The California ISO Keeps Step…with the State`s Bold Leap!
By Tami Cissna, Associate Editor
A year has passed since the advent of another great California experiment. Last April, the state opened its $20 billion electricity market to competition, and rest will become history, eventually. While some major issues have been resolved–voters rejected Proposition 9, for example–often the transition still seems more in the early stages than in a fine-tuning phase.
The California Independent System Operator (ISO), which some consider the heart of the competitive electric system, took over operation of the state`s transmission last April. The ISO, which schedules power flows through the state`s high-voltage grid and to interconnections outside the state, has had its shares of hassles.
On the recent front, the Federal Energy Regulatory Commission (FERC) chastised the ISO and the California Power Exchange (CalPX) for acting independently, contending that only state agencies can act apart of federal bodies. In particular, the commission criticized the agencies for not complying with its directives regarding the composition and role of the Oversight Board. The FERC ordered the ISO and CalPX to amend their bylaws.
But the debate over whether or not the ISO and CalPX actually are public entities is an ongoing dispute. Last April, the San Jose Mercury News sued the groups, arguing that both are state agencies and therefore subject to open-meeting laws. In December, a Sacramento County judge ruled in favor of the ISO and CalPX, deeming they are nonprofit, public-benefit corporations not subject to state laws requiring public access to meetings and documents. However, a bill introduced late last year by Sen. Steve Peace, D-La Mesa, would expressly declare the agencies are public if it is signed into law.
There was also deliberation last year over ISO price caps on replacement reserve power. Although replacement reserve power makes up barely 2 percent of the state`s power market, it is vital because it helps the system maintain stability. Each day, the ISO handles 40,000 to 45,000 MW of electricity in California.
In July 1998, the price of backup power spiked to more than 2,000 times the normal price. The ISO has capped real-time electricity prices at $250 per MWh since. 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 ISO set a schedule to raise the maximum price to $70 a kWh in May and to $2,500.
In October, the FERC gave all sellers of ancillary utility services permission to charge market-based rates for sales of ancillary services to the California ISO. The commission said it did so to emphasize the importance of mitigating market power and to allow markets to function at a more competitive level.
The commission explained that the purchase price cap would mitigate any potential exercise of market power. In Order No. 888, the commission said it would review market-based rate request 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 emphasized that in allowing the price cap to continue, the 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.
Which Way Should It Go?
On the national level, many alternative regional transmission organizations are being proposed. It is a matter of debate, even among FERC commissioners, whether regional transmission organizations should be nonprofit or for profit. Disagreement also exists regarding whether or not participation in such and entity should be voluntary.
The main point of difference is the ownership of transmission assets. In the ISO model, ownership remains with utilities, but operation is the responsibility of the ISO. In an independent transmission company (TransCo) model, utilities that own the assets retain operational control.
Proponents of ISOs believe a nonprofit entity is in better position to consider the needs of the region. They are concerned a for-profit TransCo might have improper and inefficient incentive to favor only transmission solutions, even when there are less costly and more efficient ways to relieve congestion.
Others believe TransCos represent the best alternative for transmission operation from both economic and competitive policy perspectives. They propose TransCos would be efficient and independent, with customer-driven transmission and ancillary services. Some suggest FERC could provide incentives for maximum efficiency of operations through performance-based regulation.
“The commission must more forcefully promote the many benefits regional transmission organizations can provide and decide whether to make participation in an independent system operator or other regional transmission organization mandatory in the future,” FERC Chairman James J. Hoecker said during a November teleconference with trade press representatives. In January, FERC began a series of meetings with state utility commissioners, giving them an opportunity to present their views and make recommendations.
The ISO`s sister organization, the CalPX, had to smooth out its share of kinks too. The Power Exchange, which operates the state`s computer-based open auction process, uses administrative fee funds as its major source of operating revenue. Jan. 1, the agency equalized its volumetric charges for all participants purchasing electricity in the CalPX energy markets. All 54 participants now pay 30.64 cents/MWh. For the state`s three IOUs, which provide the majority of volumetric demand in CalPX markets, the fee increased slightly from 30.38 cents/MWh to a new standard rate of 30.64 cents/MWh.
The agency hoped that by reducing the fee for most participants, it would increase the volume of electricity purchased through its markets by energy service providers (ESPs) as their customer base and power demand expands.
The CalPX also recently changed, on an experimental basis, 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.
Under the day-of market, the three auctions take place at 6 a.m., noon and 4 p.m. The 6 a.m. auction period includes individual auctions for energy delivery hours ending 11 a.m. to 4 p.m., while the noon auction will include delivery hours ending 5 p.m. to midnight. The 4 p.m. auction period trades energy for delivery hours ending 1 a.m. to 10 a.m. the following day.
Other than changing the auction period times, the day-of market remained essentially the hour-ahead market in its scheduling, adjustment and ancillary service bids submittal functions. Previously, adjustments and ancillary service bids were due to the Power Exchange 135 minutes prior to the energy delivery hour.
Not surprisingly, California, the perennial trendsetter, is considering yet one more new twist in its transitioning electric power market. State regulators are exploring possibilities for opening up electric distribution to competition.
So far, electric power deregulation has been confined to generation and after-meter services, with the “wires business”–transmission and distribution–remaining a carefully regulated monopoly. The California Public Utilities Commission said it intends to have a proposal addressing potential changes in the way distribution is regulated for the state legislature by fall. n
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A giant mapboard in the Cal-ISO Control Room gives an instant overview of where electrons are flowing. Photo courtesy of the California Independent System Operator.