Consider State?s Uniqueness in Market Redesign, Says CPUC

The California Public Utilities Commission sided with the California Independent System Operator by urging federal regulators to approve the grid operator?s conceptual market redesign proposal by July 31 so changes in the state?s ?unique? energy market can be implemented in a timely way. The CPUC made its call for speedy federal action in comments on CAISO?s May 13 filing with the Federal Energy Regulatory Commission. The grid operator is attempting to further amend its market redesign, which was initially slated for implementation in 2002 and is now set for February 2007. Although most of the comments to the federal commission on CAISO?s proposal addressed the lack of incentives for new generation, some centered on the grid operator?s implementation date. ?The question is what is being sacrificed for the sake of the implementation date, which itself is arbitrary,? said the Sacramento Municipal Utility District. ?From SMUD?s perspective, it is impossible to reconcile the volume of unresolved issues with the CAISO timelines.? However, the CPUC urged the federal commission to act by July 31 so that CAISO can outline critical path software design decisions for its software vendor. Unless the grid operator does that quickly, its market redesign implementation schedule will slip again, the state commission noted. California independent power producers told federal regulators that CAISO?s market-mitigation price cap proposal lacks strong enough incentives to support construction of new generation plants ?despite widespread concerns about adequacy of reserves.? In a separate development, FERC this week issued a report lending support to generators? claims. Coral Power told FERC that the market-mitigation measures?which include an increase in the bid price cap from $250/MWh to $1,000/MWh in four years??ignore the critical role played by scarcity pricing. In its place the ISO proposes a rigid command and control approach. This violates [FERC] policy and the views of virtually every commenter that has addressed the critical role that scarcity plays in establishing efficient markets.? However, the CPUC contends that the ?California electric market is unique in terms of its nearly devastating crisis of 2000 and 2001.? Because of this, the CPUC said, the new market design should ?not be a mirror of what has been implemented? by other independent system operators. Calpine noted that CAISO?s proposed market-power-mitigation measures rest on the unproven assertion that the CPUC?s still-evolving resource-adequacy framework will ensure adequate revenue for generators. However, the company said, ?this assertion is not supported by any analysis and is directly contradicted by California?s immediate experience.? Duke Energy urged FERC to defer action on whether changes to the local market-power-mitigation measures are appropriate until the amended market design and resource-adequacy mechanism are more fully developed. Most independent power producers, including Dynegy and Williams, voiced support for the proposal of the Independent Energy Producers and the Western Power Trading Forum to immediately lift the price cap to $1,000 instead of phasing in the increase ( Circuit , June 10, 2005). An immediate increase would boost resource adequacy, they said. CAISO?s proposed changes to the process for clearing demand bids at the load-aggregation-point level are designed to address concerns that the first proposal could have resulted in revenue inadequacy and other problems. They are consistent with the approach used in the New York ISO. The changes in the hour-ahead scheduling process are aimed at cost reduction and simplifications, the grid operator noted. FERC: California Has One-Third of Constrained Areas Low spot-market prices for power exacerbate the lack of investment in new supplies, according to the Federal Energy Regulatory Commission?s 2004 State of the Market Report . The report, released at the regulators? June 15 meeting by FERC?s Office of Market Oversight and Investigations, noted that most of the areas cited for inadequate capacity?Boston, southwest Connecticut, New York City, New Orleans, much of Southern California, and the San Francisco Bay Area??saw prices too low to signal new investment.? It added that 2004 prices in Southern California would have provided only two-thirds of the revenue needed to justify investment. In an 18-page look at the California Independent System Operator market, the report estimated that ?new gas-fired combustion turbines in California require $64.29/kW-year, while gas-fired combined cycle plants require about $87.85/ kW-year, to meet debt and equity requirements.? California is atypical in its supply situation, according to the report. In the investment portion, it notes that California?s problem is not a concern in most of the country: ?the U.S. electric industry had significant overcapacity in generation? last year.

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Consider State?s Uniqueness in Market Redesign, Says CPUC

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