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Did You Get a Reasonable Price?

This question was posed to me by my wife when I told her I was going to buy “standing room only” (SRO) tickets to the first World Series game to be held in the nation’s capital since 1933. I’m going with my son, and I am not taking this opportunity for granted. Who knows when the Nationals might be in the “Fall Classic” again! All that said, I understand why my wife asked the question. I responded to her question by saying:

“What’s reasonable?” If this were New York or Los Angeles, where World Series appearances are not rare, I suspect the price on Vivid Seats would be lower than the $619 per ticket for SRO that I shelled out for Friday night’s game. We pay the market price, not what we think is reasonable.

Capitalism: Can’t live with it, can’t live without it…

Naturally, I immediately thought about how the maxim of what the “market” requires seems lost in conversations about procuring power, especially in California. I recall the 2000-2001 Power Crisis and how the hot summer and low hydro year became a high-priced event.  The CAISO’s response was to lower price caps, and California politicians began crying “manipulation”. Responding to high demand (hot economy) and tight supply (low hydro and no long-term contracting) by lowering prices defies logic. However, the predictable urge to control prices becomes an imperative usually at the exact wrong time. The result is often locking into long-term contracts, just when prices are at their highest. (S. David Freeman, your office is calling…)

While California is perhaps the most egregious example of constant intervention, that tendency persists in nearly all power markets in the US. Name another commodity price that is subject to a “market power test” before the market even clears! This happens in both California and PJM. The other markets have an ex poste test of market power. All the organized markets have bid and price caps and react to very short-term price movements.

But within the CAISO Department of Market Monitoring (DMM) and the state Public Utilities Commission there seems something beyond just a wish to control markets. There is the distinct appearance of disliking them. Perhaps they dislike that the market dispatches the electric system as a big network, with transparent prices that reflect the system’s needs. This may bring too much attention to the effects of policy decisions.

That was then, this is now…

The sentiment within the walls of the DMM and the CPUC may have changed recently. As many will recall, the DMM expressed concern this past Spring about the use of imports for Resource Adequacy (RA). This concern was probably heightened by the fact that the CAISO was making folks aware of a possible shortfall in the RA capacity needed to keep California power reliable.

As one can see from this chart from the DMM Q2 report, imports play an important role in California’s world of plentiful solar resources and the need to balance the system:

So, when the CPUC began to consider the need to ensure imports into California, it moved with surprising procedural speed. It took a bit over 4 months before the identification of the issue, the assignment to a Commissioner for review, a proposed decision (PD) and then a vote by the Commission from the consent agenda on October 10.

With a wave of the hand, the Commission put 15 years of market practice on its head when it required that all “non-resource specific” RA must self-schedule into the CAISO, regardless of whether they were needed. The previous practice was that all RA resources were required to offer into the market but did not need to force a “must-flow” by self-scheduling.

The reaction to the PD, when it was announced in early September, was swift. CAISO strongly argued that power need not flow without a CAISO award from the market. CAISO further stated that such a rule would make renewables harder to integrate and would cause more renewable curtailment within California. The specter of market disruptions was raised by the CAISO’s own DMM. The Commission replied that market inefficiencies were not their concern and that they were only concerned with reliability – presumably at any price.

So, while the CPUC has spent the better part of twenty years suspiciously looking at the market because it might deliver high prices and might not deliver the right kind of resources (e.g., renewable), it now asserts it can’t be bothered. Perhaps it is because they know that, in the short term, imports will be made to flow, which will make them take negative prices. For a while, prices will be low in California. But what happens next? How will this make regional integration work?

“Don’t bother me with facts…”

My father loved to tell stories of his political past and my mother would often interrupt to correct his representation of some detail. He would reply; “Ann, don’t let the facts get in the way of a good story!” Amusing for conversation, but not a great strategy for regulators. Eventually, one must be concerned with the effects of policy by fiat. The message that we would get from transparent market prices will be garbled by intervention, and the CPUC seems pointedly unconcerned with this effect.

However, while the CPUC may like the price suppression effects their order may involve, it is also possible it will raise prices once RA arrangements for the next year take effect. Why offer RA into California if the “must-flow” requirement takes hold and arrangements are made for the upcoming year? Prices will likely rise for Californians – as many parties suggested to the CPUC.

But here’s a closing thought: Since the CPUC has come up with a “clarification” of a rule that changes how everyone – including the CAISO – thought RA imports were to be “offered” rather than “must flow,” does this trip into FERC jurisdiction? FERC may not want to get dragged into such an argument, but it may be hard to avoid no matter how much deference it wants to pay the Golden State. Did the CPUC just pre-empt FERC by making a de facto change that affects bidding into CAISO?