With growing concerns about the fragility of California’selectricity market under summer peak demand stresses, theCalifornia Independent System Operator (Cal-ISO) Board of GovernorsThursday laid out an aggressive agenda to transform the state’spower market into a “workably competitive” model while narrowlyrejecting further reduction in price caps. It was the second timein a week the Cal-ISO board wrestled with the price cap issue.

The Cal-ISO board, reduced by one member because of aresignation submitted following the board’s June 28 decision tolower the $750/MW price cap to $500/MWh, met for more than fourhours last week to discuss the possibility of lowering the capseven more.

The grid operator board was obviously swayed by strong statepolitical pressure — particularly from the governor’s office andthe legislative leaders who helped craft California’s 1996electricity industry restructuring law — but attempts to lowerthe price limits to $250/MW turned out to be one vote short.

A report submitted by Frank Wolak, Cal-ISO’s market monitoringchair, determined that a lower price cap will “do nothing tocorrect the market flaws, it will only reduce the cost to finalloads and UDCs (utility distribution companies), with an uncertainrisk to system reliability.”

“It seems very likely that there may be many hours during thissummer when $250 may not be sufficient to attract the necessaryenergy imports for California to meet its demand,” he said. In themost recent May-June peaks, the $750/MW cap was significantlyexceeded by wholesale prices. Since May 1, real-time energy pricesfor Cal-ISO were equal or greater than $745/MWh for 48 hours.

Wolak noted that lowering price caps would create a disincentivefor building new generation in the state and would encouragein-state generators to sell their power elsewhere.

The peak-load electricity supply and wholesale price crunchalready experienced in May and June promises to get more pronouncedin July through September in California, Wolak said, because of alist of unresolved retail and wholesale market design flaws. At thecrux of the problem is the fact that California’s high-tech drivenelectricity demand has grown rapidly over the first two years ofits power restructuring with no increase in generation capacity.And complicating this in-state situation is that surroundingWestern states that traditionally have been counted on to supplyexcess power to California have experienced the same situation ofaccelerated demand with little or no new generation coming on line.

The principal market design problems, according to the ISOmarket committee’s report, center on replacement reserve penalitiesthat encourage under-scheduling and under-bidding of loads andoverly attractive out-of-market payment schemes that discouragedirect participation in the state’s energy and ancillary servicesmarkets.

It was agreed that California’s electricity market needs acomplex combination of short- and long-term remedies, including newgeneration/transmission on an expedited basis, added demand-sizemanagement programs, rate relief for San Diego Gas and Electric Co.customers, more protections against market power abuse andeventually an elimination of price caps.

A manual on how to achieve these sometimes conflicting goals waspresented in the form of a broad-based board resolution to create a”statewide issues program” directing the Cal-ISO senior managementto take a leadership role in areas going far beyond the ISO’soriginal charter as transmission grid operator. The ISO managementis supposed to get a program under way by July 17.

In the aftermath of the decision, San Diego Gas and ElectricCo., which experienced the brunt of recent retail electricity pricespikes, called for “an emergency summit” for California’s energymarket stakeholders this Wednesday in San Diego. It also announcedit was putting up $100,000 in seed money to establish a summerenergy assistance fund for low-income customers in its serviceterritory that includes the southern-most end of the state. It isalso asking state regulators for an additional $6 million in energyefficiency program funds aimed at curbing customer usage duringpeak-load periods.

Short-term solutions to relieve SDG&E customers are toinclude “new hedging or bilateral agreement capabilities.” Then, byJuly 31, what the Cal-ISO views as “longer-term solutions orpossibilities for longer-term solutions” will be put in place toaddress the generation, transmission, demand-side management,real-time consumer metering and “other issues as parties maydevelop.”

“It is extremely important that we fix the rate problem in SanDiego,” said Jan Smutney-Jones, Cal-ISO board chairman and head ofCalifornia’s independent energy producers’ trade group. “I do notbelieve that the [lower] price cap would have any impact but anegative one on California both in the long term as a place toinvest 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 besending out.

“I do think it is important that we act and that we try toaddress the issues going on in San Diego right now. I think we needto take more of a leadership role in all of this.”

Smutney-Jones said he thinks the state needs to immediately lookat the possibility of having state and federal governmentalfacilities, which collectively represent hundreds, if notthousands, of megawatts of electrical load shutting down early onhot days as a means of lower peak load periods. He hinted that heintends to call DOE Secretary Bill Richardson to seek his help ingetting federal facilities to cooperate with the state’s program.

While fully acknowledging the state faces major problems, hethinks it is manageable without focusing on price limits, somethinghe and his independent energy producers oppose.

The key distinction in the pricing debate seemed to center onwhether California is a price-setter or price-taker in the Westernelectricity markets. Legislative, regulatory and utilityrepresentatives look at the state as a price-setter, meaning nomatter how low the price caps are set, they will become themarketing-clearing price. Generators, marketers and large end-userstend to strongly disagree, arguing that any price caps distort themarket and prevent it from operating effectively in the long-term.

The Cal-ISO gets its authority to set price caps from FERC, andthat present authorization expires Nov. 15 this year.

“I don’t personally like price caps, but in a very thin marketand in a state of transition such as we have, it is very difficultto manage without them,” said Marci Edwards of the Los AngelesDepartment of Water and Power, who also is bulk power director anda Cal-ISO board member. The board meeting on these issues wasconvened at her request. “You are forced into some form ofregulation while you fully flush out the market to a point wheresuch regulation is no longer needed. But until you get to thatpoint, 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 energyout-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 areflection that the market is still in its infancy, very thin andvery subject to gaming [market power abuse]. So until we can expandpast that, it needs a greater degree of monitoring and regulation.Until competition within the limited pool precludes that, it is nota self-correcting problem. The fatter the market gets, the less youneed to baby-sit it.”

Edwards conceded that essentially she and the LADWP are sidingin this case with California’s legislators and regulators who aresaying the market is not ready to be left entirely to its owndevices. Independent marketers, generators and energy serviceproviders disagree.

Richard Nemec, Los Angeles

©Copyright 2000 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.