Commission raises price cap in California, orders overhaul of ISO board

By Sylvie Dale, Online Editor

July 18, 2002 — The Federal Energy Regulatory Commission (FERC) on Wednesday raised a cap on electricity bid prices in California and other western states and called for an immediate overhaul of the California ISO board. The orders were answered with immediate criticism from California ISO Chairman Michael Kahn.

FERC approved a series of market mitigation measures to replace those adopted in June 2001 which mostly follow the recommendations of the California ISO Market Surveillance Committee, an independent advisory group of economic experts who review the California market.

Citing the need for adequate infrastructure such as transmission lines, generating plants, and gas pipelines, FERC said that market rules and mitigation measures alone would not foster a competitive bulk power market with balanced market rules and market oversight and mitigation.

The commission set a $250/MWh bid cap for all sales in the Western Energy Coordinating Council (WECC) beginning October 1, 2002. In other organized power markets in the country, a $1000/MWh bid cap is in effect.

In a statement, Kahn said that raising the price cap could cost consumers billions of dollars.

“Orders issued by FERC today, July 17, 2002, do a disservice to the people of California and could cost consumers billions of dollars,” Kahn said.

“The decision by FERC regarding the redesign of the California Independent System Operator (California ISO) markets weakens the mitigation tools proposed in the Market Design 2002 and approved by the California ISO Board of Governors.

“We appreciate the fact the FERC agreed with the ISO Board that west-wide mitigation, due to expire September 30, should be extended. However, lifting the price cap from the Board’s proposed $108 per megawatt level to a level of $250 per megawatt could lead to higher wholesale electricity prices in California.”

Delivering a stinging slap to the California ISO board, FERC said the board was in violation of prior orders and that it was not independent enough to operate its interstate transmission facilities and implement design proposals for electricity markets.

FERC directed the California ISO to adopt a two-tier form of governance by January 1, 2003. The top tier would consist of an independent, nonstakeholder board and would have sole decision-making authority.

A lower tier would be an advisory committee of stakeholders that may make recommendations to the Board and a separate advisory role for the California Electricity Oversight Board.

“It is critical that the Western interstate transmission grid be operated on a coordinated, non-discriminatory basis that leads to the most efficient use of electric energy resources,” the Commission said in its order.

FERC also said the existing members of the board would not be representative of all stakeholders and might not treat out-of-state transmission users fairly. The commission said it was reviewing all filings made by the board and may overturn them if necessary.

“With regard to the FERC Order overhauling the California ISO Governing Board, I strongly disagree with the statement by FERC that the Board is insufficiently independent to implement needed market design changes,” Kahn said.

“The current ISO Board is responsible for helping the state heal from the energy crisis and I feel the decision on the governance issue is an affront to Californians.”

Responding to the California Independent System Operator’s (California ISO) Comprehensive Market Design Proposal (MD02), the Commission also called on the appropriate state authorities to take immediate action to carry out critical long-term reforms-such as siting and retail demand response-that are not within FERC’s jurisdiction to implement.

Although the Market Surveillance Committee did not request extension of the current West-wide requirement that all generators offer all uncommitted power for sale, the Commission deemed this requirement to be essential to prevent physical withholding during the continued recovery of the western marketplace. Many observers have concluded that adoption of this requirement in 2001 led to significant calming of the western markets.

Other key features of the price mitigation plan adopted today are:

“- adoption of a “bid screen” tool called automatic mitigation procedure (AMP), designed to prevent economic withholding and limit the ability of a generator selling into the spot market, to raise its bid price above the current $91.87 price cap.

“- conditional approval of the California ISO’s proposal for a negative $30 cap on decremental energy bids, and penalties for excessive deviations. Negative decremental energy bids are intended to reflect costs a supplier incurs to reduce generation. The California ISO proposal is narrowly tailored to address periods of system over generation during which suppliers could exercise market power.

“- modification of the California ISO’s proposed local market power (LMP) mitigation proposal to focus on the potential to exercise market power within each of California’s present three geographic zones.

“- directed the California ISO to submit a time line by August 30 on a workable demand response program to permit customer load to participate on equal basis with generators in the hourly power markets.

“- resolution of seams, or border, issues with neighboring states. The Commission recognized the efforts of the California ISO in its talks with the Western Interconnection Seams Steering Group. The Commission directed the California ISO to continue working with this group and said that both the California ISO and the Seams Steering Group must comply with any future requirements when the Commission issues orders on the RTO West and WestConnect regional transmission organizations (RTO) proposals.

“- directed the California ISO to file, by October 21, 2002, tariff language for the day-ahead, ancillary services, and hour-ahead reforms. These changes would be implemented on January 1, 2003.

“- approved the use of the California ISO’s 12-month market competitive index as a diagnostic tool, but declined to use it as an automatic trigger for other mitigation, deeming that its approved mitigation was sufficient. It directed the California ISO to file the information produced by this index with the Commission’s newly-created Office of Market Oversight and Investigations.

“- The California ISO said, in its filing, that its proposal for an available capacity requirement (ACAP) could not be implemented until early 2004. Noting that a requirement to assure long-term adequate resources is needed because of the length of time needed to develop new resources, the Commission ordered an expedited technical conference to discuss ACAP.

California ISO’s web page is at

FERC’s web page is at

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at

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