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California's Scheduling Coordinator: Market-Maker with Advantage

Fortnightly Magazine - January 15 1998

mid-merit or base-load plants to increase prices during peak periods. Events such as "sudden generator unavailability" can reduce supply and increase MCP. The objective is to gain more from the increased peak prices than is lost from having an "infra-marginal" unit operating for more hours. The strategy is successful if generators can target the peak hours to reduce availability and have the power available when peak prices occur.

Second is gaming with "dynamic plant constraints" with plants that are marginal (more expensive). To play this game, the owners of the plant(s) must know the ramp rates - maximum rate of increasing production - of other plants that may operate in a given period. The game then is to get the more expensive unit on line and to "fill" the hours when competing plants would otherwise ramp-up, to ensure that the lower-priced unit is excluded because of dynamic constraints. %n10%n

A third strategy can involve adjustment bids to relieve constraints. Peak-period bidders who otherwise face congestion may eschew the initial energy markets (day-ahead and hour-ahead) and position themselves for the final (constrained) schedule. To succeed in the final schedule, peak-period bidders will: (1) gain information about transmission zone constraints to exercise local market power; (2) bid separate adjustment (incremental or decremental bids) prices to gain transmission access, possibly controlling the constraint point, intending to extract higher commodity or capacity prices; or (3) limit congestion information or restrict price adjustment opportunities. The latter can be achieved most directly through "hardwiring" the protocols or the sequence of bidding and scheduling steps. PX participants face this exact problem because of the market protocols initially accepted by the FERC.

A fourth strategy resembles predatory pricing. Market players may underbid to bar entry and raise overall prices. Through coordinated behavior between a set of generators, which an SC or group of SCs could arrange, market entry can be constrained in the short term, and remaining firms may then increase prices in the longer term. For example, a large portfolio of generators may depress off-peak prices, to restrict entry of base-load plants or assure that such plants face unattractive average prices. This result would disadvantage plants otherwise used in the near term (e.g., qualifying cogeneration facilities that are "put to market").

Gaming strategies also can be combined. For example, generators with market power or the ability to game peak-period prices (the first game above) could repeatedly bid low off-peak prices to bar base-load units (the fourth game). Later, as capacity margins decrease and prices increase, maintaining entry barriers will be more difficult.

Preventing Manipulation

Any previous efforts to address inappropriate gaming in the California market have been left unfinished. Strategic gaming and coordination by SCs to push up prices dominated the California ISO Market Surveillance Division's first workshop on market power. %n11%n The members discussed several market tactics, including market monitoring %n12%n and manipulation by experts to identify where inappropriate gaming could occur, yet neither have been implemented.

Although the FERC appears aware of gaming problems, it has said that such conclusions about potential problems are premature. In the