FERC Extends Olive Branch to CAISO

A week after giving initial approval to the California Independent System Operator?s (CAISO) market redesign outline, the Federal Energy Regulatory Commission (FERC) hoped to avoid getting bogged down in litigation by seeking stakeholder input in a workshop November 6. But the California Public Utilities Commission threatened to pull its support. CPUC president Mike Peevey told FERC board members that his agency may withdraw its tentative support for the approved conceptual market redesign (MD02) because provisions on which the CPUC worked extensively were jettisoned by FERC. The issue of greatest concern, Peevey said, was FERC?s rejection of the locational marginal pricing limit of $250/MWh to protect consumers and promote efficiency. Earlier this week, Peevey sent a letter to FERC chair Pat Wood laying out all his objections. Wood replied that FERC?s October 28 order on CAISO?s design was ?a first response, not a last.? FERC signed off on the grid operator?s plan to create location-specific marginal pricing and its efforts to push most of the scheduling into the forward market and out of the real-time market. CPUC member Loretta Lynch pointed out that no wholesale power buyers or consumer groups were represented at the San Francisco gathering. Holding a workshop on California?s market redesign skewed toward wholesale sellers could doom the state to a ?repeat of the horrendous history of the California energy debacle,? Lynch warned. ?Transmission is what drives energy policy,? said Jim Caldwell, head of the American Wind Energy Association. Minimizing traffic jams on the grid is critical to creating a reliable and efficient market. Lorenzo Kristof, CAISO market designer, admitted the current plan for market overhaul ?can?t deal with all the causes of the energy crisis.? There was much debate over CAISO?s proposed allocation of congestion revenue rights (CRRs), including which entities should be able to access them and how, and whether CAISO should be allocating the underlying financial rights or property rights. A key problem that the grid operator is attempting to tackle is phantom congestion, which is linked to unused transmission capacity. The issue for Wall Street was certainty. Investors want CRRs auctioned instead of allocated, said Thomas Hoatson, vice president of Goldman Sachs. Southern California Edison supports the grid operator?s CRR allocation, but Ronald Nunnally, Edison director of federal regulations, said the problem was that it ?maximized the quantity, not the value? of the rights. Pushing to loosen investor-owned utilities? grip was Mirant?s Philippe Auclair. He insisted that CRRs not be allocated automatically to load-serving entities as proposed but instead belong to retail load and divvied up among core and noncore customers. The most contentious issue was the short life of the proposed CRRs. ?It is a nonstarter,? Caldwell said. Month-long allocations would sabotage wind generators? 20-year deal, and the CRR process must create a commodity that is easily traded. To achieve that, CAISO must allocate the financial rights of the CRR on a long-term basis, he said. Kristof explained that the month-long allocations were no more than a ?true-up? and wouldn?t undo the allocations. Caldwell also said the proposed CRR allocations would ensure that the Western Area Power Administration would create its own control area because the redesign would act as a disincentive for the federal agency to join CAISO. The other big concern was the market redesign?s impact on existing contracts. Pete Garris with the Department of Water Resources said his agency?s analysis showed that the locational marginal pricing settlement would cost billions of dollars over seven years. And much of the hit would be taken in Southern California. ?I don?t believe the ISO redesign [MD02] honors existing contracts,? said Tony Braun, an attorney representing the California Municipal Utilities Association. He added that the redesign also would not be implemented in 2005 and in the meantime a number of existing contracts will have expired, which should be factored in.

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FERC Extends Olive Branch to CAISO

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