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A Hope, A Wing, and A Prayer

On the virtues and vices of ICAP, ACAP, FTRs, hubs, flowgates, DAMs, and gaming.
Fortnightly Magazine - April 15 2002

of ancillary services, the transmission provider would operate markets for energy and operating reserves in conjunction with the markets for transmission services. For both the day-ahead and real-time markets, the transmission provider would assure that purchases and sales of energy and operating reserves through the centralized energy and operating markets, or though self-supply or bilateral contract, are coordinated with transmission services on the grid. Also, the transmission provider would establish schedules for transmission service and sales and purchases of energy and operating reserves, to ensure the most efficient use of the transmission grid.

Scope and Governance. The two-track approach to resolving RTO issues means that the issues of scope and governance will be handled in individual cases, not in this SMD rulemaking. Chairman Wood pointed out that the paper doesn't address generation adequacy and ICAP. "My problem with ICAP", he said, "is that is doesn't rise to the top like LMP." Wood's personal goal is to make markets simple to the customer, and said if the customer doesn't want to watch over real-time pricing, they simply can lock-in a long-term contract.

The "Working Paper on Standardized Transmission service and Wholesale Electric Market Design," is available on FERC's Web site at www.ferc.gov.

And what allows suppliers to play the Dec Game? At the bottom of it all lies the faulty zonal pricing system. CAISO recently admitted as such:

"In reality," it said, "the 'simplicity' of the zonal system only appears so because the complexity is assumed away, allowing market participants to ignore it in scheduling while the CAISO must manage it through real-time adjustments and periodic modifications to the rules to mitigate novel gaming strategies as they arise."

The Dec Game would go by the boards under CAISO's proposed new market design. In its MD02 plan, CAISO says it would embrace a full network model of some 3,000 buses. That would permit full nodal pricing. CAISO would manage congestion in much the same way as is done in PJM. (See Figures 1 & 2, and accompanying explanation)

Harvard professor William Hogan has urged this sort of reform for years. When CAISO announced its MD02 plan, Hogan praised the epiphany and offered a single word of gratitude: "Amen."

So it should come as no surprise that the merchant generation sector reacted aghast when, at the end of January, a few weeks after unveiling its MD02 plan, CAISO appeared to backtrack by proposing a Band-Aid fix to prop up its old zonal pricing regime. This new Band-Aid fix comes in Tariff Amendment 42 ().

CAISO would attempt to kill the Dec Game by reserving authority two days ahead of real time to curtail generators (based on cost and other nonbid factors) whose schedules might otherwise threaten to increase intrazonal congestion. It would impose a unit-specific, cost-based cap on decremental bids, effectively barring negative dec bids. Amendment 42 also would change the way that CAISO aggregates and averages dec and inc bids to clear the market. Essentially, that would allow the ISO to back off a positive incremental bid to reach the same position as