While California’s electricity market has seen “dramatic improvements” since the dark days of the state’s power crisis in 2000-2001, thanks to the stabilization of prices and adequate supplies, the market remains “fundamentally frail,” an official with the California Independent System Operator (Cal-ISO) told federal regulators last Wednesday.

Anjali Sheffrin, director of market analysis at Cal-ISO, made her comments before the Federal Energy Regulatory Commission where commissioners heard from consultants and officials from several ISOs on the state of their markets.

Sheffrin said that factors contributing to stable power markets in California include normal hydro supply, stable gas prices, healthy imports, low demand and Westwide mitigation. At the same time, Sheffrin said the key structural issues that will help to define whether California’s electricity market will be competitive in the future are “not looking all that well, and so we need to monitor it carefully.”

Among the many areas of concern for the Cal-ISO are transmission upgrades and expansion, although Sheffrin acknowledged that the state has been making “tremendous progress” in this area. She thanked FERC for its recent action helping to move plans to upgrade the notorious Path 15 bottleneck, which she noted has “resulted in quite a bit of the high prices and exercise of market power in the past.”

Sheffrin also said that Cal-ISO was concerned that investor owned utilities in the state are not yet creditworthy. Specifically the grid operator is worried about the fact that those utilities are not yet able to enter into long term contracts.

She also said that although reserve margins are headed in the right direction, they are not yet at the level “that we’d like to see it at.” In addition, another market structure issue the Cal-ISO is monitoring relates to demand response. “Even though we have a few thousand megawatts of interruptible loads in California, they’re for emergency purposes and we’d like to see more programs just responsive to the real-time price.”

Addressing the parallel state and federal probes into trading strategies used by Enron in California, Sheffrin underscored the point that Cal-ISO’s bigger concern continues to be with exercise of market power. “A lot of those gaming strategies had to do with the congestion management and ancillary services market. They are a relatively small portion of the market, and the bigger concern is the mitigation of market power.”

FERC Chairman Pat Wood asked Sheffrin to comment on what kind of “broad contours” would be needed for a multi-region, market monitoring unit to be timely and effective. “I think the Enron memo showed us that these markets are very much interconnected and the transactions that were conducted occur not just within the one market, but across all these markets,” the Cal-ISO official responded.

“So, the West is looking at establishing a West-wide monitoring effort really prior to even the RTOs starting up because I think people see that they’re being impacted by those strategies right now, today,” Sheffrin said. “So we’re trying to form a coalition and share some data, but right now it’s very much in the infant stage of even what would a structure look like for regional market monitoring.”

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