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

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

The ISO had requested FERC authorization to cap prices on theancillary services because so far there are too few marketparticipants with market-based rate authority to allow thesemarkets to function correctly. It petitioned the Commission on July13 and began capping prices at $500/MWh on July 14 while awaitingFERC action.

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

The ISO action in containing the market for reserve power haddrawn the ire of Houston-based Dynegy Marketing and Trade and itsaffiliated Dynegy Power Corp. along with several other marketparticipants who have formally voiced concerns.

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

In a stinging three-page letter, dated July 15, and faxed to theISO that day, Dynegy’s president/COO Stephen Bergstrom accuses thestate-chartered grid operator with getting in the way of “givingthe market the opportunity to function properly and send thecorrect price signals.” In the name of protecting it, he contendsthe ISO is actually “impeding fair and open competition.” Bergstromthreatened possible legal action against the ISO to seek damages.

In response, ISO CEO Jeff Tranen indicated he agrees price capsare the antithesis of a free market, but the markets for fourclassifications of reserve power at this point are not competitiveso interim measures are needed to avoid extreme price gouging,noting that fundamentally he agrees with the Dynegy arguments. “Wefully support competitive markets working,” Tranen said. “But whatwe don’t support is that when the markets are not competitive,allowing unlimited prices to customers, and that is exactly why wehave a market surveillance unit and why FERC wanted that kind ofunit established.

In a plea to the ISO to “let the market work,” Bergstrom saidthat competitive markets without the traditional monopolyprotections of utility generation will experience “extreme pricevolatility,” but in the long run the efficiencies attained in thegeneration business will provide lower prices to consumers. Tranenquestions whether the ancillary power markets under currentconditions can, in fact, self-correct. The price spikes on two daysthis month have thrown the relative costs of power generation badlyout of sync, according to Tranen, noting that normally back-uppower supplies account for only one-thousandth (1/1,000) of theoverall cost of power generation, but on July 9 and again on July13 it amounted to almost half the cost, which overall averagesabout $20 million daily for power generation statewide.

Richard Nemec, Los Angeles

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