California Iso Restructuring

The California ISO has been in the throes of restructuring for the past two years, and has released what is likely to be its final design proposal. The ISO board has approved this proposal. In lieu of my slapdash review of it, I attach here some comments from a very knowledgeable and insightful colleague of mine. I don’t entirely agree on things like LMP — I’m still waiting for a good explanation from LMP supporters of how LMP is not a tool for centralized control, no matter how decentralized it looks — but that’s a mere quibble.

Bottom line: still a mixed bag, still too much desire to control and regulatory uncertainty from “market mitigation” procedures.

The new design changes don’t get it right. What’s more surprising is that they do get some things right. More interesting among the changes are the actual improvements made in the market design, especially given the heavily politicized process.

1. An integrated forward market – A day-ahead market with pricing that accounts for congestion on the grid. No more easy ways to submit a schedule to intentionally create congestion and then getting paid to “relieve” it. The party causing the congestion will pay for it rather than having congestion costs socialized among all users of the grid.

2. Locational Marginal Prices – A true nodal LMP system, at least on the generation side, rather than the current zonal system that lumps huge service territories together for pricing purposes. However, they did chicken out on full nodal pricing for consumers, hence consumers won’t get quite the right price signals. If the consumer zones are intelligently drawn, this might not be a major problem but obviously the averaging will mute economic signals. Most of the Northeast integrated markets also do some sort of zonal pricing for load, though there is some push for full nodal pricing from industrial customers.

3. Congestion Revenue Rights – these sorts of congestion hedges are useful tools in the market.

4. Residual Unit Commitment – Okay, here is a potential problem. RUC gives the ISO the opportunity to “second guess” the market, with the market getting all of the cost and/or benefits of ISO decisionmaking. Essentially, if the ISO thinks that actual load the next day will be higher than day-ahead/hour-ahead schedules indicate, it can set its unit commitment to prepare for the ISO’s higher forecast, i.e. turn on a few extra generators. If the ISO is right, then a more efficient set of generators is available to serve the actual load and consumers save a little; if the ISO is wrong, then too many generators are available and consumers pay a little more. The “not-for-profit” ISO will have little incentive to efficiently second-guess the market.

5. Market Power Mitigation – if the proposal is similar to an earlier version of the plan then the market power mitigation plan is a real mixed bag. I lean in favor of the so-called “Automated Mitigation Plans” in which the parameters for mitigating bids in the market are known ahead of time, rather than a post hoc “antitrust” style investigation as is currently continuing at the FERC with respect to prices in California in 2000-2001.

The other good news-bad news pair in the press release concerns the proposed ACAP requirement which has been abandoned (probably a good thing, since it was a new idea not completely worked out and untested), in favor of a plan under development by the California PUC and other agencies (unlikely to be a good thing).

But again, overall I think this is movement in the right direction.

LMP markets are doing good things in New England since implemented in March of this year. Finally politicians and power companies in Boston and southwest Connecticut are getting serious about siting power lines and generation. Localized payments – coming out of localized consumer pockets, for the most part – are being made for special load response programs in southwest Connecticut. These things are happening because the regional power market has implemented a LMP system in place of the previous
single-price market. I expect similar consequences for California.

Not perfection, but improvement.