News Digest

 

Transmission & ISOs

Policing the Markets

The California ISO offers a plan, but some fear that rules themselves are the problem.

The California ISO has filed a four-step draft plan to mitigate market power in California's wholesale power markets, providing a ready target for just about any industry player opposing police-type enforcement or just trying to re-design the market itself.

In particular, the ISO's plan raises the question: Is market monitoring best achieved through objective standards imposed before the fact, or by granting significant authority to regulators to review trading behavior after the fact and to impose fines and sanctions where fault is found.

The answer might be simple at first blush for a free-market economist, but think again. "Market power is much nimbler than it used to be," notes public power attorney and advocate Robert McDiarmid, representing the Northern California Power Agency. "Markets shift and redefine at a moment's notice, and many generators have the ability to track and swiftly react to those changes.

"It goes without saying," adds McDiarmid, "that in any market power analysis, market definition effectively drives the results."

McDiarmid is alluding to the problem of moving targets. No matter what the rules are, traders will find a way to get around them. In fact, fixed rules might be worse than no rules at all.

The ISO Proposal. The ISO's draft proposal to monitor trading in California's power markets, filed with the Federal Energy Regulatory Commission on Feb. 8, appears to rely more on objective, before-the-fact standards and requirements than after-the-fact review of trading behavior:

• More Forward Contracts. Proposes a target figure of 85 percent of ISO system load traded through forward contracts, which translates to a requirement that California's in-state suppliers (other than investor-owned utilities) must provide at least 70 percent of their capacity through forward contracts during super-peak periods.
• Capacity Reserve Requirements. Cites "substantial increase" in power plant unit outages (owing to unit age and intensive, uninterrupted operations), and asks for improved coordination of unit outages and a new capacity reserve requirement ("available capacity reserve," or ACR), requiring load-serving entities to contract for capacity reserves equal to 115 percent of annual peak load.
• Locational Price Reform. Admits need to mitigate locational market power, and proposes to address the problem on a permanent basis through its forthcoming proposal on congestion management reform.
• Real-Time Market Controls. Proposes to set resource-specific bid caps (RSBCs) in real-time and short-term markets not covered by long-term contracts, plus incentives to minimize real-time transactions to between 3 and 5 percent of total load. .

As might be expected, the ISO's proposals drew a mixed reaction from industry players. Some addressed the merits of the market monitoring proposal. Others appeared to take the opportunity to launch collateral attacks on the structure of California's power markets, including the "break point" concept imposed by the FERC in December, and the commission's apparent indictment of the single-price auction for commodity spot markets like a power exchange.

Failed Logic? The county of San Diego said it "generally supports" the ISO proposal for resource-specific bid