Informational Hearing
California Independent System Operator's
Market Design Proposal
State Capitol, Room 3191
February 5, 2002
10:00 a.m.
I. Opening Comments
- Senator Debra Bowen, Chairwoman
Senate Energy, Utilities & Communications Committee
II. Presentation of Market Design Proposal
III. Comments
- Kellan Fluckiger
California Power Authority
- Kent Palmerton
Williams Energy Marketing and Trading
- Tony Braun
California Municipal Utilities Association
- Sean Gallagher and Gurbux Kahlon
California Public Utilities Commission
California Independent System Operator’s Market Design Proposal
Background
On December 21, 2001, the California Independent System Operator (ISO) published a notice of its intent to seek a series of significant changes to the electricity market structure in California. In the notice, ISO staff proposed an ambitious schedule leading to presentation of a comprehensive market design proposal to the ISO governing board for its approval on February 7, 2002. Following board approval, proposed changes would be filed at the Federal Energy Regulatory Commission (FERC) for its approval.
The ISO proposal is in part a response to an order issued by FERC on December 19 which requires the ISO to file by May 1, 2002 long-delayed plans to revise its method for managing transmission grid congestion and to establish a day-ahead market for energy. The ISO also noted the urgency of improving the performance of its market design prior to the rescission by FERC of western region mitigation measures, scheduled for September 30, 2002.
On January 9, the ISO published a draft market design proposal, which included reforming congestion management and establishing a day-ahead market, as well as several other market design changes not specifically solicited by FERC. The stated mission of this market design proposal is to “ensure the ISO’s effective and sustainable performance of its core functions, position the ISO to better serve the needs of all its customers, and support efficient performance of the electricity markets for the benefit of all California consumers.”
During the week of January 14, the ISO held a series of meetings to explain, and solicit comments on, its market design proposal from designated “market participants” (load-serving entities, generators/marketers, municipal utilities and other control areas). On January 28, the ISO published a revised draft of its market design proposal, as well as a revised schedule. Instead of seeking final board approval, ISO staff will present a status report and solicit guidance from the board on February 7. Under the new schedule, the board will be asked to approve specific design changes at its March 14 and April 25 meetings.
Description of key design elements proposed by the ISO:
- Available Capacity (ACAP) Obligation. The ISO proposes to require load-serving entities (utilities and direct access providers) to prove capacity available to the ISO to serve 115% of their peak customer load (through ownership or contract). The 15% margin above actual load reflects (1) the 7% operating reserve required for reliability and (2) an additional 8% intended to sustain surplus capacity to support a competitive market. Currently, no clear obligation exists – electrical restructuring turned the responsibility for delivering reliable electric service to the market, relieving utilities from the obligation to have a reliable plan to serve their customers. If a utility has not procured sufficient power to meet demand, responsibility for purchasing needed power defaults to the ISO as the “supplier of last resort.” This has created frenzied operating conditions, compromised reliability, and exposed the ISO to the exercise of market power on the part of sellers. Because of the financial condition of utilities and the lack of available capacity, the ACAP would need to be phased-in gradually. Originally, the ISO proposed to begin implementing the ACAP on October 1, but the most recent proposal is indefinite as to when or if the ACAP will be implemented.
- Forward Congestion Management. The ISO must match generation and load schedules with the physical capabilities of the grid to ensure that energy scheduled for delivery can in fact be delivered. Currently, the ISO manages congestion using a simplified model with just three large zones (NP15, SP15 and ZP26), ignoring more localized congestion. This has created opportunities to exercise market power. The ISO proposes a more complex model that allows it to identify and price transmission congestion at a more accurate, localized level, allowing the ISO to ensure that schedules are feasible and that prices reflect actual transmission constraints.
- Day-Ahead Market. At a minimum, a day-ahead market is needed to accommodate the congestion management scheme. A centralized, transparent market for day-ahead energy trades, along the lines of the Power Exchange, may also be desirable. The ISO hasn’t proposed a specific approach.
- Residual Day-Ahead Unit Commitment. The ISO is seeking authority to order generators to start up and be available when it determines they will be needed for overall system load or local reliability needs. Currently, individual generators make their own commitment decisions. If the collective commercial decisions of generators doesn’t produce enough power to meet system demands, the ISO must scramble to secure other resources in real time.
- Bid Mitigation for Local Reliability. At times, individual generators are needed to support local reliability. Because the ISO needs them, these “pivotal” generators are able to demand prices far in excess of their costs. Currently, their ability to exercise market power is tempered by FERC’s market mitigation measures. The ISO proposes to temper the exercise of local market power by seeking authority from FERC to reduce bids it determines are excessive.
- Damage-Control Price Cap. When the current FERC market mitigation measures, including a cost-based cap, expire, California will return to a situation where there’s no pre-set limit on prices in ISO markets. The ISO suggests its market design proposal will facilitate a more competitive market and minimize the ability of sellers to demand extraordinarily high prices. Even with a successful market design, occasional extreme price spikes are possible. The ISO proposes a “damage-control” price cap, which implies a high level, but it has yet to propose any specific level.
The general intent of these proposed changes seems to be to shift the obligation to secure and deliver a sufficient and reliable supply of electricity away from the day of operations to prior to the operating day, and away from the ISO and toward utilities and generators. These changes would make the ISO market design similar to the market design used by the existing eastern ISOs, such as the PJM (Pennsylvania, New Jersey Maryland) Interconnection, from which many of the design elements have been borrowed.
If successful, these changes may allow the ISO to minimize the role it assumed by default during the energy crisis as the “supplier of last resort,” decrease the extent of its “real-time” grid management responsibilities, minimize the exercise of market power in its markets, and allow for more rational and cost-effective operation of the grid.
Based on the most recent ISO proposal and schedule, it appears that three elements of the comprehensive market design are likely to be implemented by September 30: the day-ahead market, the unit commitment standards, and a damage-control price cap. Ostensibly, the latter two are replacements for the “must offer” requirement and cost-based caps currently in place as part of FERC’s regional market mitigation measures.
The hearing is an opportunity to get an explanation of the specific objectives of the ISO proposal, assess the likely effectiveness of the proposal, and consider whether the changes proposed by the ISO are consistent with state policies and efforts to ensure reliable, affordable, and environmentally responsible electric service for California consumers.