FERC Filings
EMERGENCY MOTION OF THE ELECTRIC POWER SUPPLY ASSOCIATION FOR AN IMMEDIATE CEASE AND DESIST ORDER
CAISO BOARD’S IMPOSITION OF LOAD DIFFERENTIATED PRICE CAPS SUBVERTS THE COMMISSION’S PROCESS AND THREATENS PUNITIVE AND CHAOTIC CONSEQUENCES
The Commission’s October 19th Order set forth an orderly process for addressing conditions in the California electric power market, beginning with a special meeting of the Commission on November 1, 2000, at which the Commission is expected to release the Staff investigative report and to issue proposed remedies. Just five days before the Commission is expected to act, on October 26, 2000, the CAISO Board approved unilateral imposition of a load differentiated price cap. Not only did the CAISO Board act precipitously prior to the Commission’s announced November 1 meeting, the Board also established an effective date of November 3, 2000, which is prior to the Commission’s announced public conference scheduled on November 9, 2000, and only 12 days prior to the date on which the CAISO’s tariff authority for imposing price caps expires. The Commission has not yet acted on a pending request by the CAISO to amend its Tariff, proposing to extend indefinitely its authority to modify its price cap without further Commission approval.
The CAISO Board acted in obvious disregard for the Commission’s orderly processes and out of a misguided belief that its unilateral actions require no Commission approval. What is particularly troubling about the CAISO Board’s actions is that they were taken in direct repudiation of its own management’s proposal for settlement discussions. Whereas the CAISO management made a constructive suggestion that the parties should seek a consensual resolution of interim measures, the CAISO Board’s actions scorn consensus. Now, even if the parties were to attempt consensual settlement discussions under the Commission’s auspices, the CAISO Board’s actions have cast a dark cloud by radically altering the economic positions of the parties on the eve of those negotiations.
EPSA strongly believes that the Commission’s proceedings pursuant to the October 19th Order should be about fixing structural problems in the California electric power markets and invigorating competitive electricity markets. The proceedings should not be about “building a better price cap.” If employed at all, price caps should be measures of last resort. The CAISO Board’s unilateral action to impose a load differentiated price cap undermines the Commission’s efforts to fashion structural remedies and deprives interested parties and the Commission of the benefits of public comment and Commission review, which are self-evident when applied to the facially flawed price cap.
The CAISO Board’s load differentiated price cap threatens punitive consequences and chaos. The load differentiated price cap formula purports to set the price cap at a level reflective of hypothetical marginal, natural gas-fired units’ operating costs (over a range of load levels). Price caps could range from $50 per MWh (assuming current Henry Hub prices of approximately $4.60 per MMBtu) to a maximum of $250 per MWh (a fixed ceiling price, regardless of load levels or Henry Hub prices).
It is self-evident to any California market observer that a price cap of $50 per MWh, which is what the formula produces for off-peak load periods using current gas prices, would be confiscatory as applied to some California thermal units that have normally competed to provide off-peak power. Moreover, the price cap discriminates unduly between nuclear and hydro units, which have very low variable operating costs, and thermal units.
The CAISO Board obtained no assurances that reliability will be maintained by establishment of punitive price caps that seek to force generators to supply electricity at prices below cost, and that will undoubtedly discourage new investments in generating capacity. While the CAISO Board adheres to the fiction that its price cap only applies to its purchases in the real-time and ancillary services markets, it is well-recognized that price caps in the real-time California market impose an arbitrage limit on prices in the California PX day-ahead and hour-ahead energy markets.
There is a real risk that the CAISO Board’s actions could have the perverse effect of leading to greater rather than less reliance on out-of-market calls, exacerbating the underscheduling problems that threaten reliability. Notably, and possibly because of this glaring defect, the CAISO Board’s proposal has not been formally recommended by either the CAISO Department of Market Analysis or the Market Surveillance Committee, despite earlier directions to management to develop proposals for the October 26 Board meeting.
The CAISO Board’s price cap proposal will also require development of new and complex computer software, on top of previously mandated software changes that have only recently been forced upon and made by market participants. The load differentiated price cap is, thus, an ill-considered and fatally flawed proposal. It is out of step with other, more pressing measures that the Commission should take to fix structural defects in the California electric power markets and to allow the smooth transition to truly competitive electricity markets. The fairness and effectiveness of the remedies that the Commission proposes will be severely compromised if the CAISO Board is allowed to impose unilateral, interim measures even before public comments are taken on the Commission’s Staff investigative report and proposed remedies.
<sup>(4)The CAISO Board also subverted its own by-laws by having taken action on a load differentiated price cap proposal that had not been clearly set forth in the public notice of the agenda for the Board meeting, as is expressly required under Section 9.2 of the CAISO by-laws. </sup>