California's power market is still ripe for exploitation

Two years after an energy crisis repeatedly blacked out parts of the state and sent giant companies into bankruptcy, California's power market is still ripe for exploitation. The state's grid operator predicts a new round of market manipulation could add $ 50 mm or more to annual electricity costs starting this summer. Today, under a system that's only partly evolved beyond the chaos of the market meltdown, power generators can get paid handsomely to relieve transmission line congestion by pulling promised power off the system, even if they played a role in overloading it.
"The thing that scared us the most about all this whole mess of the energy crisis is remarkably little has been done to deal with the underlying problems," said Michael Shames, head of the Utility Consumers' Action Network. Federal regulators and the state Independent System Operator, which runs much of the electric grid, are each blaming the other for leaving the door open to what the ISO calls the "dec game," so named because of the way generators are paid to reduce given amounts, or "decrements," of power shipped at a given time.

The game could begin in earnest in less than a month. And despite technical conferences, flurries of legal filings and years of warnings, there is still no solid defence in place. The money involved is relatively small in a $ 10 bn annual electricity market, but the game's existence is a sign that in the past two years, efforts to fix a flawed system have been hobbled by a deep schism over what solution best serves consumers.
Meanwhile, now that more power plants have been built, transmission line clogs are becoming more common, more difficult to manage and more vulnerable to trading schemes. The dec game is possible because of the way the ISO rations space on power lines.

Power plants and electricity traders give the ISO schedules, one day in advance, outlining who will buy their power and how they want it to move across the network of high voltage lines that make up the electric grid.ISO computers review the schedules and identify which power lines connecting the state's three zones would be congested, like a freeway jammed with too much traffic. Then, to keep those lines flowing properly, the ISO uses a bidding system to pay some sellers to change their plans. Some will raise their output incrementally, or "inc," and others will drop their output by agreed-upon decrements, or "dec."
The theory is that sellers will lower their prices to compete for scarce space on transmission lines. And sometimes it works that way. Energy traders bid in advance to relieve congestion for power moving from other regions into the ISO as well as for transfers among three zones -- one in the north state, one in most of the south state and one around San Diego. Within the zones, the ISO still lacks a way to resolve congestion ahead of time. Instead, it has to make the adjustments as power is actually moving, in what grid operators call "real time."

When they see potentially dangerous voltage sags or overloads building on transmission lines, ISO workers can draw on earlier offers to "inc" or "dec," which at times can mean urgent phone calls to plant operators, pleading frantically for adjustments. Complicating the process: Grid operators have to match the power generated with power used or see the system crash.
Once power has been ordered, pulling a given amount of power off the system -- a dec -- can be costly. Under rules that the ISO repeatedly has asked the Federal Energy Regulatory Commission to change, power plants can be paid up to $ 30 a MWh not to run.

That amount doesn't always reflect the actual cost of holding power once a plant is cranked up to produce it. The ISO wants to change the rules to base dec payments largely on costs the power plant incurs for not running. FERC repeatedly has declined, saying virtually everyone, including the ISO, agrees the underlying market structure is flawed and has to be overhauled. Tweak this element now, some FERC officials fear, and the ISO will postpone real changes even longer.
"The real fundamental problem is that the Cal-ISO is accepting infeasible schedules," said FERC economist Derek Bandera. The new power generated should translate into falling prices, Bandera said. Instead, the new generation is creating a potential crisis. "That just illustrates how bad the market design is," he said.

California now is ringed with new and nearly completed power plants in Nevada, Arizona and Mexico. They almost all have excess output to sell, and so will be battling for space on transmission lines.
The two plants just south of the US-Mexico border are especially troublesome because they are within one of the ISO zones, even though they're in another country. That means they could submit schedules that would congest transmission lines and then, in real time, demand payments for taking off power for hundreds of MW, 12 hours a day or more, virtually daily. Unless FERC steps in, "the cost of this dec issue could be quite significant and we are concerned about it," said Keith Casey, ISO manager of market analysis and mitigation.

The ISO has told federal regulators the dec game could cost $ 50 mm a year, while some internal ISO models predict it could go up to $ 120 mm annually. But some consumer advocates believe the ISO is overstating the case to encourage construction of more high voltage lines, which would ease congestion. Some FERC officials believe the numbers are a ploy to get more regulations based on costs -- an approach that makes free-market advocates at FERC recoil.
"I am just not willing to accept worst-case scenarios: The sky is falling, and I am the big bad wolf because I am not letting them protect themselves," said Mike Coleman, a FERC associate director for infrastructure development. "We have to wait and see what unfolds this summer." Some suggest the owners of the new plants could be shamed into not exploiting the system. "It certainly fails the front-page test to pay generators not to generate," said one energy company official.
People won't regularly use the dec game, said Ziad Alaywan, ISO director of market operations, because they'll want to avoid the bad publicity. Alaywan hopes that before June 1, when the Mexico plants go into full service if legal challenges are resolved, he can work out informal agreements with the plant owners not to overcrowd the lines.

Sempra Energy, which owns the San Diego Gas and Electric. as well as one of the Mexico power plants, declined to comment. The ISO is doing a disservice to plant owners, said Jim Kritikson, a consultant for InterGen, a venture co-owned by Shell and Bechtel which has built the other Mexico plant. "They're assuming the guilt of generators before they've even had a chance to get online," he said. Kritikson said he doubts InterGen would ever ask to get paid for not running.
The state is still grappling with how it should plan new power lines, with an Energy Commission report on the most critical needs due out later this year. By then, California may also have a sense of who is playing the dec game, and how much transmission congestion will cost the state's consumers.