Letters to the Editor

Fortnightly Magazine - December 2006

To the Editor:

Your recent commentary, “Kicked Off and On Schedule(June 2006) reasonably captures many of the implementation issues and stakeholder concerns surrounding the California Independent System Operator (Cal-ISO) Market Redesign and Technology Upgrade (MRTU) program. However, I was somewhat disappointed that the article offered few details about the benefits MRTU will provide and instead focused primarily on remaining implementation issues and other issues that are to some extent unrelated to the MRTU, such as capacity markets. While the article does reluctantly mention the broad support that continues to be expressed publicly by California’s three investor-owned utilities, numerous other load-serving entities, nearly all the independent generators, and state policy-makers at the California Energy Commission (CEC) and the California Public Utilities Commission (CPUC), it glosses over, and in some cases ignores, the many benefits MRTU will bring to California and the Western electricity markets.

The redesign of the California energy market has a long history, punctuated by the energy crisis of 2000-2001. Prior to that time, the Cal-ISO recognized the need and actually began an effort with its participants to redesign the original model introduced in 1998, which featured a bifurcated Power Exchange/ISO structure and a highly imprecise zonal congestion management approach. That design process was interrupted and profoundly influenced by the crisis in 2000-2001, particularly with the sudden demise of the California Power Exchange.

Fallout from the crisis resulted in the ISO scrambling to shore up its market design due to the loss of the day-ahead market, while state regulators wrestled to stabilize the state’s resource needs, initially through long-term power contracts and more recently through the development of a resource adequacy program. As the dust settled, these two efforts—ISO market reform and resource adequacy—have more or less developed in parallel, with the Cal-ISO, the CEC, and the CPUC working closely to ensure coordination.

The ISO recognizes the importance of long-term investment in both generation and transmission and as such is working closely with all of our stakeholders to address both regional transmission planning and capacity procurement processes. It is important to note that these efforts are being conducted in parallel with MRTU and have not been “left out,” as suggested in the article.

Release 1 of MRTU, which will start up in November 2007, will incrementally build on several improvements already made to the ISO market structure in the past few years, and will add entirely new and broadly desired elements, the most important of which is a day-ahead energy market to fill the void left by the demise of the Power Exchange. Though it is true that the price signals generated by MRTU will provide guidance for long-term investment; it is most important to recognize the role these price signals play in improving real-time operation through their ability to align market participants’ financial interests with the ISO’s physical operation. With MRTU we are striving for a system in which the right amount of generation is committed and dispatched in the right locations to reduce (but not necessarily eliminate) congestion on the transmission system, and more importantly, minimize the need for costly out-of-market operator intervention to ensure moment-to-moment system reliability.

Though some market participants have expressed concerns over the complexity of MRTU, it is important to realize that the new market design greatly reduces the need for out-of-market calls in real-time, which result in significant uplift costs. The complexity of the market design should reflect the complexity of operating the underlying electric grid, no more and no less.

The California grid is a large and extremely complex grid to operate and this unavoidable reality is recognized appropriately in the design of MRTU. In doing so, downward pressure is placed on risk premiums and consequently wholesale prices by virtue of reduced uncertainty through reduction in uplift costs, since these costs cannot easily be predicted and hedged. MRTU leverages state-of-the-art technology with acknowledged “best practices” in electric market design to incorporate as many facets of California’s complex system operation into the day-ahead and real-time energy prices as possible. The intent is to drive out-of-market costs to the bare minimum, while ensuring a competitive market outcome and reliable grid operations at least cost.

Some additional complexity stems from the collaborative process with our stakeholders, through which the MRTU design has addressed certain special needs and requirements. For example, MRTU affirms the principle that in transitioning to the new market, it is important to provide mechanisms to preserve existing contractual relationships and to avoid cost shifting. In addition, the ISO reached out to uniquely situated parties, such as a number of the public-power entities, and as a result has included additional features and functionality to accommodate their needs. The provision of numerous features including Metered-Sub-Systems (MSS), and the accommodation of so-called pseudo-ties provide flexibility for both entities that directly are part of the ISO control area as well as for others such as the Los Angeles Department of Water and Power (LADWP) and the Sacramento Municipal Utility District (SMUD), which are embedded in or adjacent to the ISO control area. The intent is to insure a smooth transition to the new markets for all.

One last point brought out in your article is worth commenting on. Certain individuals have suggested the Cal- ISO is attempting to hide behind the software development process to avoid addressing certain issues and delay or circumvent compliance with specific FERC directives. I can assure your readers that this simply is not the case. The Cal-ISO has and will continue to fully comply with all FERC orders. Our motive for including testimony describing the software process, as it applies to “production grade software” such as that employed at any ISO/RTO, was simply to educate the broader stakeholder community on the breadth, depth, and rigor involved in the software development process. With the increased importance of accounting and financial controls, as demanded by Sarbanes-Oxley, it is to everyone’s advantage that the ISO develop its software and business processes with the sufficient rigor and controls to ensure the appropriate and correct market outcomes upon which market participants can base their financial statements.

The Cal-ISO is working closely with its vendors and stakeholders to ensure a smooth and successful deployment in November of 2007. The MRTU program represents thousands of hours of work from many of the sharpest minds in the energy industry. The design is based upon proven concepts that are working in other organized energy markets around the country. While we acknowledge that some implementation issues remain, it is my hope that these comments further apprise your readers of the many benefits eagerly anticipated with the implementation of MRTU.

Charles A. King, PE, Vice President, Market Development & Program Management, California ISO


In September, after Mr. King’s letter was received, the Federal Energy Regulatory Commission (FERC) accepted key components of Cal-ISO’s proposed MRTU, paving the way for a new market design complete with day-ahead locational marginal pricing, a security-constrained dispatch on a fully nodal basis, and financial hedging of grid congestion through tradable transmission rights.

FERC acted on condition that the ISO and its stakeholders would conduct technical conferences to iron out differences on certain issues. Such issues included: (1) how to reconcile differences in operational rules between the ISO and neighboring areas (“seams issues”); (2) how to treat imported capacity under resource adequacy rules; and (3) how to develop business practice manuals containing the details on how the ISO will administer its new market design. (See, Docket No. ER06-615, Sept. 21, 2006, 116 FERC ¶61,274.)

By late October, in fact, FERC already had announced the first of these technical conferences (regarding seams issues), to be held Thursday and Friday, Dec. 14-15, in Phoenix.

FERC’s September ruling ordered two key changes to the ISO proposal, regarding: (1) ISO compliance with FERC deadlines for developing long-term transmission rights; and (2) the ISO’s proposal to mandate a generating reserve requirement for load-serving entities not subject to the jurisdiction of the state’s public utilities commission.

At the same time, however, FERC approved numerous other ideas that had proved controversial with stakeholders. Such items included the ISO’s proposals to calculate transmission line losses on a marginal basis, and to delay the onset of “convergence” or “virtual” bidding, in part to facilitate development of the software that will be needed to run the new market. –BWR