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Wholesale Markets, ISOs Keeping Prices Down, CEOs Say

Competitive wholesale electricity markets are working well and, despite escalating fuel prices, independent system operators (ISO) are helping to keep energy prices down for consumers, the CEOs and market monitors of several ISOs told FERC last Tuesday.

"I think it is evident that the combination of competitive wholesale markets and a robust regional system planning process is resulting in infrastructure and resource investment in the right locations in New England," said ISO New England Inc. CEO Gordon Van Welie. "In addition, we have seen efficiency improvements in operations...and this has been accomplished without sacrificing reliability in New England -- arguably, in fact, it could be said it has strengthened reliability."

Karen Antion, interim CEO of the New York ISO (NYISO), said restructuring in New York allowed NYISO "to maintain system reliability and permits customers to enjoy higher value from existing resources."

The executives said wholesale markets are the best tool they have to help meet a series of challenges, including escalating fuel prices, integrating renewable sources into their mixes, siting issues and the cost for new transmission and storage.

"High prices in energy capacity markets in the presence of high costs do not mean there's a problem with markets," said Joseph Bowring, manager of PJM's market monitoring unit. "In fact, high prices reflecting high inward costs reflect that markets are working well. High prices in the presence of scarcity also do not mean that markets are not working. In fact, again, they are evidence that markets are working well. But high prices make it even more critical to ensure that prices reflect competitive outcomes. Competition, used as a tool of regulation, requires clear and effective market power mitigation rules."

Representatives of the California ISO (CAISO) said that region has been "stable and competitive" since the implosion of the California power market in 2000 and 2001, "but it's not all that it should be."

"We are proud of our achievements so far and honest about what is left [to do]," said CAISO CEO Yakout Mansour. "Organized markets and ISOs are better positioned than other models to meet the challenges of the future."

According to Keith Casey, director of the CAISO market monitoring department, the current market "suffers from some deficiencies," including no centralized day-ahead market and no nodal pricing.

Last month FERC conditionally approved CAISO's request to create eight sub-regions for ancillary services within its Market Redesign and Technology Upgrade (MRTU). CAISO is expected to set a tentative launch date at a meeting in July. FERC conditionally accepted the MRTU tariff in September 2006.

"The good news is MRTU, our new market design that we'll be implementing this fall, will fix [both] deficiencies by providing a centralized day-ahead market and nodal pricing, and it will provide an excellent framework for demand response," Casey said. "However, it will take some time to develop meaningful demand response...we believe the two most stabilizing changes since the crisis have been the significant level of forward energy contracting by California's load-serving entities and the introduction of a resource advocacy framework. In our view, the California energy crisis was primarily due to a lack of forward energy contracting, which both created opportunities for the exercise of market power and created significant financial risk for load-serving entities. Fortunately, today our load-serving entities are largely hedged against spot market volatility with fixed-priced long-term power contracts."

Earlier this year FERC issued a notice of proposed rulemaking (NOPR) outlining several potential reforms to improve the competitive operation of the organized wholesale power market. A key proposal in the NOPR would require ISOs and regional transmission organizations (RTO) to give market monitoring units (MMU) access to market data, resources and personnel necessary to carry out their duties; require MMUs to report directly to RTO and ISO boards, rather than to management; and would require market monitors to submit reportable violations and tariff violations to FERC's Office of Enforcement and market design flaws to the agency's Office of Energy Market Regulation.

The proposed reform is intended to improve the independence of market monitors and increase the transparency of their activities. The MMU proposal responds in part to accusations by the market monitor of PJM Interconnection that he and colleagues were not allowed to operate independently of the RTO.

To facilitate demand response, the NOPR proposes that RTOs and ISOs accept bids by demand resources to provide certain ancillary services if they meet the necessary technical requirements and the bids are at or below the market-clearing prices. It also seeks to modify RTO and ISO tariffs to eliminate during a system emergency certain charges to a power purchaser for taking less energy in real time.

The proposed reforms incorporate ideas that came from technical conferences last year and written comments on an advanced NOPR, which FERC issued a little more than a year ago.

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