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Summer Energy Market Assessment 2005

May 4, 2005

Federal Energy Regulatory Commission • Office of Market Oversight and Investigations

Disclaimer: This Report contains analyses, presentations and conclusions that may be based on or derived from the data sources cited, 

but do not necessarily reflect the positions or recommendations of the data providers.

Tom Pinkston:

Good Morning Chairman and Commissioners.

We are pleased to present the Summer Energy Market Assessment for 2005. The 

presentation will also be made available on the FERC website. 
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2004 Summer Assessment:

Regional Markets Could Show Stress 

Under Certain Conditions this 

Summer – Most Notably the West.

• Especially Tight 

Reserves in the West

• Load Pockets

• High Fuel Costs

Nationally, most regions have adequate or better reserves and are likely to face no 

problems. However, higher fuel costs than the past few years are likely to result in 

higher electricity prices in general. Also, certain locations could face market 

stresses under extreme weather conditions, particularly load pockets in the 

northeast like southwest Connecticut and areas in the west, like southern 

California., I will present the first part of the assessment and Steve Harvey will 

discuss western market issues and summarize the report. 
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Regional Electric Market 

Issues will Depend 

On Local Resources, 

Demand and Operations.

Regional issues vary depending on demand, resources and operations. 
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• Below normal 

hydro conditions

• Regions with 

higher likelihood 

of fire

• Greater reliance 

on gas-fired 

generation

• Tight reserves 

under extreme 

heat

• MISO transition to full market 

operation 

• PJM/MISO coordination

• PJM integration of new areas

• Load pockets 

in SW 

Connecticut 

and Boston

• Reserves may 

be low for very 

hot weather

• NYC/LI load 

pockets

• Short-term 

price spikes

This annotated map of the United States highlights specific regional issues identified 

as important for the summer. I will focus on New England in a minute and Steve will 

discuss the west after I’m finished. 

Otherwise, in the Midwest, the primary issues are the operation and execution of 

MISO’s transition to fully functioning RTO markets, the coordination between PJM 

and MISO and PJM’s integration of new areas, most recently of Dominion last 

weekend. 

In New York, we continue to focus on the load pockets of New York City and Long 

Island. We also are monitoring occasional short-term price spikes in the New York 

ISO. These spikes appear to be related to recent software changes, and are often 

reserved and corrected. Nevertheless, we are watching their behavior.
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Key Electric Fuel Prices Remain High

Sources: Natural Gas Intelligence, Bloomberg, L.P. and New York Mercantile Exchange (NYMEX).

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05

Price ($ per short ton)

Big Sandy River,

West Virginia

NYMEX

Central Appalachia

Coal Futures

04/29/05

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05

Prices ($ per MMBtu)

Henry Hub Cash Price

Henry Hub Futures 

Settlement Price on 

04/29/05

Let’s start with fuel prices. These charts of natural gas and coal prices starting in 

2003 combined with futures prices for this summer show that higher prices than last 

year will continue to put upward pressure on power prices nationally. These effects 

will tend to be most significant in regions highly dependent on gas-fired generation. 
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$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05

Prices ($ per MMBtu)

Transco Z6 No. 2 Heating 

Oil, NY

No. 6 Fuel 

Oil, NY

With Healthy Gas Storage Inventories, 

Oil is Driving Higher Prices

Sources: Natural Gas Intelligence, Bloomberg, L.P. and New York Mercantile Exchange (NYMEX).

Why are gas prices so high despite currently healthy gas storage inventories? 

Inventories are comfortably above the 5-year average. We’ve found that gas prices 

have followed oil prices. For example, gas prices, as shown in this graph delivered 

to New York City, have traded between No. 2 Heating oil and No. 6 Fuel oil for 

several years, with occasional forays higher due to locational scarcity. Most 

recently, gas prices have remained near the lower end of that price range indicating 

reduced gas supply stress. Recent weakness in oil prices – if dropping below $50 

per barrel can be considered “weak” – has been closely followed by gas prices.

Altogether, stronger fuel costs are likely keep average electricity prices higher than 

those experienced in the past few years.
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New England Expects Record Peak 

Demand With Adequate Reserves

Previous Peak: 25,343 MW

Hot (10%) 27,985 MW

Average (50%) 26,355 MW

Probability Load

ISO New England Peak 

Forecast and Load

ISO New England Summer 2005 

Reserve Margin

0%

5%

10%

15%

20%

25%

Average Summer Hot Summer

Sources: NEPOOL 2004 – 2013 Forecast Report of Capacity, Energy, Loads and Transmission (2004 CELT Report) 

and discussion with ISO New England. Annual net generation from ISO New England.

Recent New England ISO forecasts have indicate the potential, under extreme 

conditions, for some problems in New England this summer. ISO-NE’s expected 

2005 peak load will reach 26,355 MW at least one day during the summer and could 

go as high as 27,985 MW during an extended heat spell. The previous record peak 

load of 25,348 MW was set on August 14, 2002. Nevertheless New England should 

have a slim surplus of capacity provided the summer is not exceptionally hot and 

loads remain within the expected range. 
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Load Pockets in New England 

may Face Continued Tightness

• Generation and transmission capacity 

in SW Connecticut remains inadequate

• Secured 218 MW of emergency 

summer resources

Specific load pockets in New England could be tighter. Currently, Connecticut’s 

capacity is inadequate to serve demand and meet reliability requirements. In 

Southwest Connecticut, the ISO uses emergency resources and operating 

procedures to keep the lights on. This year, as in previous years, the ISO has 

secured 218 MW of emergency resources (portable generators) to help maintain 

reliability in Connecticut.
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Supply and Demand Conditions 

in the U.S. West this Summer 

may Result in Periods of Market 

Tightness – Higher Prices and 

Even Interruptions. 

Steven Harvey:

Thanks Tom.

Our review of supply and demand conditions in the west this summer indicates that 

there may be periods of market tightness most likely expressed as price spikes and 

possible interruptions. I want to be clear about this – spikes and interruptions are 

not the most likely result. We believe that the most likely situation is no serious 

disruption. However, the possibility remains and we need to take it seriously as we 

plan our Oversight activities for the summer. Let me describe the conditions that 

might result in disruptions in more detail.
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Western Generation Is Heavily Dependent 

on Hydro and Natural Gas

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

160

170

WECC AZN CNV NWP RMP

Capacity (GW)

Other

Oil

Dual Fuel

Natural Gas - Other

Natural Gas - Gas Turbine

Natural Gas - Combined Cycle

Hydro

Coal

Nuclear

28% reserve margin

(2004 projection NERC)

Projected peak demand

(2004 projection NERC)

20%

10%

63% 

18%

Source: OMOI Analysis of NERC 2004 ES&D database.

We graphed the generation mix for the Western Electricity Coordinating Council to 

get a general idea of the capacity mix for electricity in the west. As you can see, a 

large portion of the capacity is hydroelectric – close to 30%. Much of that is in the 

Pacific Northwest. Gas is important too, with a little more than 20% from combined 

cycle, turbine or other gas-fired generation; and more dual-fueled. Like the rest of 

the US, much of the gas-fired generation is fairly new, most of it developed since 

2000.

Given Tom’s comments before about the price of oil and natural gas, gas-fired 

generation is likely to be higher-priced than in the past few years. This 

consideration is even more important given the story in the next slide.
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Hydro and Snow Pack are Below Average

Hydro Generation Snow Water Equivalent

147%

89%

75%

32%

59%

53%

78%

80%

60%

74%

70%

71%

0

16,200

19,700

0

16,200

0

10,400

10,000

2,700

21,500

2,700

9,100

California

British 

Columbia

Idaho

Washington

Montana

Oregon

4/27/05

(% of average)

One Year Ago

(% of 

average)

Additional 

Capacity 

Created 

Downstream 

(MW)

In-State 

Capacity (MW)

Sources: OMOI analysis; derived from data from EIA, BPA, Natural Resources Conservation Services, and Bloomberg, L.P.

The outlook for hydroelectric generation is not good for this summer. With the 

exception of California, that faced extraordinary levels of precipitation over the past 

winter, the west broadly has much less water available for hydro generation than in 

an average year. Late precipitation in improved the situation somewhat, and British 

Columbia and Idaho now are in better shape than one year ago. Still, Washington, 

Montana and Oregon now face very low levels of “snow water equivalent.”

With hydro at low levels, natural gas is clearly the most significant potential 

contributor to capacity and energy needs in the west this summer. Consequently, 

we expect electricity prices in the west this summer to be higher on average than 

over the past few years, driven solely by the use of gas-fired generation to make up 

for hydroelectric generation

In effect, gas-fired generation will be competing with storage fill through the summer 

in the west, possibly effecting prices as well. We will be watching storage fill to see 

if there are any potential longer-term effects on gas supply. The western pipeline 

system appears adequate to handle the load at this point.
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Southern 

California’s 

Summer 2005 

Resource 

Margins are 

Inadequate 

for an 

Extremely Hot 

Summer

CAISO Southern Region 

Summer 2005 Reserve Margin

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

June July August September

Desired Normal Summer Hot Summer

Sources: OMOI Analysis of the California Energy Commission Summer 2005 Electricity Supply and Demand Outlook Draft Staff

Report, March 2005 and CAISO 2005 Summer Operations Assessment, March 23, 2005.

Now let’s consider effects of demand. Extensive economic growth in southern 

California has created conditions where, under extreme temperatures, capacity may 

not be adequate to cover all load. The California ISO and the California Energy 

Commission have been actively documenting these conditions, and the graph 

shows the most recent results for southern California as calculated by the ISO. 

Under projected hot summer conditions, it appears that reserve margins are 

inadequate in southern California in August, and very tight in September.

Again, I should stress that this problem only appears under fairly extreme 

conditions, and may not appear at all. Nevertheless, we understand that the 

CAISO, the California Energy Commission and the California Public Utility 

Commission have been working closely with the Governor’s Office to understand 

the situation and look for potential solutions. 

I should note that the graph does not take into account certain possible demand 

actions, for example the effects of interrupting interruptible load. I should also note 

that the graph assumes very high levels of imports into California – including 

imports from the Pacific Northwest. We have been told that on a peaking basis, 

capacity of Northwestern hydroelectric generation should be available for California.
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Most Recent 

NOAA 

Forecast is for 

Above Average 

Western 

Summer 

Temperatures

Summer demand conditions are further complicated by recent weather forecasting. 

The most recent summer temperature forecast from the National Oceanic and 

Atmospheric Administration is for above-normal heat in the west. This NOAApublished map is for July, August and September, and shows widespread 

forecasted above-average temperatures across the west, with much-above average 

temperatures in the desert southwest. If the weather plays out as projected by 

NOAA, there will be a lot of stress on the western grid.
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What Could Trigger Periods Of Electric 

Scarcity in the West?

• Hotter-than-average weather

• Transmission disruptions

• Generation disruptions

That kind of stress can result in problems beyond simply high demand. Heavily 

used equipment is more vulnerable to outages. Outages of generation or of 

transmission lines could result in localized problems in a stressed western grid. 

These kinds of outages are not really predictable, but dry weather in the northwest, 

for example, could increase the likelihood of wildfires that could, in turn , threaten 

transmission.
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What Effects Would Scarcity 

Have on Western Markets?

• Price levels are likely to be higher all 

summer due to more expensive gas.

• Spikes possible due to extraordinary heat 

or system failures.

• Forward contracting, Commission rules 

and oversight make spot price 

manipulation less likely.

What would periods of stress look like in western markets in the summer of 2005? 

First of all, prices are likely to start higher than in the past few summers due to the 

greater reliance on natural gas instead of hydroelectric generation. With periods –

probably short periods – of extreme heat, there could be price spikes to fairly high 

levels, or interruptions of service in extreme cases. 

I would note that this possibility is entirely related to market fundamentals. In our 

view, the likelihood of spot price manipulation is lower than in cases of stress in the 

past for three reasons. The first is the extent of forward contracting. Many utilities 

in the west have contracted to cover most of their needs under longer-term 

contracts. They will tend to go to spot markets only under more extreme 

circumstances. Second, the Commission has added rules – most significantly the 

Behavior Rules – designed to clarify the most significant areas of concern regarding 

buyer and seller behavior. Finally, we will continue to oversee market activity 

through the summer.
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Focus of Oversight Attention 

This Summer

•Western market behavior and prices

•New England prices in load pockets

•MISO implementation

•Price spikes in New York

•Natural gas storage fill

I’d like to summarize our report today, as we always have, by pointing out the areas 

of oversight we plan to focus on this summer. They include the western market 

behavior and activity I’ve just described as well as activity in the northeastern load 

pockets Tom identified earlier, progress in the ongoing MISO market 

implementation, the price spikes we’ve noticed in New York since the 

implementation of their new software and the status of storage fill, particularly in the 

west, as the summer goes on.

Please note once again, nationally, most regions have adequate or better reserves 

and are likely to face few market problems. Even in tighter areas such as the west 

and the northeast load pockets like southwest Connecticut, severe problems are 

unlikely unless hot weather is severe.
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Contributors

• Stacy Angel

• William Booth

• Judy Eastwood

• Robert Flanders

• Alan Haymes

• Matthew Hunter

• Steven Michals

• Colin Mount

• Thomas Pinkston

• Clint Ramdath

• Jamie Simler

• Harry Singh

• Jennifer Tremper

• Julia Tuzun

• Dean Wight

Finally, I’d like to quickly thank the many contributors listed in the presentation –

though in the interest of time I won’t read all their names. I would like to say that the 

development particularly of our views on the west this summer have been formed 

by very close coordination across Commission Staff including active representation 

by OMTR and OEP along with OMOI.

Tom, Harry Colin and I would be happy to take any of your questions.