The top federal energy regulator believes that fostering long-term contracts, not creating a capacity market, is what California needs to bring on new power supplies. On the heels of that pronouncement, the California Public Utilities Commission released a proposed decision that promotes a capacity market. "Contracts are the issue," said Joe Kelliher, Federal Energy Regulatory Commission chair. "Capacity markets are a poor substitute for contracts," he said. The state grid operator also questioned the wisdom of creating a California version of a capacity market. "We will not jump on a model until it is proven to be right," said Yakout Mansour, California Independent System Operator chief executive officer. His organization would likely be in charge of managing any future capacity market. Proponents of developing a market to trade power plant capacity-not actual output-see such trades as potentially increasing power reliability. The market, assumed to be bid a year ahead, is envisioned as providing revenue for nonutility generators' marginal plants and shoring up reliability margins. A proposed September 27 California Public Utilities Commission decision views a regulated capacity market as a means to beef up power portfolios to meet the upcoming 15-17 percent reserve requirements. Currently, nonutility power plant owners can bid their uncontracted energy into the real-time market. However, the market's $250\/MWh price caps limit generators' recovery of investments?particularly for peaking resources, according to generators. "We will look forward to mechanisms that promote the recovery of investment through payment of capacity," states the CPUC resource-adequacy proposal. All energy providers' supply reserves "should consist of a physical capacity-based program whereby a significant portion of the capacity needed by the CAISO" is reserved at least a year ahead of time, adds the draft decision. Far from settled are what constitutes a capacity product and how to police such a market. A skeptic noted that a capacity market is not clearly defined. "It is not even a point on a map," he said. "Generators need to know what they are selling and utilities to know what they are buying," acknowledged Rob Anderson, San Diego Gas & Electric director of resource planning. SDG&E is a proponent of a CAISO-run capacity market. What measures will be in place to ensure that the capacity is real and not just on paper is another big issue. "There need to be appropriate controls on the procuring entity," said Pedro Pizarro, Southern California Edison vice-president. Promoters contend that a properly developed capacity market would eliminate the need for expensive reliability-must-run contracts and reduce the possibility of utilities being stuck with unnecessary supplies?and their customers on the hook for stranded assets-if ratepayers leave the utility fold. A provision under consideration would have the capacity migrate, or follow the load. It also could include exit fees for those leaving a utility, but they'd be less onerous than existing fees because of the short-term nature of a capacity market. Many have concerns that in pursuing a capacity market, state regulators would lose sight of essential market fixes. Developing rules could take many months, and a market would not be in place for at least two years. "It's a red herring," said Dorothy Rothrock, vice-president of the California Manufacturers & Technology Association. She and others see little value in expending staff and resources on a capacity market that fails to spur new generation. Most agree, however, that this market structure is aimed at providing revenue to existing plants without contracts. Skeptics warn that the short-term nature of a capacity market will add complexity-not supplies-to the market. Supply and demand, they assert, should be met by bilateral long-term contracts for energy, with the spot market filling the gaps. Then, of course, there is the elephant in the room-its costs; specifically, who reaps the benefits and who picks up the tab. The CPUC working paper released last month outlined various issues involved in creating a "top-down bottom-up" capacity market. "Regulatory guidance is needed for the market to ?send the appropriate investment signals," it states. In its September 23 response to the commission?s paper, CAISO said that its "reluctance to agree, at this time, on the final form of a capacity-market based resource adequacy program should in no way be interpreted as equivocating on the resource adequacy structure already articulated by the Commission."