Supplier Jolts Electric Market With Lofty Bid

California’s new competitive market for electricity marked its 100th day of operation Thursday with a bit of a jolt: shockingly expensive energy.

An unidentified electricity generator--officials won’t say who--was able to bid $5,000 a megawatt Wednesday to supply power if needed during demand surges on Thursday in Southern California.

That figure was 500 to 1,000 times the usual price for so-called replacement reserve power; it represented the price the supplier was paid to reserve some of its capacity to produce electricity within 60 minutes, rather than payment for the electricity itself.

The total cost, which came to $7.5 million for 1,500 megawatts, will be born by utilities, not consumers, whose rates are capped for four years.

The average price of electricity on the California Power Exchange for delivery Thursday was $31.57 a megawatt-hour, the third-highest average since trading began March 31.

News of the bid came from the California Independent System Operator, the nonprofit agency that took over operation of the long-distance electricity transmission grid from investor-owned utilities on March 31 as part of the restructuring of the industry. The ISO also schedules delivery of the electricity that is traded on the California Power Exchange.

The restructuring of the retail and wholesale markets was designed to lower prices through competition. But the prices of some services had remained capped, including the price of replacement reserve power, which is a sort of reservations system for extra capacity to ensure reliability of the grid during demand surges.

But under a recent order by the Federal Energy Regulatory Commission, price caps were removed for some suppliers of replacement reserve power while the caps remained for others, chiefly the big investor-owned utilities: Southern California Edison, San Diego Gas & Electric and Pacific Gas & Electric.

That allowed a power generator to bid without significant competition for a three-hour, 1,500-megawatt period in Southern California, and the ISO was forced to accept the $5,000-a-megawatt bid to reserve the extra electricity generating capacity.

Utilities will ultimately foot the bill, perhaps extending the time that rate caps will remain if the problem is not fixed, said Jeffrey Tranen, chief executive of the ISO. The state’s investor-owned utilities have four years to recover the costs of so-called stranded assets, such as investments in nuclear power plants, to help them become more competitive in the new retail market.

“We are very concerned about this,” Tranen said. “We are making an emergency appeal to FERC for them to take action.” The ISO is also changing its software so that out-of-state companies will be able to bid, thereby increasing price competition, he said.

Doug Kline, a spokesman for Sempra Energy, parent of San Diego Gas & Electric, said the utility expects to recover its costs within four years, but if electricity prices are too high to accomplish that, the utilities and their shareholders will absorb that cost.

“In a competitive market, you’ve got to figure you’re going to get price spikes like this, and hopefully you’ll also get spikes the other way,” Kline said.

Other than this “blip,” Tranen said, the transmission system and electricity trading market have operated well overall.