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Kicked Off and On Schedule

Cal-ISO files a new market design, but has it traded efficiency for software?

Fortnightly Magazine - June 2006

England’s LICAP plan, and PJM’s Reliability Pricing Model, or RPM), the Cal-PUC promises by June 15 to issue amended RAR rules setting resource requirements for “local capacity areas,” known as LCAs. (See, Order Instituting Rulemaking, Cal-PUC No. R.05-12-013, Dec. 20, 2005, www.cpuc. ca.gov/Published/Final_Decision/ 52265.htm .)

That step will entail some controversy, since Cal-ISO in its MRTU has undertaken to conduct its own independent analysis of LCA capacity adequacy, thus serving as a federal “backstop” for the PUC, and perhaps even mandating extra resources, which could add uplift to ISO markets, and could create jurisdictional conflicts. Moreover, the PUC plans later this year to address the idea of a formal capacity market, but the jury is still out on that notion. (See, Assigned Commissioner’s Ruling and Scoping Memo, Cal-PUC No. R.05-12-013, Dec. 15, 2005, www.cpuc.ca.gov/published/rulings/ 54059.htm .)

For all this complexity, however, and despite the project’s huge cost (some $170 million sunk so far, by best estimate), the Cal-ISO’s actual proposal remains surprisingly incomplete. In fact, many technical details remain uncertain. One missing detail is the exact algorithm for calculating nodal prices. Another is how the ISO will incorporate gas price indices into the cost adders it uses to calculate the “default energy bids” that Cal-ISO will use to mitigate market power for transmission paths deemed noncompetitive on account of failing the ISO’s proposed “three pivotal supplier” test. Other examples abound as well.

Instead of pinning everything down, the ISO has left these unfinished details to be fleshed out later in practical operating guides to be known as “business practice manuals.” And while the ISO has advised FERC in its most recent MRTU status report that the BPM effort is now “kicked off and on schedule” (see, Status Report of Cal-ISO, FERC Docket ER02-1656-009, filed May 1, 2006) , the overall process still appears problematic.

On one hand, the FERC itself has made it clear on more than one occasion that any protocols that go beyond the typical internal utility operating manual—instructions that contain the kind of detail that ordinarily would appear in a power purchase agreement—must be filed with the commission in much the same manner as a tariff. As Chairman Joseph T. Kelliher noted in March, in his separate statement announcing a key decision on markets for the Southwest Power Pool, “We are applying the hard-learned lessons of the California crisis, by assuring that clear and complete market rules are established before markets open. It is better to get it done right than to get it done fast.”

At the same time, however, the Cal-ISO has argued that strict adherence to schedules—not only for project implementation, but also for developing and testing all the necessary software—dictates that the proposal must be “frozen” at an early date so that software developers and IT vendors can begin and complete their work in parallel, even as the proposal awaits regulatory approval. Listen to how the ISO described the problem as recently as March 15:

“Although the MRTU market design incorporates many features from the markets of Eastern ISOs, the MRTU software is based on