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Price Spike Tsunami: How Market Power Soaked California

Last year saw no shift in fundamentals. Then why was the ISO so willing to be deceived?
Fortnightly Magazine - January 1 2001

of 2000 will dramatically reduce the roles of these two state agencies in the bulk power markets of the WSCC. If there is only one moral to take from this, it should be that state and federal legislators should avoid "deregulatory" solutions that involve extensive intervention into competitive markets.

Robert McCullough is a frequent contributor to Public Utilities Fortnightly. He is the managing partner of McCullough Research, a firm specializing in bulk power and restructuring policy issues in the United States and Canada. He also is an adjunct professor of economics at Portland State University.

1 The hourly load data set from the University of California Energy Institute identifies the 1998 peak load as 44,759 MW, the 1999 peak as 45,574 MW, and the summer 2000 peak as 43,509 MW.

2 The WSCC is the regional reliability council that operates under the auspices of the North American Electric Reliability Council (NERC). NERC was founded in the mid-'60s in response to the "great blackout" in New York and New England. It functions as an association of the United States and Canadian entities that trade, generate, and regulate electricity. In actual practice, reliability issues are delegated to a series of local reliability councils.

3 The ISO operates within California but runs a control area smaller than the state as a whole, in that the ISO area excludes areas served by utilities that are not ISO members, such as the Los Angeles Department of Water and Power, the Sacramento Municipal Utility District, and various other municipal utilities and irrigation districts.

4 WSCC estimates are "worst case." Imports to California would be far lower if the Pacific Northwest had experienced "critical water"-the worst inflows in our historical record. As noted above, the Columbia River inflows were average, so the energy available for export to California was significantly higher than the WSCC's assumptions.

5 Industry jargon uses the phrase "forced outage" to describe the breakdown of equipment. "Planned outage" means that the plant is unavailable due to maintenance.

6 .

7 A utility's reserve margin is the percentage of resources available after loads have been met. The traditional rule of thumb for the industry is that reserves should be at least 5 percent of load plus the single-largest resource in the utility's portfolio. In the case of the ISO, a reserve margin in the 7 percent to 8 percent range would be regarded as a logical minimum.

8 "Factoring in the actual planned and unplanned outages that occurred in the California market (see Figures 2-12), and holding the other assumptions equal, the reserve margins in the California subregion dropped from 26.3 to 17.5 percent for June, from 17.7 to 10.2 percent for July and from 17.4 to 8.98 percent for August." .

9 The cost of emission credits has been cited as a possible explanation, but the market for emission credits is limited to the L.A. basin.

10 In its Nov. 1 order the FERC proposed to (1) allow purchasing outside the PX, (2) impose a "soft" price cap of $150 per megawatt-hour, (3) set penalties for