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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

WSCC analysis to include forced outages. However, plant outages were mentioned in the FERC's Nov. 1 staff report, which put them in the 8 percent range. 8 That would leave a reserve margin above 10 percent across all the hours during which the ISO declared emergencies.

In other words, the ISO appears to have "derated" the reserve capacity in the portion of California under its control in order to maintain consistency with its computer forecasting methodology. Our analysis shows that on average, before forced outages, the actual ISO reserve margin averaged over 20 percent during the periods last summer in which it declared emergencies.

In fact, inconsistencies between fundamentals and its offer-based methodology shows up throughout the data. For example, the generation of plants within the ISO's service territory during emergencies is very odd. The chart shows the capacity utilization of generating units in WSCC during the June 26 emergency. It provides data from both the WSCC's EHV database with the EPA's Acid Rain database, showing a fairly high correlation.

Overall, the situation is this: It appears that the ISO has a very poor methodology for evaluating its reliability situation. Underscheduling and market maneuvers such as scheduling power out of state can drive the ISO into declaring an emergency. The economic incentives designed into the system reward market participants for encouraging the ISO's perceptions of shortage.

The Shortage That Wasn't

The basic mechanics of California power markets resemble a Ouija board-a small number of players maneuvering prices in a fashion difficult even for close observers to understand.

The first stage of the process begins with the filing of supply curves with the California Power Exchange by each potential supplier. The supply curve describes the quantities offered for sale at each price. Any party can file a supply curve, although the sheer complexity of the process has posed a barrier for many less-sophisticated utilities and generators. The supply curves are then aggregated into a single PX supply curve. Under Assembly Bill 1890, the state's electric restructuring legislation, the loads of the three utilities automatically are included as the demand curve. The intersection of the supply and demand curves sets the market clearing price, and identifies which resources will operate the following day.

The supply curves are secret, but the aggregated supply curves are available from the PX on a three-month lag. As of the late-November writing of this article, aggregated supply curves were available only through the end of July. The vast amount of data makes it difficult to gather an understanding of the market-even for the participants. The PX data assembled since the start of the ISO occupies over 500 megabytes on a standard IBM personal computer. As always with ISO and PX data, no effort has been made to make analysis by outside parties easy or fruitful.

Nevertheless, the results of the PX comparison between the demand curve and the supply curve provide the template for operations by the ISO (though transactions actually become final at this stage).

The ISO takes the commodity results from the PX and adjusts the results