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Commission Watch

FERC mulls rival plans at the last minute, while on the West Coast, California gets into the game.

Fortnightly Magazine - November 2005

blew open the doors in the LICAP case, staff of the California PUC released its Capacity Markets White Paper, urging that the state's utility regulators go against the grain and consider a technical LICAP model styled after the New England proposal. Then came the Cal-ISO, the state's independent grid operator, responding to the report on Sept. 23 by saying, in effect, "not so fast."

Opposite from its counterpart in New England, the Cal-ISO chose to withhold any formal endorsement for a California LICAP plan. Moreover, it seized the opportunity to air a collection of studies to suggest that perhaps the best way out of the capacity market mess was to consider killing the price caps-the very remedy to which Kelliher alluded at FERC's LICAP hearing.

Without specifically advocating an end to price caps, the ISO nevertheless raised the issue by attaching to its formal response to the California Public Utilities Commission (CPUC) a copy of an article by Harvard Professor William Hogan that suggests just such a step. The response from the ISO, totaling more than 200 pages, included extensive reports on investigations underway at the Midwest ISO and in ERCOT to consider comparable systems to eliminate price caps and create stronger incentives for merchants to build plants. ()

In his article, Professor Hogan cites the problem of the "missing money"-how price caps prevent plant owners from recovering fixed costs through scarcity rents collected at those few magic moments when wholesale power prices in RTO-sponsored day-ahead markets otherwise might reach super-peak levels. By killing price caps and relying simply on energy prices to encourage developers to build capacity, Hogan says, regulators can avoid the evil of having to make administrative determinations of how much supply is needed. ()

Will the California PUC take the bait and bite on its staff's advice to consider an Eastern-style LICAP model for its state-mandated resource adequacy requirements (RAR), even though the likely LICAP market administrator, Cal-ISO, seems lukewarm to the idea?

In fact, the same market attributes that led New Englanders to consider a LICAP market may be present in California as well. Consider this conversation, taken again from the LICAP hearing at FERC on Sept. 20 between Commissioner Suedeen Kelly and John Estes, representing a coalition of suppliers of generating capacity:

KELLY: Mr. Estes, is it fair to say this proposal [New England's LICAP] would eliminate the possibility of what happened in California in 2000?

ESTES: It does as much as you can do right now to prevent that. And, you know …

What other region of the country besides New England has chronically bad deliverability of natural gas? What other region of the country? California has air emissions limits that are starting to tamp down on generation.

You know, what other region of the country relies on hydropower from Canada, that can dry up in a dry hydro year? California.

On Sept. 27, CPUC administrative law judge Wetzell vetted a draft opinion setting out a tentative RAR regime to begin in June 2006 that would ensure capacity by forcing load-serving entities (LSEs) to procure