California Public Utilities Commission president Mike Peevey directed CPUC staff this week to evaluate the ?best? approach to developing a capacity market?although a market will not be in place anytime soon. Peevey?s February 28 ruling, which aims to give shape to a capacity market, also requires staff to investigate a method, known as the ?New York demand curve,? that could spur power plant development. This method names the price of future capacity and is expected to assure power plant developers of a certain return on their investment. A capacity market, which stakeholders are trying to define and develop in ongoing CPUC workshops, could implement the commission?s hybrid resource-adequacy decision approved last year. However, because of the extreme complexities of the state?s system and the lack of an adequate precedent, a capacity market appears years away, according to CPUC resource-adequacy workshop participants. When the CPUC voted to require 15 percent supply cushions for utilities late last year, regulators set a theoretical direction for a hybrid competitive\/traditional market. The commission envisioned a bidding mechanism in which unregulated generators, as well as utilities, could meet utility resource-adequacy requirements. Putting together a capacity market to implement that framework has become a utility and stakeholder priority. Yet no matter how much precedence it gets, a market appears several years away. ?It looks like the same time frame as the California Independent System Operator?s market redesign,? said Katie Kaplan, Independent Energy Producers policy manager. The grid operator?s redesign is expected to be launched in 2007 (<i>Circuit<\/i>, Feb. 25, 2005). The market envisioned by stakeholders goes far beyond the capacity tagging market discussed last year ((<i>Circuit<\/i>, May 21, 2004). A capacity tagging market would?and still could?provide for trades in 1 MW segments one year in advance. Tags are a ?financial product? that are a ?half step in the right direction,? according to Ben Trammell, Dynegy Power Marketing managing director. He is seeking a more physical product?the actual energy or energy potential?from any new market. The market now on the table would not only confer the right to capacity, but have parts (combined or separate) that include properties of energy and deliverability, Trammell said. In other words, the capacity portion of a bid would reserve potential power that could be sent to a buyer at a future time. The energy portion?the actual electricity?could include a direct fuel component used to create the output. Deliverability refers to ensuring that the power actually gets across transmission lines?which could be congested or otherwise unavailable?from the generating plant to the end user. Adding another level of complication is that financial, energy, capacity, and deliverability products would each be associated with contracts of differing durations. For instance, Dynegy?s existing power plants could be ramped up to deliver power in a few months? time. However, to get new investment in building power plants, a capacity market needs to have a longer-term certainty, say many stakeholders. Utilities, which are taking these workshops seriously by sending senior executives, have maintained that three- to five-year contracts are preferable. Unregulated generators say they need much longer terms in order to secure financing. That?s where the New York demand curve could come in, according to Peevey and some stakeholders. ?The approach seems to provide an example of how to manage market power concerns while providing for locational procurement and a foundation for new investment,? Peevey said in this week?s ruling. Trammell said he wouldn?t be disappointed if California?s future market looked much like New York?s. However, he and others note that California?s geography, transmission congestion, and resource requirements make the New York precedent a troublesome fit. ?We have more physical limitations,? noted Kaplan. ?The key piece that?s different from the East Coast is local capacity requirements.? For instance, San Francisco County presents a much different capacity requirement on a local level than Kern County. While the disparate parts of a capacity market are vetted, one thing does appear clear?CAISO is the choice to run it. ?People have realized you have to have a capacity market that?s run by CAISO,? according to Kaplan. CAISO would clear residual trades and keep track of the market. She added that such a market wouldn?t preclude load-serving entities such as utilities from going out and supplying their own capacity to meet CPUC requirements. According to CAISO spokesperson Gregg Fishman, the grid operator has not accepted that position. In CAISO?s MD02 market redesign?which never took hold?the organization proposed a capacity market. Among a plethora of unanswered questions is whether CAISO would be the purchaser of last resort if there were no takers for an auction market.