacceptable and calls into question everything that we are doing, every initiative that we have taken over the past couple of years.” The root of the problem was a severe imbalance of supply caused by a combination of factors, including an earlier than expected heatwave (El Niño was of course implicated), a high level of power plant outage (both forced and planned), storm damage and transmission line restrictions. “Everything that could happen, did. The only thing missing, I believe, was a swarm of locusts,” remarked Commissioner Bailey.
As in any market this imbalance was reflected in a price rise. But $7000 per MWh – albeit for a short period – was extraordinary. Among those most injured by the spike were power traders with commitments to supply electricity at prices many times lower than this price. One fatality was Federal Energy Sales, representative of the new breed of small power trader (“whose largest assets are its cell phone and fax machine,” in the words of Joel Gilbert, quoted in EEI’s Marketing Electricity Today newsletter). The failure of Federal Energy Sales in turn brought down Power Company of America, a somewhat larger trading operation, and resulted in substantial problems for the electricity trading arms of several utilities, notably First Energy of Ohio and Springfield City Water Light & Power of Illinois (which has now withdrawn from electricity trading), as well as Southern, Entergy, Cinergy, and Pacificorp.
Particularly striking is the case of LG&E of Louisville, a utility and trader, which had emerged in recent times as a major player. LG&E posted a $230 million loss for the second quarter of 1998 and announced its abrupt departure from the power trading business.
Remarkably, despite this unpleasant experience, LG&E remains one of those who believe that the events of June, which it regards as characteristic of the “growing pains” of an immature market, actually strengthen the case for wider and deeper deregulation. The argument essentially is that deregulation must be extended nationally down to the level of the retail consumers so that, for example, at times of peak demand the public is exposed to price rises and has an incentive to reduce demand.
The June price spike has given deregulation a bad press in the United States. But it may well turn out that it is not deregulation per se that is at fault but the manner of its implementation. Lessons from the spike will prove valuable not only in the United States but also in other countries seeking to liberalise their electricity markets.
