Staff Report to the 

Federal Energy Regulatory Commission

on Western Markets and the Causes

of the Summer 2000 Price Abnormalities

Part I

of

Staff Report on U.S. Bulk Power Markets

November 1, 2000

The analyses and conclusions are those of the study team and do not necessarily reflect the views of other staff members of the Federal Energy Regulatory Commission, any individual Commissioner, or the

Commission itself.

Contents

Page

1. Overview	1-1

	Brief Overview of Conclusions	1-2

2.  Supply and Demand Conditions	2-1

	A.  Supply and Demand Background	2-2

		1.  Brief  Description of Bulk Power System in the West	2-2

		2.  Historical Load Growth and Resource Mix	2-3

		3.  Spring Expectations for the Summer of 2000	2-7

	B.  Summer 2000	2-9

		1.  Demand Growth	2-9

		2.  Increased Exports from California	2-15

		3.  Increased Plant Outages	2-19

		4.  Scheduling of Supply and Demand in California	2-22

		5.  Generation Capacity Availability and Utilization	2-24

		6.  Transmission Congestion	2-30

3.  Prices and Costs	3-1

	A.  Prices	3-2

		1.  Market Players and Ownership	3-3

		2.  Trading Patterns and Hubs	3-5

		3.  Recent Price Trends in Western Markets	3-7

		4.  Correlation of Prices in Western Markets	3-15

	B.  Cost Factors in Prices and Price Increases	3-20

		1.  Input Price Increases	3-20

	C.  Bidding in the CalPX and Selected ISO Markets	3-22

		1.  Bidding in the CalPX	3-22

		2.  Cal-ISO Replacement Reserve Markets and 

			Out-of-Market Purchases	3-27

		3.  Transmission Congestion Costs and Prices	3-28

4.  Regulatory and Institutional Environment	4-1

	A.  Economic Regulation of Utilities	4-1

		1.  Federal Economic Regulation	4-1

		2.  Economic Regulation of Electric Utilities in California	4-2

		3.  Economic Regulation of Electric Utilities in Other Western 

			States	4-8

	B.  Environmental Regulation of Electric Utilities	 4-8	

		1.  Federal Environmental Regulation of Electric Utilities 	4-8

		2.  Environmental Regulation of Utilities in California	4-9

5.  Why Were Prices High This Summer?	5-1

	A.  Market Forces: Costs and Scarcity	5-2

		1.  Increased Power Production Costs	5-2

		2.  Scarce Resources Throughout the West	5-3

	B.  Market Rules	5-8

		1.  Lack of Forward Contracting	5-9

		2.  Demand Responsiveness	5-11

		3.  Underscheduling	5-14

		4.  Exports/Imports	5-16

		5.  Auction Rules	5-17

	C.  Market Power	5-1877

		1.  Measuring the Effects of Market Power on Price	5-198

		2.  Demand Conditions	5-20

		3.  Market Power and Scarcity	5-20

		4.  Methods of Exercising Market Power	5-221

		5.  Evidence from Summer of 2000	5-232

		6.  Market Power in Context	5-24

	D.  Conclusion	5-265

6.  Policy Options	6-1

	Discussion of Options	6-4

		1.  Encourage Investment in New Generation	6-4

		2.  Remedy the Over-Reliance on Spot Market Purchases	6-5

		3.  Provide More Demand Response to Wholesale Prices	6-8

				4.  Provide Some Price Regulation While Generation Resources 			       Remain Scarce and until Regulatory Changes Are Made 

			to Provide More Demand Response	6-10

		5.  Create a More Stable Regulatory Environment	6-17

		6.  Other Options	6-19

Tables

2-1.  Subregions in the WSCC	2-2

		2-2.  Comparison of 3-Year Average Growth in Summer Peak, in the WSCC, 

		1998 and 1995	2-4

2-3.  Current and Planned Generation Capacity in the WSCC, as of  January 1, 2000	2-5

2-4.  Generation, Imports and Exports in WSCC, 1990 to 1998	2-7

2-5.  WSCC-U.S. Forecasted Demand and Supply, Summer 2000		2-8

2-6.  WSCC-California Forecasted Demand and Supply, Summer 2000	2-8

2-7.  Projected Cal-ISO Peak Loads and Resources	2-8

2-8.  Load Growth in the West, May and June 1999 to May and June 2000	2-11

2-9.  Cal-ISO Day-Ahead Forecast and Actual Average Loads, 1998 to 2000	2-13

2-10.  Electrical Emergencies Declared by the Cal-ISO (May-August)	2-15

2-11.  Offpeak Loads in the Cal-ISO Area	2-15

2-12.  Summary of California Exports and Imports by Zone	2-18

2-13.  Percent of Unplanned Outages by Duration, Cal-ISO Units, 1999 and 2000	2-21

2-14.  Correlation of Outages with the PX UMCP, May to August 2000	2-21

2-15.  Hydroelectric Generation in the West, 1999 to 2000	2-27

2-16.  Summary of WSCC Capacity Availability During the Week July 31

	  	to August 4, 2000	2-29

2-17.  Summary of Capacity Available and Energy Supplied in the Cal-ISO at                    

  	  	Hour 16 on August 4, 2000	2-30

		2-18.  Percentage of Time Major California Transmission Paths Congested, 

	  	May through August, 1999 and 2000	2-310

3-1.  Ownership of Plants in the WSCC by Class of Owner	3-4

		3-2.  Correlations of Western Market Prices:  Onpeak Prices from Megawatt Daily 

		and California Power Exchange	 3-16

		3-3.  Correlations of Western Market Prices:  Offpeak Prices from Megawatt Daily

		and California Power Exchange	3-17

3-4.  Bidding in the CalPX by Participant and Cal-ISO Price Cap, May to 

		September 2000	3-26

3-5.  Transmission Congestion Price During Congested Hours on Major Congested Paths

		May through August, 1999 and 2000	3-29

Figures

2-1.  Western Power Grid	2-4

2-2.  Peak Summer Demand in WSCC	2-6

2-3.  Capacity Resource Percentages by WSCC Subregions	2-6

2.4.  Rank of Regional Temperatures: May to August 2000	2-10

2.5.  Rank of Regional Temperatures: June 1998 to 2000	2-10

2-6.  Cal-ISO Load Curve, May to August 2000	2-12

2-7.  Average Loads in the Cal-ISO, Day-Ahead Forecast and Actual 	2-13

2-8.  Peak Loads in the Cal-ISO, Day-Ahead Forecast and Actual	 2-14		

2-9.  Net Summer Imports into Cal-ISO, 1999 and 2000.	  2-17

2-10.  Imports and Exports, Average Hourly, 1999 and 2000	2-17

2-11.  Offpeak Export Demand, 1999 and 2000	2-19

2-12.  Comparison of Average Megawatts Out of Service in the Cal-ISO                             

   		Planned and Unplanned, 1999 and 2000	2-20

2-13.  Percentage Change from 1999 in Year 2000 Peak Forecast

		Scheduled and Actual Loads		2-22					

2-14. 	Scatter Diagram of Underscheduling, PX Day-Ahead Market	2-23

		2-15.  Underscheduling : Minumum Megawatts Underscheduled in PX 

		Day-Ahead Market, by Load Range and Month	2-23

2-16.  Volumes of Run-Off at the Dalles, January to July	2-25

2-17.  Volumes of Run-Off, California Statewide Total, October to July	2-26

2-18.  Percent Change in MWh Generated in WSCC, 1999 to 2000	2-28

3-1.    Daily Price Indices for Western Market Hubs, 1997-2000	3-8

3-2.  Bilateral Index Prices at Palo Verde	3-11

3-3.  Bilateral Index Prices at COB	3-11

3-4.  Bilateral Index Prices at Mid-Columbia	3-12

3-5.  Western Market Prices for Summer 2000: Bilateral Markets vs. California

		Markets	3-12

3-6.  Palo Verde Forwards: 3rd Quarter Contracts	3-13

3-7.  COB Futures: July Contracts	3-15

3-8.  Day-Ahead Spinning, Non-Spinning and Replacement Reserves 	3-18

3-9.  Day-Ahead and Hour-Ahead Replacement Reserve MWh, NP15	3-19

3-10.  Daily Spot Prices for Western Natural Gas Markets in 2000	3-19

3-11.  NOx RECLAIM Prices for SCAQMD, May to September 2000	3-20

3-12.  Estimated Running Cost for Gas-Fired Generation in Southern California	3-22

		3-13.  Comparison of PX Onpeak Supply Bid Under ISO Cap for Selected 

	   	Participant Types	3-25

3-14.  Percentage of Non-Zero Supply Bid at $100 or Below	3-26

		3-15.  PX Bids, Replacement Reserves and Real-Time Payments 

	  	to Replacement Units, June 12 to June 16	3-28

Appendix A	A-1

Acknowledgments

The study team consists of:

Scott Miller, Co-Lead for National Investigation

Andrea Wolfman, Co-Lead for National Investigation

Gerald Williams, West Team Lead

Hollis Alpert

Lyle Hanagami

Brian Harrington

William Meroney

Ronald Rattey

John Robinson

Michelle Veloso

The team would also like to thank the following for their contributions to the report:

Bryan Craig, Joseph Cholka, Charles Faust, Marie-Beth Hall, David Hunger, Thanh

Luong, David Mead, Songthara Omkar, Robert Pease, and Roland Wentworth.