Dynegy says California ISO grants sweetheart deals to out-of-state plants.
Claiming $2 million in loses since Nov. 1, Dynegy Power Marketing Inc. accused the California Independent System Operator of playing favorites when it goes looking for energy to cover imbalances or supply ancillary services for the next day during a "super peak," by going out of state to negotiate purchases from off-system generators at lucrative high market prices, while at the same time forcing in-state, on-system generators (like Dynegy), to honor their commitments under the Participating Generator Agreements and supply energy to the ISO on the ISO's demand through the remedial "Out-of-Market" (OOM) tariff procedure, at much lower preset prices.
In its complaint filed Dec. 22, Dynegy asked the Federal Energy Regulatory Commission to force the ISO, no later than March 1, to honor its "long-promised proposal" to create a third payment option (instead of the OOM rate or selling through an institutional auction like the California Power Exchange), that would permit a generator subject to OOM calls to elect to be paid its day-ahead pre-submitted bid or call price.
Meanwhile, the ISO insists that it is "willing to review" alternative payment approaches. But it says it will discuss the matter only if Dynegy will cooperate and respond when the ISO calls during an emergency to issue operating instructions for Dynegy's generating plants.
Dynegy's David Francis, vice president for western power trading, testified on Dec. 21 on why he thought the ISO was bending the rules:
"I AM RESPONSIBLE FOR, AMONG OTHER THINGS, monitoring the supply and demand in various markets administered by the California Power Exchange, the ISO, the Automated Power Exchange and other bilateral markets. ... I make my decisions ... based on my knowledge of the operating conditions in the markets. ...
"IN SEVERAL CASES I HAVE OBSERVED THAT THE ISO HAS ACCEPTED OFFERS from suppliers in the forward Super Peak markets administered by the PX and APX at prices that exceed the applicable bid cap in use by the ISO. In addition, I have witnessed instances in which Dynegy had offered energy at a compensatory price in these same markets, had the offer declined by the ISO, and then had the ISO order Dynegy to provide energy at a price dictated by the ISO's filed OOM cap, which price was in fact lower than the compensatory price that was required for the unit in question for the applicable time period.
"MY CONCLUSION FROM THESE OBSERVATIONS IS THAT THE ISO HAS BEEN WILLING to negotiate with the owners of generating units that are not located within the ISO control area, and thus do not have a Participating Generator Agreement, but that the ISO has not been willing to negotiate a price above the bid cap in any instance in which a unit also has a PGA contract. ...
"MOREOVER, I HAVE WITNESSED OTHER INSTANCES when the ISO has called upon an RMR [regulatory must-run] generating unit to supply energy at minimum load at the price called for under the RMR contract, and then required additional energy from the unit under the OOM procedures and at OOM-determined prices, which in most high natural gas pricing periods will be lower than an individually determined RMR price and also lower than the Imbalance Energy price for the hour(s) in question."
West Power Trading
Dynegy Power Marketing
But earlier, on Nov. 22, the ISO's Randy Abernathy had dismissed such concerns in a letter to Dynegy divisional vice president Lynn Lednicky:
DEAR MR. LEDNICKY:
"RECENT ORAL AND WRITTEN COMMUNICATIONS have given the ISO concerns about the willingness of Dynegy to respond to ISO instructions. This concern was the basis of a phone call this afternoon. ...
"BASED ON THAT CALL, IT IS OUR UNDERSTANDING that Dynegy will respond and operate when called. Secondly there is a disagreement over compensation for those calls [demands for energy]. While the ISO is willing to review alternate payment approaches in the longer term, it is imperative in the short term that Dynegy responds to ISO operator instructions.
"SO THAT BOTH PARTIES UNDERSTAND THE NATURE OF THE ISSUE before us, the potential consequences of such a failure to respond, the ISO wishes to clarify the following points. ...
"IT ALSO SEEMS NECESSARY TO CLARIFY that ISO reliability instructions are not to be made a function of debates regarding payments above the current ISO price cap. The ISO is well within its authority to call upon a Participating Generator to provide energy out of market without reference to prices bid above the price cap. Consistent with FERC's orders, bids above the ISO's price caps are rejected.
"FINALLY, YOU SHOULD BE ADVISED THAT, given current system conditions, any unit outages not included in annual maintenance plans submitted to the ISO are subject to investigation and possible sanctions. ..."
Vice President, Client Services
Dynegy counters that it cannot operate its plants at the low OOM rate, claiming, for example, that with delivered natural gas costs reaching $40 per million Btu, and NOx emissions costs at $50 per pound, that its El Segundo Units 1 and 2 (called to run at a 70-MW load) require a payment of $660 per megawatt-hour just to meet marginal costs.
"The Participating Generators," says Dynegy, "should be paid a compensatory rate.
"By employing OOM provisions before exhausting competitive offers to remedy potentially thin markets," says Dynegy, "the ISO has repeatedly paid Participating Generators rates that are below short-run marginal costs."
Dynegy sees the ISO as playing favorites: "The ISO has repeatedly called on Dynegy to supply it energy when the only plausible motivation that can be discerned is a cost-cutting tactic designed to avoid paying a higher price demanded from other available suppliers."
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