California’s “heat storm” last week drew some regulatory lightning, as FERC took emergency action Thursday setting a hard price cap for wholesale power across the West at $91.87 per MWh, at the same time criticizing the Cal-ISO for following a strategy to minimize costs — without regard to reliability.

The Commission’s directive came after the Cal-ISO, claiming it was following FERC’s formula for the mitigated market clearing price (MMCP), reset the cap down from the $91.87 limit to $57.14 Tuesday afternoon and to $55.26 Wednesday, after declaring Stage One and Stage Two power emergency alerts both days. Prices surged into the $90 range briefly on Tuesday.

In raising the cap the Commission said it could not expose consumers in the western states to the potential effects of a low price cap, which “could cause severe price disruptions.” The cap will remain in place until the expiration of the Commission’s current price mitigation measures on Sept. 30.

While heat continued in California Thursday and Friday, it moderated somewhat, and it appeared unlikely there would be further calls for emergency power. Demand was estimated to hit 40,769 MW Thursday and 37,627 Friday, compared to 42,659 MW Wednesday. Early in the week, California officials labeled the onslaught of hot weather a “heat storm,” that spread over the West, limiting power from out of state. Las Vegas, NV was reporting 110 degree high temperatures.

On Wednesday, after the Cal-ISO lowered the price cap, the chairman of PNM Resources took time out in an earnings conference call to blast the “idiocy” of low regulated price caps.”At $57, you tell me how we generate peaking generation here, ship it to California and incur start-up and O&M costs associated with those units. That’s nuts and I honestly believe that the FERC understands that and they recognize they have to fix that situation,” said Chairman Jeff Sterba.

FERC said it had been planning to address the Cal-ISO’s petition for reconsideration of the 7% operating reserve threshold that triggers setting a new cap at its open meeting this week. Thursday’s “short term” action, establishing a hard cap at the previously existing MMCP (i.e., $91.87), was taken “to assure the continuity and reliability of western spot markets.”

The higher price cap “should continue to facilitate energy offers into the Western market,” FERC said. Although, in the long term it may be inadequate to properly encourage the continued development of transmission and generation infrastructure.

“Other mitigation measures, including a bid cap, have been proposed to be effective Oct. 1, 2002 as part of the ISO’s comprehensive market redesign proposal” [ER02-1656]. “The Commission will act in the near future to establish appropriate mitigation measures and encourage infrastructure development for the period beginning Oct. 1, 2002.”

FERC’s move drew praise from Reliant Energy. “Certainly that would be welcome relief and it would certainly help all of us in trying to run the plants at full bore and at the same time recover our costs,” Reliant Energy spokesperson Richard Wheatley told Power Market Today. “So, in the sense it’s a recognition of the realities of the marketplace in California. Of course, FERC should be commended for that realization.”

Continuing its running battle with the Cal-ISO over when to trigger new price caps, FERC criticized the grid operator for following a strategy to minimize costs without regard to reliability. The ISO’s practice of procuring operating reserves to meet the lower 6.2% requirements of the Western Electric Coordinating Council (WECC) gives the ISO the ability at times to reduce its operating reserve levels to below the Commission’s 7% trigger level and recalculate prices.

Additionally, the waiver provisions of the must-offer obligation, give the ISO “additional ability to manipulate the trigger for recalculation of price mitigation,” FERC said. The Commission’s new hard cap provides transparency and “certainty of a number known readily by market participants, and ensures that it is not subject to potential manipulation by either the ISO or generators.”

Meanwhile, earlier in the week, the head of California’s Energy Commission, Bill Keese, had said that with what he estimated as 3,000 MW of new generation this year and 3,000 MW of conservation, “looks like the state will do just fine” in the ongoing heat wave, unless a major power plant or transmission line suddenly goes down.

And a former state legislator and adviser to the governor, Richard Katz, contrasted the situation now, compared to the crisis in the winter of 2001 when an average of 12,000 to 15,000 MW often were off line for maintenance. This year, the state is averaging 3,000 to 4,000 MW off on a daily basis, he said. “This year we are in much better shape because everything we put in place is now working.

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