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News Digest

Fortnightly Magazine - November 1 2000

ordered the New York ISO to report back by Jan. 1 on a plan to allow bidding by nonphysical market participants (those not serving actual load) in the ISO's day-ahead and real-time energy markets. The FERC predicted that virtual bidding was not a matter of "if," but "when." Nevertheless, it warned of difficulties in software conversion. "It is imprudent," said the FERC, "to introduce sudden overrides and quick fixes." Morgan Stanley had complained that the NY ISO policy barring power marketers and other so-called "virtual" players from bidding had harmed power marketers by limiting them from hedging risks from price swings between the day-ahead and real-time markets, thus reducing liquidity, impeding efficiency, and distorting prices. .

California Price Spikes. In a statement released at the FERC's field hearing held in San Diego to address last summer's high power prices in California, San Diego Gas & Electric Co. said that reform proposals now under discussion at the California ISO mark "a step backward" that will "perpetuate an inherently inefficient" market design.

"The ISO's stakeholder process is producing flawed reform proposals," said SDG&E. "We will protest the ISO staff's reform proposals if they are filed at FERC as currently contemplated."

SDG&E submitted detailed evidence of pricing anomalies at the Power Exchange and the ISO, and blamed the problem on what it called California's "unique de-centralized approach" to market coordination, which relies on private scheduling coordinators to take the lead role in managing congestion, instead of handing that job to the ISO itself, as is done generally in the U.S. Northeast.

Earlier, on Aug. 31, Sempra Energy (SDG&E's parent company) had joined with two consumer advocacy groups in California (TURN and UCAN) to submit a formal white paper to the California ISO CEO Terry winter and the ISO board of governors. The white paper offers a comprehensive proposal for reforming the ISO market, and describes in great detail the various internal reform proposals under discussion at the ISO itself.

That study, "Comments on the Congestion Management Proposals of the California ISO," was prepared by Scott M. Harvey, managing director, LECG/Navigant Consulting Inc., and professor William W. Hogan, of Harvard University.

"We conclude," say Hogan and Harvey, "that the basic reform approaches recommended by the California ISO are not likely to support an efficient market. ... [T]he CAISO proposals suffer from a systematic failure to address the most fundamental requirements of effective congestion management."

Instead of addressing the FERC concerns, Hogan and Harvey predicted that current ISO proposals would create new problems:

  • Commitment decisions pushed further forward in time.
  • Market complexity and higher operating costs.
  • Higher transaction costs for hedging congestion with fixed transmission rights.

At the hearing itself, TURN lawyer Mike Florio was no more optimistic. He saw virtually no chance of significant reform from within at the California ISO:

"I'm on the ISO board, and it pains me to have to say this, but I don't think you're going to get the kinds of changes that you need with the current structure of that board. In fact, I would say the ISO is incapable