Prepared Direct Testimony of Robert McCullough on Behalf of the ...

Page 24 <strong>of</strong> 76SEd4TAC-400How did you model the change in SCAQMD policy towards pricing RECLAIMemissions credits that occurred in January?After discussions with SCAQMD personnel and a careful review <strong>of</strong> the RECLAIM data, wetreated the cost <strong>of</strong> credits as $7.50/pound. Since SCAQMD split the market into two parts andallowed electric generators to purchase their requirements over their allocations at $7.50/pound inJanuary, this is the logical economic cost.Why were operations at these plants under utility ownership higher than your modelpredicted?Before April 1, 1998, California's wholesale markets were simpler, but they were not free h mmarket power. Traditionally, three buyers, Pacific Gas and Electric, Southern California Edison,and San Diego Electric and Gas dominated the import market from the Pacific Northwest. Onthe seller side <strong>of</strong> the market, over twenty different entities were attempting to sell their non-firmelectricity. This is a classic def nition <strong>of</strong> oligopsony - a large number <strong>of</strong> sellers facing a smallnumber <strong>of</strong> buyers. Buyers reacted to this market advantage by buying less than they wouldnormally have purchased as part <strong>of</strong> their negotiating strategy. Thus we would expect the plants tohave operated more than a simple dispatch model would predict during this period. After thestartup <strong>of</strong> the IS0 and PX, the three utilities no longer had market power, instead they purchasedpower through the PX and divested the large thermal units.Have you reviewed the specific case <strong>of</strong> the Reliant withholding reported in the Relianttranscripts?Yes. As part <strong>of</strong> California's divestiture policy, Southern California Edison sold four major plants