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More Forward Contracting By CA Utilities Needed

More Forward Contracting By CA Utilities Needed

The management of California's independent grid operator (Cal-ISO) is searching for ways to correct market flaws identified last month by its market surveillance committee, which spread blame around to utilities, regulators, generators and the Cal-ISO itself in the wake of the summer price/supply crunch. A suggested response by Cal-ISO staff was submitted Sept. 28 to the grid operator's board of governors.

While noting that the Cal-ISO management "in large part" concurs with the market surveillance panel's earlier findings and recommendations, the staff summary of its response focused on six key areas.

In its short history, the Cal-ISO has experienced significant under-scheduling of load and generation on a day-ahead and hour-ahead basis relative to real-time electricity consumption and production, the market committee and Cal-ISO staff agree. The state-chartered grid operator has attempted to do something about it in recent months and years, and it's looking to do more in this area.

A major design flaw, according to staff, is what it calls "the regulatory constraints on forward contracting" by the investor-owned utility distribution companies (IOUs). The utilities have for the most part been given limited authority by state regulators, but the IOUs have failed to even use that limited authority. This failure has "significantly hindered market performance," the surveillance committee stated.

"The (surveillance committee) notes that had California's three IOUs signed forward financial contracts equal to their expected net demand for energy and ancillary services during .May and June of 2000, average prices in the (California wholesale spot power market, Cal-PX) and Cal-ISO markets during these months would have been significantly lower," said Greg Cook, a Cal-ISO senior policy analyst in a staff memo outlining Cal-ISO management responses to the surveillance panel's report. "Even if the June 2000 price spikes had still occurred, the IOUs would have been largely insulated from this spot market price volatility with forward hedges."

Cook went on to tell the Cal-ISO board that the grid operator's management "agrees strongly" with the committee's conclusion that forward contracting by market participants "will reduce the risk of price spikes and is an important element of a competitive electric market."

In regard to the proposal for PG&E to transfer its extensive, multi-billion-dollar hydroelectric assets to a nonutility affiliate, the Cal-ISO staff agrees with the market review committee that the network of some 68 hydro power plants has a potentially large impact on energy and ancillary services markets. Cal-ISO earlier reached a market power mitigation agreement with PG&E because of this factor. Thus, Cal-ISO has not taken a position on whether or when a divestiture of the hydro assets from the utility should occur, noting that the question should be left to the California Public Utilities Commission to decide, but it should include means of minimizing market power being exercised.

In its own operations, the Cal-ISO staff has committed to following the market review panel's recommendation that the grid operator be more sensitive to market power issues in putting together its reliability contracts, and Cook's response stressed the point that the Cal-ISO followed these recommendations in renegotiating reliability must-run contracts and reforms in the ancillary services market. "Staff will continue to strive to consider the market power implications of any proposal designed to improve system reliability," Cook told the Cal-ISO board.

In the other areas - out-of-market payments and ten-minute settlements - the Cal-ISO is considering the market reviewers' recommendations, but further study and discussion is needed.

Richard Nemec, Los Angeles

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