California ISO adopts cost-based price caps for each generator

Despite doubts the plans will pass muster with federal regulators, the board of the California grid operator Thursday adopted a scheme subjecting wholesale electricity transactions to price caps on a plant-by-plant basis. The plan also sets up a day-ahead power market operated by the California Independent System Operator (ISO) and gives the ISO the power to curtail electricity exports during emergencies.


By Ann de Rouffignac
OGJ Online

HOUSTON, Mar. 15�Despite doubts the plans will pass muster with federal regulators, the board of the California grid operator Thursday adopted a scheme subjecting wholesale electricity transactions to price caps on a plant-by-plant basis.

The plan also sets up a day-ahead power market operated by the California Independent System Operator (ISO) and gives the ISO the power to curtail electricity exports during emergencies.

While approving the plan, Chairman Michael Kahn noted the Bush administration hasn't been receptive to price caps, suggesting the Federal Energy Regulatory Commission (FERC), which has oversight responsibility for wholesale markets, might oppose the ISO action. Kahn said the board would go ahead without FERC�s blessing. But he wondered aloud how the plan could be enforced when market participants are subject to FERC not ISO jurisdiction.

Under the ISO plan, individual plant-assigned caps would be in place through the summer of 2002. The board approved the so-called �Market Stabilization Plan,� and authorized the staff to flesh out the details and prepare FERC filings.

Lorenzo Kristov, ISO manager of market design, conceded the plan will have no effect on power supply for the summer nor will it reduce demand. But with FERC's $150/Mw-hr "soft cap" expiring in April, Kristov said, the ISO needs to "come up with something and get it approved before then."

Controlled bids
Under the soft cap, transactions above $150/Mw-hr are subject to review and possible refund by suppliers. Kristov said the ISO needs a plan mitigating supplier market power and that stabilizes ISO operations by reducing need for the grid operator to make real-time electricity purchases.

Under the plan, all generators within the ISO�s control area would be subject to the bid cap for energy, ancillary services, and congestion management. Individual power plants would get a specific bid cap depending on its costs of production, including fuel, emissions costs, and variable operating and maintenance costs. They would also get a payment to help recover fixed costs.

�We don�t intend to negotiate with each generator for each plant but plug the heat rate curve and other costs into a formula,� said Kristov.

The ISO would also implement and operate new day-ahead and hour-ahead markets for energy and unit commitments to cover the �net short� position or amount of load forecast but not covered by bilateral contract schedules.

Power plants in various control areas would bid in power at the controlled price. The market would produce a cost-based market clearing price that would also govern what out-of-state resources would get. If the ISO forecasts or declares emergency conditions for the next day, it would be able to curtail exports from the control area.

�This is not a desire to curb exports,� said Kristov. �We just need to serve native load first like other control areas.�

Since the provision will impose risks on legitimate sales to out-of-state loads that may not be deliverable under emergency conditions, he said the ISO would pay a capacity payment to compensate for the risk of curtailment and to ensure resources will be reimbursed for their standing availability to serve the control area.

A Williams spokesman noted that his company had sold three-fourths of its portfolio forward or outside of the state. �What about those contracts?� he asked.

Speaking at the board meeting during public comment period, Sue Mara, director of government affairs for Enron Corp., criticized the ISO for meddling in cost control and not sticking to its mission of ensuring reliability and doing little to address supply and demand.

�The ISO mission is to provide reliability, not low cost power,� she said. �This plan does nothing for the summer which will be a disaster. This discussion does nothing to increase supply or reduce demand. It�s a waste of time.�

Kahn shot back to Mara that the board didn�t need to be �lectured� on the laws of supply and demand. Further, the governor and the legislature were addressing those issues, he said.

Contact annd@ogjonline.com

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