The management of California’s independent grid operator(Cal-ISO) is searching for ways to correct market flaws identifiedlast month by its market surveillance committee, which spread blamearound to utilities, regulators, generators and the Cal-ISO itselfin the wake of the summer price/supply crunch. A suggested responseby Cal-ISO staff was submitted Sept. 28 to the grid operator’sboard of governors.

While noting that the Cal-ISO management “in large part” concurswith the market surveillance panel’s earlier findings andrecommendations, the staff summary of its response focused on sixkey areas.

In its short history, the Cal-ISO has experienced significantunder-scheduling of load and generation on a day-ahead andhour-ahead basis relative to real-time electricity consumption andproduction, the market committee and Cal-ISO staff agree. Thestate-chartered grid operator has attempted to do something aboutit in recent months and years, and it’s looking to do more in thisarea.

A major design flaw, according to staff, is what it calls “theregulatory constraints on forward contracting” by theinvestor-owned utility distribution companies (IOUs). The utilitieshave for the most part been given limited authority by stateregulators, but the IOUs have failed to even use that limitedauthority. This failure has “significantly hindered marketperformance,” the surveillance committee stated.

“The (surveillance committee) notes that had California’s threeIOUs signed forward financial contracts equal to their expected netdemand for energy and ancillary services during .May and June of2000, average prices in the (California wholesale spot powermarket, Cal-PX) and Cal-ISO markets during these months would havebeen significantly lower,” said Greg Cook, a Cal-ISO senior policyanalyst in a staff memo outlining Cal-ISO management responses tothe surveillance panel’s report. “Even if the June 2000 pricespikes had still occurred, the IOUs would have been largelyinsulated from this spot market price volatility with forwardhedges.”

Cook went on to tell the Cal-ISO board that the grid operator’smanagement “agrees strongly” with the committee’s conclusion thatforward contracting by market participants “will reduce the risk ofprice spikes and is an important element of a competitive electricmarket.”

In regard to the proposal for PG&E to transfer itsextensive, multi-billion-dollar hydroelectric assets to anonutility affiliate, the Cal-ISO staff agrees with the marketreview committee that the network of some 68 hydro power plants hasa potentially large impact on energy and ancillary servicesmarkets. Cal-ISO earlier reached a market power mitigationagreement with PG&E because of this factor. Thus, Cal-ISO hasnot taken a position on whether or when a divestiture of the hydroassets from the utility should occur, noting that the questionshould be left to the California Public Utilities Commission todecide, but it should include means of minimizing market powerbeing exercised.

In its own operations, the Cal-ISO staff has committed tofollowing the market review panel’s recommendation that the gridoperator be more sensitive to market power issues in puttingtogether its reliability contracts, and Cook’s response stressedthe point that the Cal-ISO followed these recommendations inrenegotiating reliability must-run contracts and reforms in theancillary services market. “Staff will continue to strive toconsider the market power implications of any proposal designed toimprove system reliability,” Cook told the Cal-ISO board.

In the other areas – out-of-market payments and ten-minutesettlements – the Cal-ISO is considering the market reviewers’recommendations, but further study and discussion is needed.

Richard Nemec, Los Angeles

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