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CA-ISO Rejects Further Cap Cuts, Launches New Power Market Plan

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 even more.

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 markets.

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 peak-load periods.

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 develop."

"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 sending out.

"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 providers disagree.

Richard Nemec, Los Angeles

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