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Enhancing Cal-SO Price Cap Power Draws Fire

Enhancing Cal-SO Price Cap Power Draws Fire

Independent power marketers have denounced efforts by the California Independent System Operator (Cal-ISO) to extend its purchase price cap authority, fearing it would give the Cal-ISO "unfettered" control over wholesale electric market prices in the state. But California investor-owned utilities, Southern California Edison and Pacific Gas and Electric, and the California Power Exchange (Cal-PX) and California Electricity Oversight Board see an upside to the Cal-ISO's request.

At the center of the debate is Amendment No. 31 in which the Cal-ISO seeks to extend indefinitely its authority to disqualify bids in the imbalance energy and ancillary service markets that exceed specified levels. Its ability to impose the so-called purchase price cap, which currently is set at $250/MWh, is due to expire Nov. 15. The Cal-ISO also asked FERC to confirm its authority to impose price caps for all of its markets without first seeking Commission approval.

"The Commission should view this proposal with alarm. It represents a serious set-back indicating that the [Cal-ISO] is attempting to use price caps as a permanent crutch that operates in lieu of its pursuit of a long-term structural solution" for the dysfunctional California bulk power markets, said PPL Montana LLC and PPL EnergyPlus LLC, adding that FERC should reject the "indefinite continuation of price caps" being proposed by the Cal-ISO.

When the Commission first granted the Cal-ISO price-cap authority, the ISO pledged that it would propose a plan by the summer of 2000 to eliminate the need for price caps, the PPL companies noted. "The ISO now chooses to ignore its commitment..."

Giving the Cal-ISO "open-ended" authority to levy price caps would be counter-competitive, the PPL companies further argue. "At a time when regulatory efforts to remove monopolistic practices in the electric industry are well underway, giving the ISO the authority it seeks to establish prices at its discretion would, in essence, authorize it to monopsonize California's markets."

The Cal-ISO's "blanket authority request is broader than any authority ever issued by the Commission and could set a dangerous precedent," warned Dynegy Power Marketing Inc. In a previous order this year, FERC left intact the Cal-ISO's discretion to set the cap at whatever level it deemed fit, believing that the Cal-ISO-run markets generally make up only 10%-15% of the sales in California markets, Dynegy noted. However, that rational has one "critical flaw" - specifically, the Cal-ISO's purchasers' cap has historically acted as a de facto cap on the Cal-PX markets, whose volume often totals 75% to 80% of the state's electric markets, it said.

Duke Energy believes it is crucial for FERC to retain a sunset date on price caps, and to conduct periodic reviews of the need for price caps. In fact, it said the Commission should require the Cal-ISO to justify prior to next March 31 why any price caps should be maintained in the California bulk power markets.

Giving the Cal-ISO's governing board - which continues to "succumb to political pressure" from California legislators and Gov. Gray Davis - sole authority to impose price caps would upset the California electric market even further, Merrill Lynch Capital Services Inc. said. "Allegations of political arm-twisting and threats to purported 'independent' members of the board were widespread this summer and caused great concern about the integrity of the markets among market participants."

The Cal-PX said it conditionally supported the Cal-ISO's request, saying the ISO needs the authority to impose price caps in its real-time markets in the event they are need. However, it said it was concerned that price caps levied by the Cal-ISO "should not create disincentives for use of the forward markets for energy and ancillary services in California." It asked FERC to "carefully monitor and condition any authorization" granted to Cal-ISO to prevent this from occurring.

Southern California Edison also backed the Cal-ISO's request. The "ISO's purchase price cap is the only thing now standing between California consumers and the ability of sellers to set 'extremely high prices.'" It believes the Cal-ISO should continue to have the authority to disqualify artificially inflated bids until the California power markets become "workably competitive."

However, Edison conceded Amendment No. 31 isn't a cure-all. It "will merely maintain the status quo, and the status quo consists of a market that is not workably competitive and that results in prices that are unjust and unreasonable, even with the existing $250/MWh purchase price cap."

Susan Parker

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