The California Independent System Operator (Cal-ISO) Fridayfiled with the Federal Energy Regulatory Commission urging steps betaken, including creating a $100/MWh payment price cap andpenalties for noncompliance, to encourage a return of more suppliesinto the forward, as opposed to the real-time spot, market. Cal-ISOCEO Terry Winter took this action without his governing board’sauthorization.

Cal-ISO’s filing is suggesting that FERC mandate that thegenerators sell set percentages of their output in the forwardmarket, rather than holding back for the real-time, higher-pricedmarket. The state-chartered, nonprofit California transmission gridoperator is hoping to get more favorable prices by tying up setamounts of power in the forward markets because the generators canthen spread their costs over more hours of generation than they canin the emergency, real-time market.

“We are trying to put in front of FERC a proposal that will workwith all of the other proposals they are considering in the currentexpedited time frame,” said Winter, who added that he doesn’t thinkCalifonia’s market is being “gamed,” but it has rules that need tobe changed to permit a truly competitive market.

“The lack of forward contracting and scheduling means theCalifornia ISO is making up for huge shortfalls ten minutes beforethe power is consumed.” The plan suggests requiring utilities tocontract for 85% of their customer requirements in advance of whenthey are needed.

The ISO’s plan, which was advanced as a discussion platform,would institute a payment cap of $100 in all markets with someexemptions. Exempt would be generators that can prove they willlose money if capped at that rate; generators that contract 70% oftheir supply to serve California customers, renewable generation;facilities producing less than 50 MW, new power plants and importedpower. The existing $250 MWh price cap would still exist and serveas the absolute price ceiling for all transactions.

“This proposal would take the ISO back to its original missionof operating the markets of last resort, allowing ISO operators tofocus on maintaining reliability of the power grid,” Winter said.

In Washington last Thursday the Federal Energy RegulatoryCommission took what it called the “unusual step” of announcing itsschedule for achieving an order by the end of this year to remedyCalifornia wholesale electric pricing problems. Drawing on anongoing staff investigation and informational hearings thecommission held in San Diego in September, FERC will hold sessionsNov. 1 and 9 to release its proposed remedies and discuss them.

FERC’s action comes amid a number of requests and politicalpressure for federal help by California officials, utilities andenergy companies — including the latest from the ISO and oneearlier in the week from the state’s largest electric utilities andtheir usual adversary, The Utility Reform Network (TURN), a utilitywatchdog group. The utilities and TURN made a joint FERC filingOct. 16 seeking a $100 across-the-board cap on all wholesaleelectricity prices and for longer term fixes, including adeclaration that the state’s electricity market is unworkable underits current framework.

Winter agreed with the description. “As a marketplace we werenot smart enough to anticipate everything that people (generatorsand marketers) have come up with now after the fact. The realproblem is still a scarcity of supply. The idea now is to keeppeople out of the (emergency) real-time market (run by Cal-ISO) andmake them work forward (in the California Power Exchange, orCal-PX)”

Winter said what he called a “flurry of filings” from Californiainterests at FERC this week “is extremely good, putting thediscussion clearly in front of FERC and allowing everybody’s ideasto be reviewed. In this forum people can come to agreements thatwill move this forward and protect California from high prices nextsummer.” (Nevertheless, a separate FERC filing Friday from one ofthe state’s major utilities, San Diego Gas and Electric, proposedthat Cal-ISO’s structure, operations and governing board besignificantly changed.)

In noting the prospect for a federal resolution, Winter saideveryone must realize that both price increases for emissioncontrols and natural gas are also contributing to the continuinghigh electricity prices in the state, which he said are stayingabove $100/MWh, despite statewide electricity peak-demand that isonly about 60% of its summer levels.

For natural gas, Winter characterized the situation as one inwhich prices have increased “dramatically, while supply isradically down,” meaning next summer will be “extremely difficult”for the state.

The goal for Cal-ISO is to shrink the real-time market it runs,which has been accounting for about 20% of the load, to less than10%, and ideally 5%.

The petition by Pacific Gas and Electric, Southern CaliforniaEdison and TURN — mirroring requests made earlier to FERC bySempra Energy’s San Diego Gas and Electric — asked the federalregulators to replace the price caps with long-term “market powermitigation measures.”

SDG&E last Friday made its own filing in support of theemergency measure, calling for “swift and immediate action inaddressing the FERC fundamental structural defects in California’sderegulated marketplace and outlining 17 “fundamental structuralreforms” in the state’s wholesale market, including restructuringthe Cal-ISO governing board and operations.

“Despite the cooler weather and lower statewide demand werecently have been experiencing, the high wholesale electric pricesour customers endured this summer are not subsiding,” saidSDG&E’ Chairman Edwin Guiles. As it has several timespreviously, SDG&E proposed that FERC adopt interim cost-basedbid caps for power suppliers selling into California’s wholesalemarket.

Edison’s John Fielder, a senior vice president, cited theexample of a recent Sunday, Sept. 24, when prices reached $150/MWheven though “demand was relatively low” (about 60% of what it wason peak summer days). The utilities and consumer group are askingFERC to also look at the question of refunds of this summer’s powercosts that have exceeded the retail rates the utilities are allowedto charge by about $5 billion so far.

Another indication that the California market’s problems won’tbe over for awhile came last week fromthe federal hydropowermarketer in the Pacific Northwest, Bonneville Power Administration(BPA), which said it would have no electricity supplies to sellinto California in the next two or three years.

“We have always relied on power from the Northwest and it hascertainly been dwindling,” Winter said, commenting on theannouncement. “This has us very, very concerned. I am not surewhether they are talking in terms of peak-demand energy or just ingeneral terms. In any event, it really highlights the more regionalnature of this problem.

“One of the other fears I have is not just the natural gas priceincreases, but also the availability of gas supplies intoCalifornia. As we add all of this new (gas-fired) generation here,we are certainly going to be taxing the infrastructure of naturalgas, just as we have taxed electricity on the transmission site.”

Winter acknowledged that generators and marketers will opposeadditional price caps and penalties, such as the ones the Cal-ISOis proposing, noting that he, personally, would rather rely on themarket. However, he thinks California’s situation is sufficientlyout of hand to warrant caps on a interim basis.

Richard Nemec, Los Angeles

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