July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
California's Scheduling Coordinator: Market-Maker with Advantage
AFTER A FOUR-YEAR DEBATE ON ELECTRICITY REFORM, CALIfornia's powerful industry players have carved out a unique and broad new role for "scheduling coordinators." SCs have the central role in offering fully unbundled generation, transmission and retail-access services. But could these SCs, by controlling the market, also become the new monopolists?
California's highly complex scheme for markets, while said to be laissez faire, maintains several artificial constraints and market protocols that create advantages for SCs. As it is now designed, the California Power Exchange (the spot market, or PX) seems certain to have a limited role and a limited life, further reducing competition and market transparency.
Integral to the California experiment is the SC concept, which so far is unproven. SCs act for generators and consumers to schedule trading on the grid. By submitting bids to the independent system operator (who runs the transmission system), the SCs help the ISO manage line congestion. However, SCs can concentrate generation through contracting or acquisition. In this very complex market, with rules tailored for SCs, concentration of market power appears inevitable, as does market manipulation through gaming behavior.
The Federal Energy Regulatory Commission has allowed California's experiment to begin, but approval remains conditional. %n1%n The FERC will review many matters, most of which involve market protocols governing SC activities. Overall, the FERC appears cognizant of potential problems. However, for the time being it has chosen to monitor market activity and simply "observe" any market-power abuse. Smart gaming strategists will disguise their behavior and avoid regulatory review, much as occurred in England and Wales. A more credible approach might examine each market mechanism and construct counter examples that prove the ability to play inappropriate, discriminatory games.
California's attempt to have SCs "make the market" may have opened a Pandora's box of market power and gaming problems. %n2%n Compared to independent system operators in New York, New England, and Pennsylvania-New Jersey-Maryland, %n3%n with simpler markets and ISOs that resolve congestion, California may have gone too far too fast. Instead, California's scheme makes SCs coordinate all market players and dictate generation dispatch. Congress and other states should take a hard look at California's experiment. California may have created a market-maker role with overwhelming advantage and a market structure that encourages power abuse. That is a future that others should avoid.
Controlling Scheduling and Congestion
Scheduling coordinators offer schedules and bids to the ISO acting as agents for participating generators and loads in three trading markets - day-ahead, hour-ahead and real- time. In each of these three markets, the ISO publishes congestion information, executes trades brokered by the SCs and then redispatches resources, based on SC congestion bids when necessary. In both day-ahead and hour-ahead markets, the ISO accepts schedules and bids from SCs that reflect acceptable dispatch adjustments. The SC's schedule must exactly match the power provided to the grid and power taken off the grid for each hour. In the real-time market, the ISO can use only SC-provided bids to adjust for congestion.
In the day-ahead market, SCs can use an "iterative window" to make trades in response