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Domestication

I want to talk about the California ISO (CAISO) and the awful position it has been put in by FERC, the CPUC, the legislature of California and other factors that restrict its independence.

But before I forget…

If you want to participate in the WPTF Web meeting on the future of Resource Adequacy (RA) in the West region this Friday (May 22), there will be a registration link at the end of the blog. We have great panelists to speak from the perspectives of one of the EIM entities, the California ISO (CAISO) and a more academic approach to solving the future RA needs of the region.

You’re on your own, kid…

Now, back to what appears to be the prisoner’s dilemma in Folsom. What is sometimes hard to appreciate in the West is that the CAISO is left alone and given far more discretion in its market rules than any other FERC-regulated market. This is an artifact of the Western Power Crisis of 2000-2001; that debacle resulted in the consensus to leave California to its own devices. In decisions ranging from governance to Resource Adequacy (RA) design, the CAISO has enjoyed a level of deference from regulators that no ISO, not even a single-state ISO like the one in New York, could imagine.

The intention was to back away from the very intense politics in California after the Power Crisis, and let time heal bad feelings so that if FERC ever needed to be involved, the interactions could be more positive. Alas, I assert, FERC has abandoned the field to be filled by a California political and regulatory environment that distrusts markets and has emboldened the state to disregard legitimate federal interest. CAISO, in return, might wish to seek more market-oriented solutions as an efficient way to reliably dispatch the grid. But to do so means that it may often have to fight the CPUC’s predilection for “command and control” outcomes or the political environment in Sacramento.

Such as?

As I’ve said in other writing, running an ISO is not an easy business. If it is done correctly, several stakeholders will disagree with ISO management at any given time. This is a tolerable situation if the regulators and the political climate are not against the ISO at the same time. Even when the state regulator is not happy, the ISO can pursue a course it believes is correct if it has the backing of its primary regulator.

Let us imagine a counter-scenario. Say the market monitor is of the opinion that under certain situations given high demand and reduced supply, market power might exist over the entire system of the CAISO as well as areas that normally export to the CAISO. The market monitor might look at this theoretically possible situation, and – though it has never been demonstrated in the market – suggest that a test for such a situation should be put in place. The problem is, such test could easily be inadvertently set to trigger at a level and in conditions when possible market power is indistinguishable from genuine, temporary scarcity. Further, the market monitor might want an automatic mitigation scheme put into place to deal with this trigger threshold, even though it might be really reflecting scarcity. And in the case that the price is reflecting scarcity, well then the efficient market is doing its job well. Mitigation, far from improving things, would provide disincentives for participation.

This theoretical exercise in search of a solution is happening now at the CAISO. Given the staff involved in the discussion of the subject, it is hard to believe this initiative on “system market power mitigation” is a priority of their own making. The more likely scenario is that they wish to appease the Department of Market Monitoring (DMM) on the issue for fear that otherwise DMM would stir up concerns at the CPUC. The calculation is that FERC is not paying attention, and the CPUC would not miss the opportunity to beat up the CAISO if they chose not to take strenuous efforts to suppress prices.

What is particularly odd about this initiative is that it may be creating a sense of pause within the community of utilities who are contemplating further integration into the CAISO beyond EIM. More than one executive from an EIM entity cited the system market power mitigation effort as a warning sign against further integration with the ethos this represents.

Is that all?

I hesitate to bring up Congestion Revenue Rights (CRRs), but what has happened in California seems to point again to this prisoner’s dilemma that seems all too recurrent in the CAISO at the humor of the DMM and the CPUC. CRRs represent a way to hedge congestion on the transmission system, and as such are allocated to those who represent customers on a load-weighted basis. Beyond this allocation, market participants can buy CRRs in a competitive auction. The existence of this auction market provides benefits beyond just the hedging of congestion. The ability to take “counter-flow” positions (different than expected flow directions) can provide additional capacity and revenue.

The CAISO decided to launch a very extensive change to the CRR market that involved limiting paths and the participation of participants who are not traditional load representatives. One of the goals was to eliminate revenue shortfalls between the auction and settlement period. The need to address this was driven by the DMM’s view that all the revenues belonged to companies representing load.

The CAISO’s motive for taking the rather aggressive solution of reducing paths available for auction instead of gradual steps suggested a need to appease the DMM from advocating for the elimination of the CRR market altogether. In other words, feed the beast in hopes it will go away and not make trouble with other political forces inside of California.

On this latter point, data has suggested that the steps taken by the CAISO have not reduced revenue shortfalls, despite eliminating pathways available for auction. The goal in pursuing this action was to allocate all left over to load servicers. Reason would suggest a possible rethinking of the “reform”, but I fear that CAISO might avoid this rational approach because it would open the possibility for the DMM to advocate again for eliminating the market altogether.

Your point?

Exercising independence is difficult. It can get one in trouble with politicians who represent goals that are rooted in the short-term. If the independent decision goes against a zeitgeist, the exercise can be particularly painful. Having a legal authority back up the independent decision can help a great deal. If the legal authority values keeping things calm above most other considerations, one can expect some unwelcome outcomes.

Oh, and if you want to participate in our Web meeting on the future of Regional RA needs, please click here to register. You will be sent a Zoom link the day before the meeting.