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Feds Set $400/MWh Soft Price Cap in WECC Outside of CAISO

February 20, 2006
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FERC recently issued an order modifying the price cap on spot market sales in the Western Electricity Coordinating Council (WECC) outside the California Independent System Operator (CAISO) grid to a $400/MWh "soft" cap. The order also raises the ancillary service capacity bid cap in CAISO to a $400/MWh soft cap [EL06-44].

The order follows on the heels of a Jan. 13 decision in which the Commission launched an investigation into the price cap in WECC outside CAISO territory. FERC also instituted an investigation into the CAISO's ancillary service capacity bid cap in order to consider whether any incentives that distort a supplier's choice between offering energy or ancillary services will result from the rise in gas prices and the increase in the CAISO energy bid cap.

In the Jan. 13 order, FERC said it would allow CAISO to raise its $250/MWh bid cap for real-time energy bids and adjustment bids to a $400/MWh bid cap, but rejected a proposal by the California grid operator to change the current "soft" nature of the cap to a "hard" cap during an interim period prior to implementation of a Market Redesign and Technology Upgrade and a resource adequacy mechanism [ER06-354, EL06-44].

In this month's order, FERC said that it is unjust and unreasonable to have inconsistent bid caps in CAISO and the rest of the WECC. FERC therefore found that the price cap for spot market sales in the non-CAISO WECC established by a July 2002 order "is no longer just and reasonable, and find that the just and reasonable price cap is a $400/MWh 'soft' cap. Therefore, we establish a $400/MWh 'soft' price cap in the WECC outside the CAISO, effective upon issuance of this order."

At the same time, the federal agency determined that the existing bid cap for ancillary services in California is no longer just and reasonable and that the right step is to raise the cap to $400/MWh as a soft cap. "As we noted in the Jan. 13 order, a generator may incur energy opportunity costs in providing ancillary services. Specifically, in periods when the energy price exceeds the generator's incremental cost of producing energy, the generator could have earned profits by selling energy, but gives up those profits to the extent that it provides ancillary services instead."

By raising the energy bid cap to $400/MWh, the profits from selling energy and thus, the opportunity costs to provide ancillary services, "may increase for at least some generators, especially those that do not use natural gas," FERC said. If the ancillary service capacity bid cap is below the opportunity cost of providing ancillary services, the generator may choose to provide energy rather than ancillary services.

FERC agreed with Williams Power Co. Inc. "that the simplest way to alleviate this concern, given the CAISO's other market design rules, is to raise the ancillary service capacity bid cap to the level of the energy bid cap, i.e., to $400/MWh."

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