It was the most exclusive, and one might say, one of the most extraordinary dinners. Never have I seen so many prominent CEOs, regulators, and financial gurus all in one room, discussing the...
Price Cap Follies
Beware the transmission operator that is truly "independent."
By now you've read all about it: in the dead of night, in a July hotter than hot, how the board of governors of the California Independent System Operator failed by one vote to tighten controls over state-run electricity markets for various back-up power services (real-time ancillary services and intra-zonal congestion management) by forcing the maximum price down to $250 per megawatt-hour, just eight days after it had lowered the price cap from $750 to $500 in what it called emergency action.
But you may have missed the story behind the story--how the ISO proper had opposed the price cap resolutions offered by the various private citizen stakeholders who sit on the board to ensure that the ISO will remain independent of utility control.
A few days after the failed vote, I talked with ISO spokesman Patrick Dorinson, who asked me to "please get the word out" that the governing board makes its own decisions, independent from the ISO proper, and that the two don't always see eye to eye. He sent me a copy of an internal memo that the ISO had circulated to warn that a tougher price cap would make customers worse off, not better.
"Lowering the price caps will increase out-of-market activity necessary by the ISO to maintain reliability within its control area.
"Increased out-of-market activity ... likely will [increase] the number of transactions required in real time ... [and] the likelihood of scheduling errors.
"It may become necessary for the ISO to engage in activity in advance of the PX and ISO day-ahead markets ... thinning the markets and raising prices."
Instead the ISO urged market players to better manage price risk. It asked the regulators and the legislature to remove constraints on hedging opportunities for distribution utilities. But what about those who had already hedged?
On July 10, the Morgan Stanley Capital Group asked the Federal Energy Regulatory Commission to reinstate the old $750 price cap for markets controlled by the California ISO, and to bar any further board attempts to cut the cap. Morgan Stanley called the ISO action "hasty and extreme," prompted by "blatant political pressure." (One press report put the blame for price cap fever on the populist state senator, Steve Peace). But more than that, Morgan decried the losses: "Cal ISO's sudden decision ... disadvantages power marketers such as Morgan Stanley that had hedged and made significant investments in the market in reliance on a $750 price cap."
It added, "This decision unduly favors local utilities or any other entity that has failed to hedge."
BACK EAST, THE FERC FACED ITS OWN CRITICS. The commission was put back on its heels by the Wall Street Journal's page one "Doom and Gloom" story, which saw Energy Secretary Richardson all but promising blackouts this summer. Fearing a hearing in Congress, the FERC quickly asked for advice on how to shore up reliability this summer. The electric industry was only too happy oblige, offering a wide array of ideas.
Perhaps you've seen the