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Perspective

The ISO takes on critics of its new market design.
Fortnightly Magazine - September 15 2002
  • be delivered in real time, leading to inaccurate congestion pricing, congestion gaming, and real-time operating challenges. Under MD02, transmission capacity will be allocated and priced consistently across all ISO market time frames. The resulting prices will reflect the value of energy at each node, will correctly charge grid users for their impact on congestion, and will send accurate locational price signals for demand response and new generator siting. In conjunction with LMP, the ISO's proposal completely overhauls the design of firm transmission rights (FTRs) to a design that is fully compatible with nodal pricing. Once again, the ISO's LMP pricing and associated FTR proposals are perfectly aligned with FERC's SMD NOPR.
  • An available capacity (ACAP) obligation on load serving entities. When the restructured market began in California, no entity had the responsibility to make sure that adequate supply resources would be available to meet load requirements. What was known in the pre-restructuring world as the "obligation to serve" was softened to an obligation to procure energy in the spot markets of the Power Exchange, with the belief that these markets would provide adequate supplies at reasonable prices. This huge exposure to spot markets turned out to be a fatal flaw. With ACAP, the ISO directly addresses this flaw by sending strong incentives for forward contracting and minimal reliance on spot markets. Recognizing the need for such measures to ensure reliable grid operation and long-term resource adequacy, FERC proposes a similar mechanism in the SMD NOPR.

A second major fallacy of the article is that MD02 differs dramatically from the successful market designs of the northeast. The authors quote a comment from the Independent Energy Producers Association, "Given the relative success of markets such as PJM and NYISO … IEP is wary of proposals that California blaze new and untested trails." In truth, the ISO's MD02 team carefully studied the eastern market designs, which are the basis for FERC's SMD NOPR, and followed them quite closely in developing MD02. MD02 embodies most, if not all, the key features of these other ISOs and of the SMD, including:

  • Integrated forward optimization of energy, ancillary services, unit commitment and congestion management, as described above;
  • Residual unit commitment (RUC), which enables the ISO to issue unit commitment instructions when there is a significant gap between the supply scheduled in the day-ahead market and the ISO's forecast load for the next day;
  • LMP or nodal pricing in all ISO markets, as described above;
  • Capacity obligations on load-serving entities, as described above (admittedly the ISO's ACAP proposal has some distinguishing features when compared to eastern models, but this aspect of market design is not fully resolved anywhere, and the eastern ISOs are still working among themselves to arrive at the optimal model for capacity obligations);
  • Point-to-point FTRs, which go hand-in-hand with LMP;
  • Allocation of FTRs to native loads, to mitigate their risk of high congestion costs; and
  • Market power mitigation provisions that are approved for other ISOs, including damage control bid cap, local market power mitigation, and automated mitigation procedures (AMP).

All of the items above-which constitute the