The practicality of meeting the California Independent System Operator's local operating requirements in various regions across the state to increase reliability is running up against the associated costs, raising the issue of what constitutes a reasonable supply cushion. This dichotomy is being played out in two parallel proceedings. One is CAISO's market redesign process; the other is the California Public Utilities Commission?s resource-adequacy proceeding. Pacific Gas & Electric, with comments echoed by other market participants, insisted at an August 2 CAISO workshop that the grid operator's requirement for a supply reserve in geographically prescribed areas should be cut by more than half because of its high cost and impracticality. The grid operator is calling for a 15-17 percent reserve in local areas, with a significant 25,000 MW considered necessary to fulfill that requirement. Developing operational requirements for different regions-known as "local area reliability"-is far different from and more complex than developing one-size statewide requirements. After the CPUC decided to require reliability margins of between 15 percent and 17 percent on a statewide basis last year, stakeholders began hammering out details in workshops, which included chopping up the grid into load pockets where reliability requirements vary widely. At the same time, the grid operator is creating new requirements for utilities to maintain extra power supplies as locational capacity in lieu of continued dependence on federal must-offer requirements and local reliability-must-run contracts. The former is deemed unfair to those in the free market because they have no choice about power operations being called upon, whereas the latter addresses local reliability needs but entails an expensive cost to be shared. "The local resource adequacy requirement started out as part of a planning exercise to determine which resource can be counted toward meeting demand. The CAISO should not turn this into a requirement to procure resources to meet operating requirements and to protect against contingencies that are beyond the planning standards," PG&E stated in a July 26 paper to CAISO. PG&E is concerned that if the grid operator's rules are adopted, it will have to contract for every available megawatt in some local areas at an unreasonable cost. Meanwhile, at the CPUC, a coalition of stakeholders, including Southern California Edison, PG&E, and The Utility Reform Network, are trying to stave off the grid operator's requirement for another year. "Unfortunately, the mechanics of implementing such a local area reliability obligation on each load serving entity were not addressed in a meaningful manner during the workshop process," the groups wrote in a July 25 filing. "The commission should continue to rely on the CAISO's reliability-must-run process and the existing must-offer obligation." The organizations question how there can be a competitive market with 25,000 MW designated as necessary-which they call an "overly conservative" and "onerous' requirement on CAISO's part. Siding with utilities, the California Large Energy Consumers Association and the California Manufacturers & Technology Association want utilities to contract for adequate capacity to serve peak demand-not to "pursue an 'all capacity at any cost' regulatory program." One method would be to allow significant distributed generation within those areas, explained consultant Barbara Barkovich. "The state is intent on building lots of transmission to areas where there are wind resources" as well as transmission between the north and south. "But there seems to be less focus on reducing the number of local reliability areas and thus local market power." CAISO "strenuously disagrees" with the proposal that the move toward locational capacity should be deferred until 2007. "If the commission abandons the local capacity requirement as part of the June 2006 implementation elements, the commission risks fatally undermining" CAISO's local market power mitigation procedures in its market redesign and the massive expansion of CAISO?s procurement role, the grid operator stated in comments to the CPUC July 25. CAISO fears that the Federal Energy Regulatory Commission will implement a method of scarcity pricing instead?setting high prices in areas of low supply to attract investors to those areas. The groups representing large consumers dismissed the grid operator's fears. "Local market power is a fact of life" for now, they said. They support creation of a capacity market but object to the grid operator's 2006 proposal. -J.A. Savage
