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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

LLC took a shot at the ISO's plan to impose a capacity requirement-the same sort of mandate that has sparked fierce debate in markets in the Northeast, over the concept of whether and how to price capacity reserves in a way different than commodity energy.

"Capacity credit markets should not be implemented in California or anywhere else," said the company's general counsel Wanda Schiller. "Because capacity credits have no value, any price greater than zero is unjust and unreasonable."

Schiller described how the company's experience in the Northeast had convinced it that capacity markets are folly.

"Strategic Energy is a competitive electricity provider in Western Pennsylvania, Ohio and California, where there current is no installed capacity (ICAP) or ACR market construct. ... Where they exist, customers pay a great deal of money but receive nothing in return."

By contrast, Duke Energy, Dynegy, Mirant, Williams, and Reliant Energy joined forces to propose their own comprehensive market monitoring plan, complete with "governing principles" and detailed statements of monitoring functions and authority thought to be proper for a separate administrative market monitoring unit (MMU). Their proposal suggested greater reliance on an after-the-fact review of trading behavior, but in an informal setting:

"The MMU should engage in informal discussions with specific market participants ... informal notification should be the primary method for altering bidding behavior, rather than an ex post adjustment to prices or an ex ante adjustment to bids."

Congestion as the Enemy. To attorney Robert McDiarmid, however, transmission congestion continues to be the wellspring of opportunity for market manipulation. He cited the Federal Trade Commission as the authority for the concept of "transient market power," created by transmission congestion that shrinks markets and creates the kind of load pockets that encourage market manipulation.

"The generator in this situation knows the unit must be called because its unit is the only one that can meet the congested load. As it turns out, very few hours like this are needed for the generator to reap monopoly profits."

McDiarmid and his client NCPA suggested that the ISO's plan will fail since it does not address the transient market power present in dynamic wholesale markets.

"NCPA has reviewed these proposals and was struck by how few of them addressed what ought to be the central questions: What should the market monitors look for, and what should they do if they find it?"

Studies and Reports

New England Gas Markets. The New England ISO has released a report by a private consulting firm showing that the region's system of natural gas pipelines appears adequate to meet anticipated requirements for gas distribution service and gas-fired generating plants in the spring, summer, and fall seasons through 2005, but that problems loom in the winter heating season, as early as 2003. That year, the study forecasts a lack of sufficient operational flexibility to satisfy gas demand in New England, leading to transmission deficits in 2005 throughout the heating season, as it is expected that the proportionate use of natural gas for electric generation in the region will rise from 16 percent in