Power markets ,
 Power markets
Carl J Levesque; Lori Burkhart; Phillip Cross; Bruce W Radford
  
09/01/2000 
Public Utilities Fortnightly 
Page 10 
Copyright (c) 2000 Bell & Howell Information and Learning Company. All rights 
reserved. Copyright Public Utilities Reports, Incorporated Sep 1, 2000 
PRICE CAP BACKLASH. The Federal Energy Regulatory Commission granted 
"fast-track" processing to review the complaint filed by Morgan Stanley 
Capital Group to overturn the $500-per-megawatt-hour price cap imposed in 
late June by the California Independent System Operator (but see below), but 
saw no need to force the ISO to rescind the cap. 
As the FERC explained, a cap sets the price at which the ISO will buy power, 
and does not restrict options for sellers, as they can choose to sell into 
other markets. 
Commissioner Hebert concurred in the result, but called on the FERC to 
investigate the ISO. "Getting to the bottom of the problem, in my view, 
requires us to begin a proceeding to rescind our approval of the ISO as the 
operator of the California grid." Docket No. EL00-91 -000, 92 FERC 
(para)61,112, July 28, 2000. 
Earlier, on July 26, the FERC had asked its staff to conduct an investigation 
of price volatility in wholesale U.S. power markets, and to report back by 
Nov. 1, so that the commission could use the findings in evaluating proposals 
due from utilities by Oct. 15, regarding FERC Order 2000 and plans for 
regional transmission organizations. 
CALIFORNIA. On Aug. 1 the board of governors of the California Independent 
System Operator voted 15-6 (two abstained) to lower the price cap from $500 
per megawatt-hour to $250, effective from Aug. 7 to Oct. 15, in the real-time 
markets that it administers for ancillary services and congestion relief. 
NORTHEAST REGION. In separate orders, the FERC imposed temporary caps of 
$1,000 per megawatt-hour (the same level as PJM's price cap) governing bids 
by power suppliers in energy markets run by the New York Independent System 
Operator and the New England Power Pool 
But the caps did not escape a dissenting opinion from commissioner Curt 
Hebert, who accused the majority of rushing in to cover "utility mistakes" 
that created exposed positions in the market. Hebert likened the majority's 
concern over using emergency measures to Captain Louis Renault, the gendarme 
in the film "Casablanca" who was shocked to find gambling inside Rick's bar. 
Hebert repeated Casey Stengel's lament: "Can't anyone here play this game?" 
* NEW YORK ISO. In New York, the FERC cited a lack of demand-side 
participation. "If load cannot respond to dramatic increases in prices," said 
the FERC, "then generators can submit very high bids that the ISO must accept 
when supply is tight" 
Nevertheless, the majority declined to include "antigaming" tariff rules 
requested by the New York state commission and various intervenors. Such 
rules would have placed a $24,000-per-megawatt limit on payments to suppliers 
over 24 hours, to prevent suppliers from attaching conditions to their bids 
requiring high minimum general levels or long minimum run times, as a way of 
evading the bid cap. Further, the bid cap will not apply to ancillary 
services, emergency imports into the region, or to so-called "sink price 
bids," which set the scheduling queue for exports out of the ISO area, since 
such bids do not affect prices paid by New York buyers. 
The ISO board had sought the cap (set to expire on Oct. 28), but had 
suggested a higher bid maximum of $1,300-- approximately equal to the highest 
observed day-ahead locational marginal price seen within the ISO, at least as 
of the end of June. 
The FERC acknowledged that power supplies were tight, but predicted that the 
cap would not dry up imports from other regions since the New York ISO still 
maintained an installed capacity requirement. It said the weak demand-side 
volume was due, "at least in part, to factors that prevent retail customers 
from seeing the realtime hour price, rather than because [they] are 
inherently willing to buy electricity at any price" Docket No. ER003038-000, 
92 FERC (para)61,073, July 26, 2000. 
* NEW ENGLAND. The call for bid caps had come from Nstar (holding company for 
Boston Edison), which had also asked for a study of market power and had 
cited a general failure of market mechanisms and a resulting lack of 
confidence by market participants. The ISO itself had opposed bid caps. 
In imposing the cap, the FERC agreed that the New England power market did 
not operate in a competitive manner "New England's existing market rules make 
it profitable for generators to submit very high bids for a small portion of 
their capacity ... When OP4 [emergency] conditions are declared ... 
generators know that virtually all bids will be accepted" 
The FERC observed that New England's "clearing-- price" form of auction was 
designed to encourage bidding at cost, but that the region's "actual 
experience" had not been "fully consistent with these bidding expectations" 
It added, "[PI rites in New England are vulnerable to spikes during OP4 
conditions that are vastly in excess of prices at other times." Docket No. 
EL00-83- 000, 92 FERC (para)61,065, July 26, 2000.
filuntz@aol.com, liz@luntz.com, nicholas.o'day@enron.com, 