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California's Scheduling Coordinator: Market-Maker with Advantage
PX approval order, it recommended more study and monitoring. %n13%n FERC's approach is as follows:
1. Ensure FERC jurisdiction by requiring market-related ISO and PX protocols be filed as part of the ISO/PX tariff.
2. Deem the congestion pricing approach preliminary, monitor its ability to send efficient price signals and require more transparent congestion information.
3. Require the PX to file Activity Rules to encourage honest iterative bidding.
4. Require the ISO and PX to conduct studies to assess possible market power abuse.
Regarding the latter, "the studies should pay specific attention to the susceptibility of the auction format to overt and tactical collusion and the potential to exercise market power." %n14%n This is a recurring theme in the FERC's decision.
The FERC also posed approaches to address three of the well-recognized gaming strategies. To address gaming by capacity withholding, the FERC requires that "availability standards" be developed for generators. %n15%n
To concerns about gaming with "dynamic plant constraints," the FERC would have generators file detailed information on marginal cost and unit availability to the ISO and PX, to assist in monitoring. With required plant divestiture, California's IOU generators will compose a small set of the generators that could exercise market coordination and gaming strategies. Monitoring a few plants makes little sense.
To address potential gaming of peak-period bidders and congestion, the FERC requires further study of congestion protocols and market monitoring.
The FERC's ultimate threat is to re-regulate the ISO and PX if market power abuse becomes evident. "We find that, if there is evidence that the Companies have been exercising market power, bid caps may be an appropriate response." This is no idle threat, as the FERC directs "the ISO and PX each to file pro forma bid caps with the Commission under F.P.A. section 205 as soon as practicable."
The need for more market rules, market studies, and even re-regulation is in part a response to the belief that the PX will not provide competitive MCPs. It appears that design has subverted the PX. As California's small and medium consumers have argued, a viable and transparent PX - one not burdened with protocols making it noncompetitive with other SCs - would make gaming and market dominance more difficult. Obviously, this plan would reduce the margins of other SCs, which points to the reason other SCs and large players are so disparaging of a viable PX - that it will affect their bottom line.
Will other interested parties and the FERC have the ability to make this a truly competitive market? The prospects appear dim. Strategic gaming and the capture of monopoly power look destined. Given their momentum, California's major players seem unstoppable. In addition, the ISO is very resistant to FERC's proposed changes, making reform less likely. Other states and Congress should critically assess whether California's head-long rush to laissez faire markets takes two steps forward only to land three steps back.
Eric Charles Woychik, president of Strategy Integration, a consulting firm to industry participants, has worked with energy utilities for more than 20 years. He has been involved