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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

load to serve), in order to ensure day-ahead and real-time prices “converge” (hence the term) and thus weed out any arbitrage opportunities. Coral Power puts the case succinctly:

“Allowing LSEs, alone of all market participants, to shift load from the day-ahead market to the real time market is an invitation to do what suppliers may not do: bid strategically and settle in real time.”

Coral explains further: “The under-scheduling of day-ahead schedules artificially suppresses the day-ahead energy price that the LSEs pay for a large volume of load, which more than counterbalances the effects of potentially driving up the real-time price, which is paid on a much smaller volume of load.”

So far, Cal-ISO has continued to insist that to incorporate virtual bidding would delay the MRTU by a full year: “There is no single conceptual design of convergence bidding that all the other ISOs have adopted and that the Cal-ISO could adopt … without any stakeholder engagement. …

“For example, the PJM virtual bidding feature is based on a nodal approach while … the New York ISO markets utilize a load zone [and] hub-based approach.”

Nevertheless, after perhaps feeling stung by all the criticism, Cal-ISO suggested in a status report update filed on March 15 that it might consider moving up implementation to a “Release 1A.” In other words, of all the possible day-two additions of market features, the ISO said it would put virtual bidding at the top of the queue.

History buffs should note that this issue first came up a dozen year ago, at a hearing held June 14, 1994, to consider the California PUC’s infamous “Blue Book” vision for electric competition.

On that occasion, Robert Levin (then and still a senior vice president at NYMEX, the New York Mercantile Exchange) had recommended a purely financial market for California, such as NYMEX had designed for natural gas. In the NYMEX gas market, said Levin, virtual bidding typically caused daily trading volumes to run about four times the volume of daily consumption.

Whereupon the PUC, led by its then president Dan Fessler, came to question the wisdom of such a practice, as if it were a moral affront:

“What is the social value that is being added by [this] excess number of transactions that are being engaged? What are they providing to the economy? They have provided to certain people now famous in the American body politic a means of instant fortune, but aside from that circumstance, one would have to wonder.” (See, “Real Time in California,” Public Utilities Fortnightly, Oct. 15, 1994, p. 8.)