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News Digest

The California ISO offers a plan, but some fear that rules themselves are the problem.
Fortnightly Magazine - March 15 2001

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 caps, but disagreed with the idea to allow a fixed profit margin above production costs in setting RSBCs, saying that the caps should include only marginal production costs. It acknowledged that peaking resources trading only in spot markets might find it difficult to recover fixed costs with such a cap, but suggested that forward contracts would take care of the problem.

In similar fashion, TURN (The Utility Reform Network) and UCAN (Utility Consumers' Action Network) also favored RSBCs, calling them "the most immediate, useful solution."

In comments filed by consultant Eric Woychik, TURN and UCAN declared that RSBCs "will create competitive market conditions and are not cost-of-service or cost-based pricing." At the same time, however, TURN and UCAN opposed "as-bid" pricing as inferior to a single-price auction, even though they acknowledged that as-bid pricing enjoys widespread support.

"The fallacy of this logic," said Woychik, "is in the assumption that only a few generators will attempt strategic gaming behavior [under] an as-bid scenario. When sellers can exercise market power, all those who are part of the as-bid auction cap artificially inflate their bids and are likely to do so, which is likely to produce results that are comparable to or worse than we have now."

The supplier Strategic Energy