CA-ISO Rejects Further Cap Cuts, Launches New Power Market Plan
With growing concerns about the fragility of California's
electricity market under summer peak demand stresses, the
California Independent System Operator (Cal-ISO) Board of Governors
Thursday laid out an aggressive agenda to transform the state's
power market into a "workably competitive" model while narrowly
rejecting further reduction in price caps. It was the second time
in a week the Cal-ISO board wrestled with the price cap issue.
The Cal-ISO board, reduced by one member because of a
resignation submitted following the board's June 28 decision to
lower the $750/MW price cap to $500/MWh, met for more than four
hours last week to discuss the possibility of lowering the caps
The grid operator board was obviously swayed by strong state
political pressure --- particularly from the governor's office and
the legislative leaders who helped craft California's 1996
electricity industry restructuring law --- but attempts to lower
the price limits to $250/MW turned out to be one vote short.
A report submitted by Frank Wolak, Cal-ISO's market monitoring
chair, determined that a lower price cap will "do nothing to
correct the market flaws, it will only reduce the cost to final
loads and UDCs (utility distribution companies), with an uncertain
risk to system reliability."
"It seems very likely that there may be many hours during this
summer when $250 may not be sufficient to attract the necessary
energy imports for California to meet its demand," he said. In the
most recent May-June peaks, the $750/MW cap was significantly
exceeded by wholesale prices. Since May 1, real-time energy prices
for Cal-ISO were equal or greater than $745/MWh for 48 hours.
Wolak noted that lowering price caps would create a disincentive
for building new generation in the state and would encourage
in-state generators to sell their power elsewhere.
The peak-load electricity supply and wholesale price crunch
already experienced in May and June promises to get more pronounced
in July through September in California, Wolak said, because of a
list of unresolved retail and wholesale market design flaws. At the
crux of the problem is the fact that California's high-tech driven
electricity demand has grown rapidly over the first two years of
its power restructuring with no increase in generation capacity.
And complicating this in-state situation is that surrounding
Western states that traditionally have been counted on to supply
excess power to California have experienced the same situation of
accelerated demand with little or no new generation coming on line.
The principal market design problems, according to the ISO
market committee's report, center on replacement reserve penalities
that encourage under-scheduling and under-bidding of loads and
overly attractive out-of-market payment schemes that discourage
direct participation in the state's energy and ancillary services
It was agreed that California's electricity market needs a
complex combination of short- and long-term remedies, including new
generation/transmission on an expedited basis, added demand-size
management programs, rate relief for San Diego Gas and Electric Co.
customers, more protections against market power abuse and
eventually an elimination of price caps.
A manual on how to achieve these sometimes conflicting goals was
presented in the form of a broad-based board resolution to create a
"statewide issues program" directing the Cal-ISO senior management
to take a leadership role in areas going far beyond the ISO's
original charter as transmission grid operator. The ISO management
is supposed to get a program under way by July 17.
In the aftermath of the decision, San Diego Gas and Electric
Co., which experienced the brunt of recent retail electricity price
spikes, called for "an emergency summit" for California's energy
market stakeholders this Wednesday in San Diego. It also announced
it was putting up $100,000 in seed money to establish a summer
energy assistance fund for low-income customers in its service
territory that includes the southern-most end of the state. It is
also asking state regulators for an additional $6 million in energy
efficiency program funds aimed at curbing customer usage during
Short-term solutions to relieve SDG&E customers are to
include "new hedging or bilateral agreement capabilities." Then, by
July 31, what the Cal-ISO views as "longer-term solutions or
possibilities for longer-term solutions" will be put in place to
address the generation, transmission, demand-side management,
real-time consumer metering and "other issues as parties may
"It is extremely important that we fix the rate problem in San
Diego," said Jan Smutney-Jones, Cal-ISO board chairman and head of
California's independent energy producers' trade group. "I do not
believe that the [lower] price cap would have any impact but a
negative one on California both in the long term as a place to
invest money and in the short term in terms of its effect on rates.
I am just very concerned about the long-term signal we would be
"I do think it is important that we act and that we try to
address the issues going on in San Diego right now. I think we need
to take more of a leadership role in all of this."
Smutney-Jones said he thinks the state needs to immediately look
at the possibility of having state and federal governmental
facilities, which collectively represent hundreds, if not
thousands, of megawatts of electrical load shutting down early on
hot days as a means of lower peak load periods. He hinted that he
intends to call DOE Secretary Bill Richardson to seek his help in
getting federal facilities to cooperate with the state's program.
While fully acknowledging the state faces major problems, he
thinks it is manageable without focusing on price limits, something
he and his independent energy producers oppose.
The key distinction in the pricing debate seemed to center on
whether California is a price-setter or price-taker in the Western
electricity markets. Legislative, regulatory and utility
representatives look at the state as a price-setter, meaning no
matter how low the price caps are set, they will become the
marketing-clearing price. Generators, marketers and large end-users
tend to strongly disagree, arguing that any price caps distort the
market and prevent it from operating effectively in the long-term.
The Cal-ISO gets its authority to set price caps from FERC, and
that present authorization expires Nov. 15 this year.
"I don't personally like price caps, but in a very thin market
and in a state of transition such as we have, it is very difficult
to manage without them," said Marci Edwards of the Los Angeles
Department of Water and Power, who also is bulk power director and
a Cal-ISO board member. The board meeting on these issues was
convened at her request. "You are forced into some form of
regulation while you fully flush out the market to a point where
such regulation is no longer needed. But until you get to that
point, you are between a rock and a hard place for awhile."
"Cal-ISO is not one of our major customers," said Edwards,
speaking from LADWP's perspective. "We sell a lot of energy
out-of-state into the Nevada and broader desert Southwest markets.
We're just selling what is excess to our needs at any given time.
"I think the decision of LADWP to support price caps is more a
reflection that the market is still in its infancy, very thin and
very subject to gaming [market power abuse]. So until we can expand
past that, it needs a greater degree of monitoring and regulation.
Until competition within the limited pool precludes that, it is not
a self-correcting problem. The fatter the market gets, the less you
need to baby-sit it."
Edwards conceded that essentially she and the LADWP are siding
in this case with California's legislators and regulators who are
saying the market is not ready to be left entirely to its own
devices. Independent marketers, generators and energy service
Richard Nemec, Los Angeles