Facing more power alerts, near-record demand and strongpolitical pressure, the California Independent System Operator(Cal-ISO) Board Monday voted, 15-6, to lower the price cap to$250/MW for ancillary services, and spent another day discussingwhat combination of fixed-price supply deals and infrastructureupgrades can help the state avoid blackouts and rolling brownoutsthe rest of this summer. The price cap lowering is effective Aug.7.

The state legislative leader who helped push throughCalifornia’s 1996 electricity restructuring law, Sen.Steve Peace,gave a 15-minute speech/lecture to the Cal-ISO board prior to itsvote, contending that the agency needed to recognize its own”dysfunctional operations” with regard to price caps and the factthat California’s electricity market is “dysfunctional” and needsto be restructured. It can’t be done until there is some longerterm relief for San Diego consumers and the price caps are lowered,Peace told the board.

Peace, along with a few others, encouraged the Cal-ISO go beforeits fellow state agency, the California Public UtilitiesCommission, Thursday to urge it to declare the market structureunworkable and re-institute retail price caps in San Diego. Peaceargued that data now shows that just the Cal-ISO ancillary servicesprice cap lowering from $750 to $500/MW resulted in a 40% lowerwholesale price on the state power exchange (Cal-PX) during lastmonth’s peaks, compared to late June’s peaks when the higher capwas in place.

Short-term, yesterday’s move on the price cap, along withexpected moves by the CPUC to provide rate relief and ask FERC forwholesale price caps throughout the West, are expected byCalifornia officials to bring more retail price stability. Longerterm Gov. Gray Davis is expected soon to come up with proposedsolutions, some of which may mean more rolling back ofderegulation, according to Sen. Peace.

“The Power Exchange board and the ISO board need to formallyrecognize that the market is dysfunctional, Peace said. “You needto assure that prices set in a dysfunctional market are not passedthrough to the beneficiaries of the dysfunction (merchantgenerators). It doesn’t require illegal collusive activity, it justrequires a market design that produces other than true marketprices.”

Cal-ISO staff presented various statistics on recent months, onehypothesizing that a $250 price cap would have saved the state’selectric consumers about $99 million over the June-July period ofseveral heat/demand/price spikes. Another statistic from recentmonths’ experience is that after demand gets above the 33,000 MWlevel, wholesale prices “just explode,” according to a Cal-ISOstaff member who noted this was a lower threshold level than lastsummer.

For the second consecutive day, Cal-ISO called a Stage TwoAlert, meaning it would go after at least 1,000 MW of curtailedload and perhaps even more. Forecasts Tuesday and Monday were forpeaks above 46,000 MW, which is above the all-time peak demandrecord set last summer. As of the mid-afternoon, however, thestatewide peak was still almost 4,000 MW below that projected levelat a little above 42,000 MW. This week the entire 12-state Westernregion is experiencing sustained heat.

In these peak-demand situations, California has about 40,000 MWof in-state power (not counting that available to large municipalutilities), and it can generally get an average of 4,000 MW fromout-of-state, which is half what it was importing last summer,according to Cal-ISO.

As part of the debate on the price caps, proponents andopponents seemed to be divided between those who think there hasbeen market gaming (not necessarily illegal) involved, which provesthe market structure is broken, and those such as the generatorsand marketers who contend it is a lack of adequate generation andtransmission that is the culprit.

“The jury is still out on whether the market is the best way toget ancillary services,” Peace said.

Given all of the growing political and regulatory activity onthe issue, board members seemed to want to get to a vote followingthe long discourse by the state legislator. Strong urging againstlowering the price cap from generators such as Southern Co. andWilliams went unheeded for the most part.

“What this Board does today won’t do a thing to help what isgoing on in San Diego right now. San Diego customers are getting aproduct untouched by human judgment. SDG&E is taking the costs(of power) it is getting and putting it right on the ratepayers,”said Jan Smutny-Jones, Cal-ISO board chairman and head of thestatewide trade group for independent power generators. “In thespringtime, the situation is fine, and in the summer you are alwaysgoing to see price volatility regardless of the market structure.

“I’m aware of at least eight proposals made to SDG&E,long-term deals to help stabilize prices. My understanding is thatSDG&E will not sign any of those deals because of its corporatepolicy of not procuring electricity for its customers. I think itis grossly unfair to expect the Cal-ISO board to somehow magicallychange the situation when no one in San Diego is willing to standup and do risk management on the part of customers. I think it istime to stop pointing the finger at this (Cal-ISO) board andexpecting it to solve the retail price problems in San Diego.”

The price cap lowering won’t to it alone, it is going to takeseveral different items to get this under control, said GaryCotton, SDG&E executive and a Cal-ISO board member who favoredlowering the cap. He noted that earlier in the spring the statelegislature took away SDG&E’s ability to buy supplies outsideof the Cal-PX, which would have given him the authority to signinterim, fixed price contracts now.

©Copyright 2000 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press, Inc.