The Federal Energy Regulatory Commission appointed Bud Earley policy advisor on electric matters. Earley most recently served as director of the electric policy division of the FERC's Office of...
Price Spike Tsunami: How Market Power Soaked California
cost associated with market power, which can be measured in terms of cents per kilowatt-hour, with a plus/minus figure showing the expected range of statistical variation, at a confidence level of 99 percent.
The surcharges shown here come on top of prior surcharges identified with increased costs in bulk power markets of 1.67 cents per kilowatt-hour and 1.17 cents per kilowatt-hour, brought about in April 1998 by the creation of the ISO and PX, respectively. These costs reflect the elimination of California's traditional advantages in import markets and the inefficiencies caused by ISO operational rules. Figures 8 and 9 illustrate the overall impact of market power through June.
Can This Market Be Saved?
On Nov. 1, FERC proposed a handful of reforms 10 for the California market, and though it was expected that the commission would revisit and fine-tune its proposed remedies, we can be relatively certain of some of the changes that the FERC has in mind, and can begin to sort out what those changes might mean for California markets.
The most significant of these reforms (and the most likely to be retained in any subsequent modified or final order) was the elimination of the restriction on California's three, major investor-owned electric utilities (IOUs) from purchasing energy outside of the Power Exchange. Freeing the IOUs from this constraint should strongly reduce the means for market manipulation. Unfortunately, however, market power can also be exercised within the complex rules of the ISO.
Of course, it is true that the FERC also encouraged the ISO to revisit its reliability approach. And the ISO's recent decision to stop disseminating the EHV data will also make collusion more difficult. But problems still remain.
The ISO still reserves the right to intervene massively in California markets with little external review. As a market player, the ISO has proved unsophisticated and gullible. FERC's replacement of the ISO board with non-market participants is unlikely to change the fundamental flaws in the organization's charter. Overall, the ISO's role as a primary energy provider during periods of undergeneration, and the corresponding tendency of the ISO to declare system emergencies during these periods, means that a substantial portion of last summer's problem remains to be solved.
The most important modification yet to be required is a careful review of the ISO's emergency purchasing powers. We expect that the ISO eventually will "buy forward," as is the practice with other utilities.
And a second modification should be imposed as well: Reduce the concentration of ownership of generation in the state of California. While the high degree of concentration is not sufficient to cause the problem in and of itself, it makes market abuse far easier than it should be.
The primary lesson from this summer's experience in California is that the desire to "improve" upon the market has many risks. The Rube Goldberg design of AB 1890 has brought market power and inefficiency to a market that would have operated far more smoothly without the supervision of the California PX and ISO. It is easy now to predict that the summer