Dynegy, CA ISO Battle Over Price Caps

The Federal Energy Regulatory Commission issued an order late Friday authorizing the California ISO on an interim basis to "reject bids in excess of whatever price levels it believes are appropriate for Regulation, Spinning Reserve, Non-Spinning Reserve and Replacement Reserve. The price levels could be based on costs, market or any factor the ISO determines will attract sufficient bids into the markets."

FERC acted after the ISO reported that on July 9 due to congestion problems prices for Replacement Reserves for the Southern Zone reached $5,000 MWh for three hours and were at $2,500 and $750/MWh during two other hours. "As a result the total cost for Replacement Reserves during these three hours was $9.1 million." If the ISO had bought Replacement Reserves the following day it would have cost in excess of $17 million.

The ISO had requested FERC authorization to cap prices on the ancillary services because so far there are too few market participants with market-based rate authority to allow these markets to function correctly. It petitioned the Commission on July 13 and began capping prices at $500/MWh on July 14 while awaiting FERC action.

FERC told the market surveillance committees of the ISO and PX to each conduct an independent study of the bidding behaviors and structural characteristics of the markets and report back to FERC in 30 days.

The ISO action in containing the market for reserve power had drawn the ire of Houston-based Dynegy Marketing and Trade and its affiliated Dynegy Power Corp. along with several other market participants who have formally voiced concerns.

The Dynegy units operate merchant power plants in California and provide scheduling coordination for two of the gas-fired generation plants that were sold to merchant operators.

In a stinging three-page letter, dated July 15, and faxed to the ISO that day, Dynegy's president/COO Stephen Bergstrom accuses the state-chartered grid operator with getting in the way of "giving the market the opportunity to function properly and send the correct price signals." In the name of protecting it, he contends the ISO is actually "impeding fair and open competition." Bergstrom threatened possible legal action against the ISO to seek damages.

In response, ISO CEO Jeff Tranen indicated he agrees price caps are the antithesis of a free market, but the markets for four classifications of reserve power at this point are not competitive so interim measures are needed to avoid extreme price gouging, noting that fundamentally he agrees with the Dynegy arguments. "We fully support competitive markets working," Tranen said. "But what we don't support is that when the markets are not competitive, allowing unlimited prices to customers, and that is exactly why we have a market surveillance unit and why FERC wanted that kind of unit established.

In a plea to the ISO to "let the market work," Bergstrom said that competitive markets without the traditional monopoly protections of utility generation will experience "extreme price volatility," but in the long run the efficiencies attained in the generation business will provide lower prices to consumers. Tranen questions whether the ancillary power markets under current conditions can, in fact, self-correct. The price spikes on two days this month have thrown the relative costs of power generation badly out of sync, according to Tranen, noting that normally back-up power supplies account for only one-thousandth (1/1,000) of the overall cost of power generation, but on July 9 and again on July 13 it amounted to almost half the cost, which overall averages about $20 million daily for power generation statewide.

Richard Nemec, Los Angeles

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