By Anjali Sheffrin The California Independent System Operator would like to correct some misconceptions that may have arisen from a February 1 Circuit article regarding the delay in the implementation of the grid operator’s market redesign and technology upgrade (MRTU). The story accurately portrayed that CAISO is disappointed that market redesign implementation has been delayed and that we remain committed to making sure that our market participants and our internal processes and personnel are ready for this change before we go live. However, the story also indicated that the main reason for enacting market redesign is to close the “loopholes” that allowed the “Enron games” and the energy crisis of 2000-01 to occur. In reality, the redesign is more about improving system reliability and providing more accurate information than it is about closing loopholes from the energy crisis or Enron’s now-infamous trading strategies. To a large degree, the “loopholes” have been closed for several years. Based on various orders issued by the Federal Energy Regulatory Commission since the crisis, we now have market rules and additional authority that either prevent or remove the incentive to engage in the “Enron games.” We also have stronger market power mitigation rules. More importantly, the market power abuse that occurred during the energy crisis was largely enabled by a lack of forward energy contracting that exposed a significant amount of Californian’s energy demand to spot market prices. This is no longer the case. In 2001, California began engaging in forward energy contracts that helped end the crisis. Now, through resource adequacy requirements and long-term procurement rules adopted by the California Public Utilities Commission, utilities must enter into forward contracts and use their own generation if they have it to serve their customers energy needs. As a result, the grid operator’s spot market now represents less than 5 percent of total demand. On most days, it represents far less than 5 percent, thereby limiting any potential impact of spot prices on customers. Thus, the market structure has already matured a great deal from where it was during and immediately after the crisis. Market redesign represents more significant and far-reaching improvements that go well beyond simply closing old loopholes. The three main components of MRTU will enhance CAISO’s spot market structure in several important ways that will have both reliability and economic efficiency benefits: First, the new structure provides a day-ahead energy market--which has not existed in California since early 2001. At the time, the now-bankrupt California Power Exchange provided a trading system. In 2008, most of any given day’s energy need is now transacted via long-term contracts--there is a need for a small day-ahead market to address daily changes in supply and demand conditions. Second, the market redesign provides a full-network model that allows the grid operator to “see” all potential congestion from the day-ahead schedules submitted to us--and address that congestion in the least-cost way. Another way to put this is, the new market will identify any infeasible schedules and address them a day ahead of time--rather than in real time as we must do now. There are both cost and reliability benefits to this. Third, congestion management will be based on “locational marginal pricing”--a system that determines spot energy prices based on where generators are located in relation to the customer demand, as well as in relation to any potential transmission congestion. These three main components of the redesign work together to improve system reliability and make the market more transparent--providing more accurate information about current and expected grid conditions to CAISO and market participants. This vast improvement in the type, timing and transparency of the information flow to and from CAISO markets provides several important benefits: -Strong economic incentives for generators to operate in accord with the needs of the grid. -Clear definition of where new investment in generation and transmission infrastructure is needed most. -More time and better data enabling grid operators to make better informed decisions and conduct more efficient grid and market operations. -Support for demand response--a growing and important aspect of the energy landscape--by providing more specific price signals that can be used to define demand response products and trigger voluntary demand response programs. Demand response--defined as changing energy use patterns in response to price or grid conditions--relies on transparent information that the new market will provide. -Reductions in greenhouse gas emissions by allowing the CAISO to dispatch the system using the most efficient generation first. -Help in identifying and stopping market manipulation before it impacts consumers. The technology upgrade portion of the redesign deserves discussion as well. CAISO is to a great degree operating on the same technology platform that was first installed in 1997. It has served us well, but it no longer offers the flexibility, functionality and scalability that our maturing market needs and that today’s technology can provide. The grid operator would have needed to replace these systems by now even if the energy crisis had never happened. The CAISO market structure and the rules that govern it have matured in the eight years since the energy crisis, to the point where those issues have largely been addressed. The market redesign creates a platform for continuing that evolution, providing much needed technology and market enhancements that will lead to reliability and efficiency benefits for customers and market participants. --Anjali Sheffrin, is CAISO’s chief economist and director of market & product development
