Lonely Real-Time Market The California Independent System Operator's push to have most energy traded outside its real-time market may be too successful, according to data from last month's heat wave. Or it may be just successful enough, proving that regulators' resource-adequacy efforts are working. The interpretation depends on who is spinning the issue. Whatever the case, the lack of action in the real-time market further clouds the true cost of energy. Those who want to sell power said the lack of activity in the real-time market bodes ill for consumers, with prices increasing and supplies heading out of state. "I think folks generally found it odd that prices outside of California throughout the West were significantly higher than what was clearing the CAISO market," states Steven Kelly, Independent Energy Producers policy director. Others see the lack of activity as a good sign. "The scheduling behavior of [utilities] and the small number of price spikes in the real-time market during the heat storm has very positive implications for the California Public Utilities Commission's current resource-adequacy process," counters Frank Wolak, Stanford professor and CAISO Market Surveillance Committee chair. "The high levels of fixed-price forward contracts' coverage of final demand by the three [utilities] enabled them to schedule virtually all of their actual demand in the day-ahead and hour-ahead markets. This left an extremely small real-time market, which meant there was adequate competition among suppliers to meet the very small real-time demand, so there were few five-minute periods when the price hit the $400\/MWh bid cap," he explains. While no one could pin down the price of trades outside California, the $400\/MWh Federal Energy Regulatory Commission price cap that pertains to the grid operator's market applies to other Western states. Sources such as Kelly say there were many trades outside of California that were weighted at the high end of the cap. Thus, he and others said energy that could be used in California is going elsewhere. In addition, energy that is being used in California through prescheduling is probably also coming in at a high price. During the 2000-01 energy crisis, energy traders used CAISO's real-time market for more than 30 percent of their trades - and those trades reached almost $10,000\/MWh at the zenith of the crisis. After that, the grid operator pushed utilities to nail down a larger percentage of the power it expects will be needed outside the real-time market. A review of the amount of energy that utilities scheduled during hot days in late July versus the amount actually used shows that utilities for the most part had a cushion of power. It wasn't much - from 0.1 percent extra supply available over demand on some afternoons to a solid 2 percent extra on others, according to grid operator data. However, utilities were caught short on July 22. That day, at noon, there was a nearly 4 percent difference between energy that was prescheduled and demand for that energy. Still, given that CAISO expects that its real-time market is about 5 percent of total energy consumption in its control area, that 4 percent during the worst of the heat wave demand barely put the real-time market to use. "If [utilities] are more risk averse than suppliers, then slight overscheduling (on average) is optimal, which implies [they] are willing to purchase at a higher price in the day-ahead and hour-ahead market in order to guard against the risk of physical curtailment - a real possibility during the July heat storm - or sustained periods of very high real-time prices," notes Wolak. The prices on the real-time market during the heat storm were moderate - rarely hitting the $400\/MWh cap (Circuit, Aug. 11, 2006). The cost of the prescheduled energy to utilities during that time is unknown. "Nothing is transparent," notes Kelly. He explains that much prescheduled energy is obtained in contracts, and those prices are unknown. Since the California Power Exchange went out of business, utilities schedule 24 hours in advance, but there is no day-ahead market. When, and if, the grid operator's market redesign is approved by federal regulators, CAISO will host its own day-ahead market. The redesign would provide utilities with the option of buying energy, in addition to contracting and\/or using their own power, such as that from their hydroelectric or nuclear plants. Meanwhile, utilities in California sold record amounts of energy to consumers. Bills for July's use are trickling in, sending shock waves to some consumers. Pacific Gas & Electric's early estimate is about $125 million to $150 million in extra income from the time of the heat storm, according to Aaron Johnson, deputy Division of Ratepayer Advocates director. However, he emphasized that the numbers are still speculative. In theory, the California Public Utilities Commission has an accounting mechanism that decouples electricity sales profits from the amount of electricity sold. In other words, utilities should not have an incentive to sell more electricity but instead should be neutral as to whether it's negawatts conserved or megawatts sold. The state's decoupling policy was suspended when deregulation set in. It was revived, however, after the energy crisis, explains Johnson. Utilities will submit their sales figures to the commission later this year. The sales will be trued up against revenue requirements. That can be done through a credit or through lowering rates. PG&E said last week that it plans to provide a one-time bill credit of 15 percent for all residential customers and 10 percent for all other customers, including agricultural, business, commercial, and governmental, in the wake of July's heat wave. The CPUC has to approve the credit. The Division of Ratepayer Advocates sent a letter of support for the credit to the commission August 24. In addition to the credit, the utility plans to set aside $5 million to help customers avoid shutoffs for nonpayment, according to Johnson. Other utilities could return the profits by lowering rates, as well as a bill credit - although a credit tends to create better public relations for utilities. "If they give it back now, they still have to true up later - customers get it back either way," Johnson says. Comparing July to June, PG&E residential customers' electricity usage increased by an average of 28 percent per customer, according to the utility, with average bills increasing by 44 percent. Thus, even with the credit, PG&E's income could increase by about 30 percent for sales during that time. However, because the price of that energy is mostly unknown since it's being traded outside the real-time market, the relationship between the higher sales and utility income is also unknown.