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FERC's California plan needs pressing, to fix blatant gaffes on NOx, demand bids, and megawatt laundering.
Fortnightly Magazine - July 1 2001
  • Public power utilities (Turlock, Modesto, SMUD) whine that FERC can't force municipal utilities to sell resources to the ISO. They'll lose their tax-free financing. Meanwhile, power producers say they should reap "scarcity rents" (prices above marginal cost) if forced to sell as well. Are you kidding? Neither side will win.
  • Market Manipulation. Power producers rejoice that regulators have failed to cite evidence of precise episodes of market manipulation by individual sellers, while the ISO staff, and many famous economists, churn out empirical studies showing that about one-third of power producer revenues in California stem directly from market power. Guess what? They're both right.
  • Protection Against Risk. Utilities want the ISO to keep its hands off their self-generation still dedicated to native load, to cover the risk of the duty to serve. Producers, meanwhile, are short on power (they're net sellers). They also face portfolio risk, and must adopt curious bidding strategies, like the "hockey-stick" bids banned by FERC, and to withhold some plants with run-time limits (such as environmental restrictions) from dispatch except in super-peak hours, as Reliant claims, to preserve their option value as a hedge against risk of loss of plants already bound by forward contracts, and having to buy replacement power at exorbitant prices. You say that producers can't feather their bids to cover the higher risk of running more hours, as Mirant wants? Chill out. You'll never cover every risk.
  • Regulator Prejudice. Utilities complain that FERC won't grant refunds. Producers say the ISO is a virtual market player, disregarding some FERC rules, using its authority to coordinate outages to hold prices down artificially, and allowing the California Department of Water Resources to gain access to the ISO control room, as Duke Energy alleges, to pick up confidential market information to grab an edge against producers in buying power for California residents. Can they do that? Too bad. Politics is cruel.

"THE ISO'S REAL-TIME MARKET HAS DIMINISHED IN SIZE TO ALMOST INCONSEQUENTIAL LEVELS SINCE JANUARY ," says Patrick McAuliffe, of the California Electricity Oversight Board, and that's where the problem lies.

McAuliffe puts the ISO's BEEP (Balancing and Ex-post Price) market--the market subject to FERC's price mitigation plan--at only 4.4 percent and 4.5 percent of California ISO load in January and February, and only 1.4 percent in March. When you consider that mitigation only occurs during a Stage One, Two, or Three alerts, when reserves fall below 7.5 percent, you find, as McAuliffe notes, that "the size of the BEEP market subject to potential price mitigation had the FERC order been in effect in March 2001 decreases to 0.3 percent." That's three parts in a thousand.

Where did the load go? It went to "megawatt laundering," whereby a California producer sells power forward to a daisy chain of power marketers, who then are allowed under the FERC rule to sell back into California on the strength of their own purchase price, without having to justify the price as against the FERC's proxy price, based on gas and other operating costs.

"This is a giant loophole," says Mark Patrizio, at