California Municipal Utilities Association

Highlights of Comments on California Independent System Operator ("ISO") Market Design 2002

Senate Energy, Utilities and Communications Committee

February 5, 2002

General Observations

CMUA believes it is time to reexamine the issue of market structure in light of the current state of the electric industry in California. Today, much of the load in California is met by forward contracts or owned capacity. This has always been and continues to be true for CMUA members. It is increasingly true for investor-owned utility load due to the contracts entered into by the State of California to meet the net short position of the IOUs. Further, direct access is at a standstill. While predictions are a risky proposition, it seems likely that for the next few years the electricity industry in California will be run on a bilateral model with few Load Serving Entities ("LSEs"), rather than a centralized market with many LSEs.

These facts should influence how market reform is approached. It is not unreasonable to ask the following questions:

• How will the ISOs model for transmission pricing and grid management affect delivery and cost of energy and capacity already bought under contract or owned by CERS, the IOUs, and CMUA members?
   
• Has a cost-benefit analysis been performed that shows that these market structures will benefit consumers?
   
• Is the ISO’s proposed Locational Marginal Price ("LMP") for congestion management appropriate when bilateral transactions will be fairly predictable and limited in number?
   
• How much will the ISO’s proposal raise prices to consumers in constrained locations like San Francisco, San Diego, the Peninsula, or the Fresno area?

It is necessary and appropriate to examine the possible real-world consequences of a proposed market reform proposal before implementation.

Available Capacity ("ACAP") Obligation

With its ACAP proposal, the ISO appears to be attempting to solve a real problem. Under the former regime, there was not clearly delineated responsibility as to which entities were responsible for assuring adequate supply. A capacity obligation imposed on LSEs is appropriate because it puts the responsibility on entities that are directly answerable to customers or regulators, gets the ISO out of the procurement business, and creates a "market" for capacity. This should, in turn, provide incentives to build generation in California, and help avoid "boom and bust" cycles. CMUA supports a capacity obligation on LSEs, but is concerned with the specifics of the ISO proposal:

• CMUA is concerned that the ISO’s ACAP proposal will be unduly expensive because it requires reserve level much higher than necessary to ensure reliability per Western Systems Coordinating Council requirements.
   
• CMUA is concerned that ISO is seeking unnecessary dispatch authority and control over generation that is run as part of integrated system operations to meet native load requirements.

Congestion Management and Firm Transmission Rights ("FTRs")

Again, the ISO is attempting to solve real problems with its Market Design proposals in this area. However, CMUA remains concerned that real consumer benefit will not result from the new proposals either.

Since its inception, the ISO has struggled to operate the grid under a flawed model that did not require load or generators to schedule accurately. Further, the ISO systems were constrained in how they solved localized reliability problems, which allowed strategic bidding of both generation and load. This cost consumers money and jeopardized reliability.

• CMUA supports the ISO’s proposals to more closely model the actual operation of the system. This should diminish gaming opportunities for both loads and generators.
   
• The transmission system was designed to allow LSEs to meet their capacity and load serving obligations. That is still the primary purpose of the transmission system. Therefore, any ISO proposal must ensure certainty of delivery and cost. If an LSE has a generator with a 30-year life, a one-year right to delivery over the grid is not acceptable. This issue is not well addressed in the ISO proposal.
   
• CMUA is concerned that consumers in constrained areas will see potentially large price increases.
   
• Transmission was built to serve load, and consumers pay for it. Firm Transmission Rights ("FTRs"), if created, should be allocated to LSEs, not market participants whose sole purpose is to trade them as a financial instrument.
   
• Given past history, CMUA members would like concrete assurances before trading their existing rights to use the transmission system for FTRs that are a work in progress.