Power Markets Disconnected? How to Reconcile Retail with Wholesale
operator and retail rules set by the state Public Utilities Commission. They concerned shopping credits, procurement of reserve power, ancillary services and congestion management. Some reforms now are in place - only time will tell if they will mitigate past distortions.
The most overwhelming disconnection that occurred in California involved the retail shopping credit, known as the "PX credit," designed to reimburse direct access customers by backing out the market price of wholesale power as determined on the California Power Exchange. During the first year of competition, the PX credit was set consistently below the all-in wholesale cost of retail electricity. This disconnection continues to cripple the residential and small commercial markets for competitive retail electricity. It must be corrected by unbundling the retail tariffs so that the retail credit provides customers with an opportunity to save when they shop.
During the peak demand periods of summer 1998, exorbitant price spikes occurred, with capacity selling in excess of $5,000 per megawatt per day. Among the disconnections that contributed to these retail price spikes were two rules in the wholesale market concerning operating reserves and ancillary services.
First, the ISO set a limit of 25 percent on the portion of operating reserves supplied by out-of-state imports. The rule required the ISO to secure too much capacity from within the system, thus raising prices for this ancillary service. Since then, the ISO has changed its protocols and systems and now allows up to 50 percent of operating reserves to be imported.
Second, cost-based caps imposed on the price of ancillary services (including capacity) encouraged owners to withhold capacity from the market. Capacity holders claimed that operating constraints made plants more expensive to operate than could be offset by the cost-based cap revenues. Some blamed the caps, while others claimed that utilities were exercising market power under the protection of antiquated reliability must-run ISO rules. In late October 1998, the FERC issued an order lifting all cost-based caps.
The removal of cost-based caps and the easing of import restrictions has helped avoid price spikes during the summer of 1999, at least through early August. Nevertheless, other issues still must be addressed.
First, the California ISO needs to reassess the need for its congestion management system (CONG) with more than 3,000 buses. The CONG is extremely cumbersome and costly. It adds unnecessary risk to providing competitive retail service. Marketers have proposed a "simplified transmission congestion management system" based on 10 to 15 zones. This simplified system could be run in lieu of the CONG, except where certain types of congestion are indicated.
Second, the California ISO could implement a 1997 FERC order requiring that utilities make available at market-determined rates fixed transmission rights not under contract. This enhancement to wholesale procedures effectively would make more generation resources available for the supply of competitive retail load.
Third, the ISO could recognize more of the potential for customer-specific load control. The technology is in place, in whole or in part, to allow for site-specific load control and for those customers to receive cost savings. Until now, the ISO