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 narrowlydrawing short of further tightening of price caps. It was thesecond time in a week the Cal-ISO board wrestled with the price capissue.

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. InAddition, western states that traditionally have been counted on tosupply excess power to California are in the same boat.

In the aftermath of the Thursday meeting, San Diego Gas andElectric, experiencing the brunt of retail electricity pricespikes, on Friday called for “an emergency summit” for California’senergy market stakeholders this Wednesday in San Diego. It alsoannounced it was putting up $100,000 in seed money to establish asummer energy assistance fund for low-income customers in itsservice territory. It is also asking state regulators for anadditional $6 million in energy efficiency program funds aimed atcurbing customer usage during peak-load periods.

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 Electriccustomers, 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 grid operator. ISO management is supposed toget a program under way by July 17.

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 will beput in place to address the generation, transmission, demand-sidemanagement, real-time consumer metering and other issues.

“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.

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.

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