California power prices have skyrocketed. Is this normal — or more Enron-style ‘manipulation’?

The epic heat wave that’s produced rolling blackouts in California comes with a high price tag.

Wholesale power prices have occasionally shot up past $1,000 per megawatt hour — mirroring prices from the devastating 2001 energy crisis — as the California Independent System Operator has frantically worked to keep the juice flowing to the grid.

These prices eventually could find their way into rates paid by customers of the ISO’s member utilities, such as PG&E Corp., although it’s far too early to tell.

The blackouts and high prices have raised suspicions of market manipulation of the sort that plagued the state in 2001. Loretta Lynch, who was president of the Public Utilities Commission during the 2001 energy crisis, has said California is being victimized by “the sons of Enron,” a reference to the notorious energy company that led the way in gaming the system nearly two decades ago.

But top ISO officials have said they’ve seen no evidence of anything improper. They’re convinced the heat wave is largely driving conditions on the grid.

“We have a perfect storm going on here,” ISO chief executive Steve Berberich told reporters. “It’s not unusual to have high prices when you have these levels of (usage).”

Among other things, California has become heavily dependent on solar energy. When the sun goes down, high temperatures linger but solar energy dries up. Another factor is that the heat wave has engulfed the entire West, meaning California has struggled to import electricity from neighboring states like it typically does.

James Bushnell, a UC Davis economist and member of the ISO’s market surveillance committee, said Tuesday that prices are behaving more or less as they should.

While utilities line up much of their supply well in advance, a good-sized portion of California’s energy supply is bought and sold in either the “day-ahead” market or the last-minute spot market. Huge volumes of power can change hands through an intricate computerized trading mechanism. There isn’t one market; instead, the state is divided into hundreds of trading hubs or “nodes” that blanket the state.

Despite the ISO market’s complexity, Bushnell said it comes down to supply and demand economics.

“When customers are willing to pay a lot for a product, and supplies get really tight — when you go from abundance to scarcity — prices can really jump,” Bushnell said. “It’s not a sign of manipulation.”

Rajat Deb, who runs a Bay Area electricity-markets firm called LCG Consulting, agreed that the prices are “nothing really out of line.” He said prices were staying high Wednesday, particularly in Southern California, even though overall demands on the grid had eased off and the ISO wasn’t anticipating any blackouts.

Prices can become extremely volatile during crunch times, particularly late afternoon or early evening, when it’s still extremely hot but solar-energy supplies are starting to wane as the sun goes down.

Take Monday, when Berberich told reporters that rolling blackouts were almost certain to hit as many as 3.3 million homes and residences that evening. It would have been one of the largest blackouts in California history.

During the hour beginning between 5 and 6 p.m., prices more than doubled to $387 per megawatt-hour — the electricity needed to power about 750 homes — compared to the hour before. In the next hour, they reached $800 and stayed there until 8 p.m.

The prices reflect an average culled from hundreds of different spots across Northern California where electricity was being traded in the ISO’s complex market. The ISO price fluctuations don’t affect SMUD, the Sacramento Municipal Utility District, which isn’t part of the ISO.

Soon after, as the blackouts didn’t materialize and the ISO called off its emergency alerts, prices tailed off. Between 10 and 11 p.m., they were down to $71.63.

Will power bills increase because of chaos?

While price spikes are undoubtedly contributing to utilities’ costs, Bushnell said it’s unlikely customers will see a meaningful increase in their bills. That’s partly because utilities generally use hedging instruments — financial contracts — to smooth out big fluctuations in pricing.

In addition, the utilities could ride out the latest spikes because the higher wholesale prices are for limited periods of time and for limited amounts of energy.

“One can live with a $1,000 price if you’re only buying your last megawatt at that $1,000 price,” he said.

PG&E said it doesn’t expect the recent volatility to meaningfully affect customer bills.

“Electric wholesale prices have been relatively modest and stable for much of 2020 to date,” PG&E spokeswoman Lynsey Paulo said in an email. “While market price spikes experienced this past week can increase costs for energy purchased for customers and are thus passed on to customers through rates, the impact of the current increase is neither immediate nor necessarily significant for future rates.”

By contrast, during the 2001 crisis, wholesale prices were often in the $1,000 range “for hours at a time,” Bushnell said. California’s combined electricity bill increased by billions of dollars, which led to higher rates for customers of the big utilities that belong to the ISO, such as PG&E.

Eventually, after investigators uncovered market-manipulation schemes, federal officials ordered power suppliers to make major refunds, but the process took years.

As it is, Californians pay some of the highest electric rates in the country, almost 19 cents per kilowatt hour — compared to the U.S. average of just under 13 cents. But because of conservation programs and other factors, energy usage is so low in California that the average monthly bill is actually lower than the nation’s.

Ultimately, customer rates for PG&E and the other investor-owned utilities are set by the Public Utilities Commission.

The PUC has been dragged into the controversy over what’s caused the blackouts. Berberich said the commission has failed to implement a strict “resource adequacy” regulation that would force the utilities to procure a greater share of their power in advance. The PUC said it ordered utilities last fall to line up 3,300 megawatts worth of new power over the next three years.

For his part, Gov. Gavin Newsom has demanded an investigation into what’s gone wrong.

“Let me make this crystal clear,” Newsom said Monday. “We failed to predict and plan these shortages, and that’s simply unacceptable.”

This story was originally published August 19, 2020 at 5:00 AM.