FERC Filings
COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION ON THE PROPOSED MARKET STABILIZATION PLAN OF THE CALIFORNIA INDEPENDENT SYSTEM OPERATOR-San Diego Gas & Electric Company-Complainant v. Sellers of Energy and Ancillary Services Into Markets Operated by the
2. THE COMMISSION SHOULD REJECT THE CAISO MARKET STABILIZATION PLAN
EPSA shares the CAISO’s concern that market reform is a critical part of any workable solution to California’s energy woes. As we have pointed out in filing after filing, the reliability of the electricity system in the west, and indeed throughout the country, depends upon robust, well-functioning competitive markets. It is vitally important for the Commission to ensure that all market participants are treated fairly and comparably and to remove obstacles to the successful completion of transactions in wholesale power markets. However, no one should mistake the proposals outlined in the CAISO MSP with the fundamental changes needed to achieve those policy objectives. While it may be politically expedient to blame high prices on “market power,” market stabilization and repair must focus on the critical issues of poorly designed markets, inadequate generation resources and deficient infrastructure. A continued witch hunt for evidence of market power, together with continuing credit problems, now pose the greatest obstacle to the promise and potential of robust competitive markets and the enhanced reliability they provide.
The CAISO has admitted that the MSP will do nothing to increase power supply or reduce demand, the two most critical requirements for avoiding widespread service disruptions this summer. In fact, the plan is likely to have a negative effect on new investment, since it perpetuates the current lack of market and regulatory stability, and increases risk for investment in California. Rather than presenting a well thought out, comprehensive market-stabilization plan, developed with meaningful stakeholder input, the CAISO has proposed a half-baked radical restructuring of the California market, recycling calls for counter productive price controls and suggesting the implementation of bits and pieces of eastern ISO markets.
Among the several radical changes to market design that have been proposed are the elimination of the requirement for balanced schedules, the elimination of capacity bids for ancillary services, the introduction of centralized unit commitment and multi-part bidding for generators. While the pros and cons of these changes are debatable, few would argue that they will not remedy the fundamental problem of inelastic demand arising from frozen retail rates and insufficient supply in the short-term. At the same time, these changes present a considerable implementation challenge to be in place by this summer.
Experiences elsewhere (e.g., New England) reveal that FERC filings by ISOs can often underestimate the time required to fully implement a proposal.
Much of the CAISO filing goes not to any effort to fundamentally restructure the California market (much of which was done by the Commission’s December 15 Order) nor to address the remaining problems that face California. Rather, the MSP continues the CAISO’s oft-repeated and unsubstantiated
allegations of parties exercising “market power” in California. Again, as EPSA
has often pointed out, high prices in and of themselves are not proof of anti-
competitive behavior or market power abuse. However, once again, the CAISO is arguing that high prices are attributable to market power, without documenting any illegal behavior or accounting for the full cost of capacity value, opportunity costs, scarcity value, transmission constraints, emission offsets and risks, including credit risk, in California’s supply constrained market.
If the State of California is serious about stabilizing and repairing its market, it would do well to consider the recommendations of Cambridge Energy Research Associates (CERA), an independent energy/economic think tank, which suggests in a recent special report that California needs to establish a capacity reserve requirement and a capacity payment mechanism, move to portfolio buying, align wholesale and retail market structures, expedite the building of capacity and resolve the current credit crisis. While some of this may extend beyond the jurisdiction of the CAISO, the efforts of all California parties would be better spent directed at implementing those recommendations rather than developing more band-aid fixes that perpetuate a moving target approach to California’s market structure.
Turning to the substantive aspects of the CAISO’s proposal, as EPSA has argued in numerous other filings, bid caps do great harm to markets. The CAISO proposes that generators provide “standing cost-based bids,” a proposal that is consistent with the governor’s oft-stated demands. However, these bids bear no relationship to how prices clear in any market, particularly one with the type of shortages experienced in the west. Therefore, the market will send no price signals, either to encourage new investment (which is currently faced with a time-consuming and inefficient siting process in California) or for load to reduce demand. Further, price caps undermine the development of the risk-mitigation tools needed for successful market development.
EPSA is also extremely troubled by the CAISO’s plan to curtail export schedules when faced with shortfalls. While positing that it is doing things like PJM, New York ISO or NEPOOL, the CAISO is, in fact, picking and choosing features of those markets in a poorly thought-out and disconnected way. In PJM, for example, generators have a choice of serving as ICAP resources or not. From the MSP filing, it appears that all participating generators will be subject to having their exports curtailed, whether they choose to participate as capacity resources or not. In fact, the MSP does not propose an ICAP market and it is unclear how prices for curtailed exports will be determined or how the process will be administratively managed. The CAISO stated that it intends to pay the market clearing price for curtailed exports and not the actual loss of the curtailed export. This will increase the risk of loss and could further increase prices. While the MSP introduces the concept of capacity payments in California, it does not take a market-based approach to capacity valuation.
Further, California is not an electrical island. It is integrated into and dependant upon the Western System Coordinating Council (WSCC). Despite the CAISO’s “California First!” approach, unilateral decisions to curtail export schedules could have a significant impact on reliability in other states or even of the western grid. Given the CAISO’s desire to curtail exports, one would expect that it would be equally desirous of maximizing imports from external resources. It is unclear how this can occur under the MSP if internal resources are bid-capped and external resources are forced to be price-takers. This proposal reiterates the need for FERC to speed up the implementation of Order No. 2000 and require an appropriate regional transmission organization. Ironically, however, the California Governor and the CAISO appear to be creating the very seams issues, through the curtailment of firm exports, that the Commission is seeking to eliminate.
There are other aspects of the CAISO MSP that appear equally poorly planned. For example, the CAISO proposes that the costs associated with residual load not scheduled in the day-ahead or hour-ahead markets be allocated to imbalances. While this might appear reasonable, it ignores the fact that market participants’ risk of incurring imbalance penalties will depend on the accuracy of the ISO’s load forecast. If the ISO’s forecasts turn out to be conservative, a likely outcome since its primary mission is reliability, the proposed cost allocation will unfairly penalize market participants with even small imbalances for the CAISO’s own forecasting errors.
The CAISO’s proposal to create Day-Ahead and Hour-Ahead Energy Markets is contrary to the goals of the December 15th Order. In that Order, the Commission clearly stated a preference for buyers and sellers to enter into longer-term forward contracts. The creation of Day-Ahead and Hour-Ahead Energy Markets does not further that goal. Instead of encouraging load serving entities to enter into forward contracts, they will now be allowed to submit unbalanced schedules into the CAISO’s new spot markets to procure energy. This may have the unintended consequence of increasing, rather than decreasing, reliance on short-term markets. This approach will also shift the authority to oversee those markets away from the Commission to the State of California through the Governor-appointed CAISO Board.