Cal-ISO plans strategy to remove ancillary power price caps

Cal-ISO plans strategy to remove ancillary power price caps

Tami Cissna

Associate Editor

The California Independent Systems Operator (Cal-ISO) is revamping the state`s ancillary services markets in hopes of lifting price caps on reserve power. If the comprehensive redesign is successful, the Cal-ISO will raise its current $250 per MW cap to $750 per MW by next summer and then higher later, said new CEO Terry Winter.

The Cal-ISO, which schedules power flows through the state`s high-voltage grid and to interconnections outside the state, said higher than anticipated demand for ancillary service, too small available supply of ancillary service, and market inefficiencies created the need for price caps.

“We are now making mid-course corrections we knew at the onset would have to be done,” said Winter, who succeeded Jeffrey Tranen as the Cal-ISO`s CEO in March. Tranen left the Cal-ISO to return to New England.

Winter said a key correction is removing opportunity and incentive for deviate behavior. However, there is a delicate balance between facilitating fair competition and allowing equal competitive opportunity, and many compromises will have to be made. “We may not solve all our problems,” he said.

Replacement reserve power is vital because it helps the system maintain stability. Each day the Cal-ISO, which took over operation of the state`s transmission last April, handles 40,000 to 45,000 MW of electricity in California.

In July, the ISO capped real-time electricity prices at $250 per MW last July after the price of reserve power spiked as high as $10,000 per MW-more than 2,000 times the average until then of $6.50 per MW, said Cal-ISO spokesman Patrick Dorinson.

The FERC has ruled against permanent caps, but allowed the ISO to continue with discretionary price caps until remaining issues of market control are worked out. The Cal-ISO comprehensive redesign of the ancillary services markets includes the following elements:

– design changes to the ancillary service auction that allow the ISO to lower costs by substituting higher-quality services for lower-quality services, when doing so reduces total costs;

– removal of economic incentives for scheduling coordinators and generators to ignore ISO dispatch instructions for capacity bid into the market and accepted by the ISO;

– purchase of additional replacement reserves that could be called on if needed, to reduce the need for high-cost emergency deals with other control areas;

– automation of dispatch instructions to generating units to improve generator response times (compared to current phone call system) and make sure no capacity bids are skipped;

– separate pricing of regulation-upward service and regulation-downward service to reduce costs (now, the most expensive service sets the price for both), and eliminate gaming opportunities between the two services which inflate prices-those who bid inaccurately will bear the costs; and

– implementation of software to allow ancillary services trades between scheduling coordinators so they can protect themselves and their customers from price fluctuations and other features of the Cal-ISO`s markets.

Winter said the timing of the price caps lift depends on how quickly redesign elements are completed-especially software changes and must-run contract changes, and whether markets respond as expected to redesign efforts.

In Order No. 888, the FERC said it would review market-based rate requests for ancillary service on a case-by-case basis. The seller must show it lacks market power in the area in which it seeks to provide the service.

The commission said that in allowing the price cap to continue, the Cal-ISO is not setting rates, but, as a purchaser of the ancillary services, has the same ability as any other buyer to reject excessive bids.

Winter said despite the rough spots, the Cal-ISO`s formation has been a success story. In its short life span, it rapidly got all its numerous computer systems online, has maintained excellent reliability, and has essentially enabled the California competitive electricity market to work. As a result, the cost of electricity transmission has decreased in the state. Ancillary power, where the markets experienced the price spikes last summer, represents only 10 percent of the power, Winter said.

“We have made tremendous strides in the first year,” he said. “We have clearly gone from zero to full market-driven competition. We knew there would be warts, bumps and hiccups along the way.”

The California Power Exchange (CalPX), the ISO`s sister organization, has been working out bugs as well. The CalPX, which operates the state`s computer-based open auction process, equalized its volumetric charges for all participants purchasing electricity in the CalPX energy markets last January. All 54 participants now pay 30.64 cents per MWh-a slight increase for the state`s three investor owned utilities.

The CalPX also changed its hour-ahead electricity market into a day-of market, featuring three auction periods daily. The day-of market was an effort to increase market efficiency by providing three auction periods daily, rather than continue with the hour-ahead market`s 24 individual hourly auction periods.

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