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Revisiting California

Market power after two years.
Fortnightly Magazine - April 1 2002

of the American Economics Association, the American Financial Association, and the Econometric Association. Mr. McCullough is also an Adjunct Professor at Portland State University.

  1. The phrase, "Ten years of rapid load growth without new resources," was a hallmark of an excellent public affairs campaign waged by marketers and generators in the California crisis. Interestingly, both parts of the phrase were strikingly untrue. The West Coast had a better load resource balance in 2000 than in previous years and peak loads actually were lower in the ISO's control area than they had been since 1997.
  2. One irony of the California market failure was the phrase "Independent System Operator." The ISO board was was chaired by the representative of very generators that its internal market analysis division was monitoring, leading to a passive market surveillance that never seriously addressed the market power problems until FERC and the Governor of California replaced the board . In retrospect it is clear that the ISO was hardly independent.
  3. The California ISO purchases its reserves on a daily basis. In practice, this was like trying to buy insurance after your house had started on fire. Under traditional reliability planning, hydro-electric generation above minimum isn't even considered as a possible source of capacity reserves. The ISO attempted to use this frequently absent resource as the reserve of last resort during California's frequent emergencies from May 2000 to June 2001.
  4. The ISO issues emergency notices when its forecasted hourly reserves fall below set levels -7% for Stage 1, 5% for Stage 2, and 1.5% for Stage 3. In practice, this mechanism has never worked. Emergency declarations have tended to reflect the need for additional operational rights for the ISO rather than hard and fast standards.
  5. The ISO typically set price caps that they could exceed if there was a declared emergency or if the energy was imported from out of state. Prescheduled "exports" to Oregon that were exactly matched by emergency "imports" to California ballooned over this period, for example.
  6. Assessment of the Summer 2000 Operating Period, Western Systems Coordinating Council, Spring 2000, page 3.
  7. West Coast power planning revolves around two fundamental facts. First, loads are high in California in the summer because of cooling needs and high in the Pacific Northwest during the winter for heating. Second, the WSCC's largest
  8. Alvin Alexanderson, the General Counsel of Portland General Electric, relates a story from his college career that describes a similar market failure. The local pizzaria in Ann Arbor had a policy of selling pizzas that had been ordered but not picked up at a discount. The students, quickly understanding the incentives this system created, would always order pizzas, but fail to pick them up. Since they often were sitting in the pizzarea at the time, they could then help the owner by offering to eat the abandoned meals. Unlike the ISO, the pizzaria owner was quick to see the folly of his ways and changed the rules.
  9. The ISO did not start keeping a careful log of plant outages until 2001. At the time of the first emergencies,