Transmission & ISOs
Policing the Markets
The California ISO offers a plan, but some fear that rules themselves are the problem.
The California ISO has filed a four-step draft plan to mitigate market power in California's wholesale power markets, providing a ready target for just about any industry player opposing police-type enforcement or just trying to re-design the market itself.
In particular, the ISO's plan raises the question: Is market monitoring best achieved through objective standards imposed before the fact, or by granting significant authority to regulators to review trading behavior after the fact and to impose fines and sanctions where fault is found.
The answer might be simple at first blush for a free-market economist, but think again. "Market power is much nimbler than it used to be," notes public power attorney and advocate Robert McDiarmid, representing the Northern California Power Agency. "Markets shift and redefine at a moment's notice, and many generators have the ability to track and swiftly react to those changes.
"It goes without saying," adds McDiarmid, "that in any market power analysis, market definition effectively drives the results."
McDiarmid is alluding to the problem of moving targets. No matter what the rules are, traders will find a way to get around them. In fact, fixed rules might be worse than no rules at all.
The ISO Proposal. The ISO's draft proposal to monitor trading in California's power markets, filed with the Federal Energy Regulatory Commission on Feb. 8, appears to rely more on objective, before-the-fact standards and requirements than after-the-fact review of trading behavior:
- More Forward Contracts. Proposes a target figure of 85 percent of ISO system load traded through forward contracts, which translates to a requirement that California's in-state suppliers (other than investor-owned utilities) must provide at least 70 percent of their capacity through forward contracts during super-peak periods.
- Capacity Reserve Requirements. Cites "substantial increase" in power plant unit outages (owing to unit age and intensive, uninterrupted operations), and asks for improved coordination of unit outages and a new capacity reserve requirement ("available capacity reserve," or ACR), requiring load-serving entities to contract for capacity reserves equal to 115 percent of annual peak load.
- Locational Price Reform. Admits need to mitigate locational market power, and proposes to address the problem on a permanent basis through its forthcoming proposal on congestion management reform.
- Real-Time Market Controls. Proposes to set resource-specific bid caps (RSBCs) in real-time and short-term markets not covered by long-term contracts, plus incentives to minimize real-time transactions to between 3 and 5 percent of total load. .
As might be expected, the ISO's proposals drew a mixed reaction from industry players. Some addressed the merits of the market monitoring proposal. Others appeared to take the opportunity to launch collateral attacks on the structure of California's power markets, including the "break point" concept imposed by the FERC in December, and the commission's apparent indictment of the single-price auction for commodity spot markets like a power exchange.
Failed Logic? The county of San Diego said it "generally supports" the ISO proposal for resource-specific bid caps, but disagreed with the idea to allow a fixed profit margin above production costs in setting RSBCs, saying that the caps should include only marginal production costs. It acknowledged that peaking resources trading only in spot markets might find it difficult to recover fixed costs with such a cap, but suggested that forward contracts would take care of the problem.
In similar fashion, TURN (The Utility Reform Network) and UCAN (Utility Consumers' Action Network) also favored RSBCs, calling them "the most immediate, useful solution."
In comments filed by consultant Eric Woychik, TURN and UCAN declared that RSBCs "will create competitive market conditions and are not cost-of-service or cost-based pricing." At the same time, however, TURN and UCAN opposed "as-bid" pricing as inferior to a single-price auction, even though they acknowledged that as-bid pricing enjoys widespread support.
"The fallacy of this logic," said Woychik, "is in the assumption that only a few generators will attempt strategic gaming behavior [under] an as-bid scenario. When sellers can exercise market power, all those who are part of the as-bid auction cap artificially inflate their bids and are likely to do so, which is likely to produce results that are comparable to or worse than we have now."
The supplier Strategic Energy LLC took a shot at the ISO's plan to impose a capacity requirement-the same sort of mandate that has sparked fierce debate in markets in the Northeast, over the concept of whether and how to price capacity reserves in a way different than commodity energy.
"Capacity credit markets should not be implemented in California or anywhere else," said the company's general counsel Wanda Schiller. "Because capacity credits have no value, any price greater than zero is unjust and unreasonable."
Schiller described how the company's experience in the Northeast had convinced it that capacity markets are folly.
"Strategic Energy is a competitive electricity provider in Western Pennsylvania, Ohio and California, where there current is no installed capacity (ICAP) or ACR market construct. ... Where they exist, customers pay a great deal of money but receive nothing in return."
By contrast, Duke Energy, Dynegy, Mirant, Williams, and Reliant Energy joined forces to propose their own comprehensive market monitoring plan, complete with "governing principles" and detailed statements of monitoring functions and authority thought to be proper for a separate administrative market monitoring unit (MMU). Their proposal suggested greater reliance on an after-the-fact review of trading behavior, but in an informal setting:
"The MMU should engage in informal discussions with specific market participants ... informal notification should be the primary method for altering bidding behavior, rather than an ex post adjustment to prices or an ex ante adjustment to bids."
Congestion as the Enemy. To attorney Robert McDiarmid, however, transmission congestion continues to be the wellspring of opportunity for market manipulation. He cited the Federal Trade Commission as the authority for the concept of "transient market power," created by transmission congestion that shrinks markets and creates the kind of load pockets that encourage market manipulation.
"The generator in this situation knows the unit must be called because its unit is the only one that can meet the congested load. As it turns out, very few hours like this are needed for the generator to reap monopoly profits."
McDiarmid and his client NCPA suggested that the ISO's plan will fail since it does not address the transient market power present in dynamic wholesale markets.
"NCPA has reviewed these proposals and was struck by how few of them addressed what ought to be the central questions: What should the market monitors look for, and what should they do if they find it?"
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