Reliant Decries Price-Mitigation Mechanism in CA

Reliant Energy Power Generation and Reliant Energy Service last week filed an emergency request for expedited reconsideration of FERC's April decision in which it approved price-mitigation for the troubled California power market during reserve emergencies.

Problems became apparent with the mitigation approach almost immediately after it went into effect in late May, the Reliant companies told the Commission [RT01-85-001]. It's biggest downfall is that it "gives no recognition to the recovery of [the] capital costs and fixed costs" of power generators in California. "In this sense, it fairly may be said that the Commission has imposed below-cost price caps on many California generators," they noted..

The Reliant companies further charge that the California Independent System Operator (Cal-ISO), which is charged with establishing a proxy power price during emergencies under the mitigation plan, has been improperly carrying out the Commission's directives.

FERC's price-mitigation plan, which is intended to offer some price relief to California, calls for the Cal-ISO to establish a single-market clearing price for real-time transactions in its market during times of reserve deficiencies (Stage I, II and III emergencies) in the state. During these periods, the Cal-ISO's market price is to be limited to the marginal cost of the highest-cost generator called upon to run during an emergency. FERC directed the Cal-ISO to calculate the marginal cost for each generator, based on a unit's heat rate and proxy gas and emissions costs, plus $2 added for operational and maintenance expenses.

The Cal-ISO imposed the price-mitigation mechanism for the first time at mid-day on May 30, when a Stage I emergency was called in the state. The market-clearing price (MCP) for wholesale power dropped to $108/MWh from $300/MWH, with "capped prices ranging from $29/MWh to $135/MWh for the remainder of the day," the Reliant companies reported.

"This precipitous drop in MCP resulted from a proxy formula that is not representative of actual costs and from improper implementation of that proxy price-cap formula by the Cal-ISO, not from squeezing out market power," they said.

During the reserve emergency, Reliant said it offered to make its peaking and backup generation units available to the Cal-ISO, which eventually dispatched the units. The Cal-ISO had determined that the proxy prices for natural gas and emissions on May 30 were $6.453/MMBtu and $0.00 respectively, which Reliant said were substantially below its actual costs. Reliant estimated it had paid a spot price of $11.52/MMBtu for gas to fuel its units, and an environmental mitigation fee for its Mandalay 3 unit of $6,000 per operating hour. In the end, "the Cal-ISO dispatched Reliant's backup peaking units based on a proxy price for two of those units of below $100/MWh, instead of using Reliant's variable cost-based bid price," the Reliant companies protested.

FERC "should require that the proxy prices be revised to use representative gas costs, that the Cal-ISO implement the emissions costs operating reserve guideline in the market mitigation order, and that the Cal-ISO use bid prices...in calculation of the proxy MCPs," it urged in its emergency action.

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