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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

work is to study reports from the Western Systems Coordinating Council. 2 The WSCC evaluates the state of the load resource balance in our area in a number of different documents. The two most widely known documents are the "Load and Resources Report" and the "Summer Adequacy Report." The "2000 Summer Adequacy Report" was published on May 25, 2000.

"The 2000 Summer Adequacy Report" indicated that there were sufficient resources on both a regional level and within California. The chart summarizes the reserve margin, by month, for the WSCC, California, and the ISO. 3

The WSCC estimates for California and the ISO implied a satisfactory margin of loads over resources for this summer-a margin above 15 percent. The WSCC estimates depended on a low level of imports-2,000 MW over the summer months. 4

Notwithstanding the foregoing, from June 23rd through the end of the summer, the ISO declared 38 separate emergencies. In each case, the ISO announced that its reserves had fallen below the appropriate trigger level. Each emergency was characterized by high prices as the ISO entered the larger WSCC bulk power market for "out of market" purchases to meet its system peaks in real time.

The contradiction between the ISO and the WSCC estimates has been difficult for the industry to resolve. As a matter of industry tradition, reliability issues are not matters that are subject to deception-declaring a false emergency is the equivalent of "crying wolf." At the same time, the ISO's frequent emergencies did not reflect the experience of the summer at any other utility in the region. (The only echo of the ISO's continuing difficulties that occurred elsewhere on the West Coast was a single day-Aug. 22, 2000-when the Bonneville Power Administration advised the national Marine Fisheries Service that low flows might threaten its environmental obligations. BPA officials later noted that they were amazed at the quantity of offers they received the next day from potential suppliers.)

Nevertheless, despite this puzzling difference between estimates, the explanation turns out to be relatively straightforward.

Every other utility in the region makes its reliability arrangements on a reasonable prospective planning horizon. As a matter of industry practice, each utility owns or has contracted for sufficient capacity to meet summer and winter peaks-even after forced outages. 5 The ISO, on the other hand, depends on day-ahead offers of capacity to meet summer peaks. Simply put, the ISO declared each emergency when the offers of capacity were insufficient to meet its reliability criteria. It is, of course, significant that, without exception, next day real-time sellers were available to avert the ISO's emergency, but at murderous market-clearing prices. The mystery is why the ISO allowed itself to be so repeatedly deceived. This fact alone may explain why the FERC insisted in its Nov. 1 order 6 on eliminating the generators' representatives from the ISO board.

As of the end of November, there was enough data to update the WSCC's estimate of the ISO's reserve margin for actual loads and imports, 7 though at our firm, we were not yet able to update the