-----Original Message-----
From: 	Comnes, Alan  
Sent:	Friday, January 11, 2002 9:10 AM
To:	Comnes, Alan; Belden, Tim; Badeer, Robert; Mallory, Chris; Lackey, Chris; Richter, Jeff; Hall, Steve C. (Legal); Blair, Kit; Gilbert, Scotty; Williams III, Bill; Calger, Christopher F.; Heizenrader, Tim; Foster, Chris H.
Cc:	Nicolay, Christi L.; Steffes, James D.; Dasovich, Jeff; Novosel, Sarah
Subject:	RE: California ISO Market Re-Design 2002 (MD02)

All:

A more detailed version  of CAISO's MD02 proposal was released on Wednesday.  Below I am copying a summary prepared by Andy Brown who covers these matters for IEP.

It appears that the CAISO proposal will allow for SC's to go short or long in the R/T market (i.e., final schedules do not need to be balanced).  That's good.  

I think the most material issue at this point is how the forward capacity requirement (ACAP, akin to ICAP) will affect our trading.

GAC

What is CAISO proposing?

First off, there are "target price" and "intra-zonal congestion management"
FERC filings that are apparently almost ready for a drop at FERC.  The
"comprehensive" package would build off that.

In essencence, CAISO is proposing a capacity market (similar to what IEP
proposed at the CPUC "Procurement OIR") that has an "available capacity
obligation" (ACAP) on the load-serving entities (LSEs, aka the utilities and
electric service providers).  This is the solution to the "all spot, all the
time" design that was associated with the CPUC's "mandatory buy/sell"
requirement and failure to provide forward reasonableness guidelines for the
utilities.  The LSEs would be required to show / specify to CAISO the ACAP
resources on a month-ahead basis equal to at least 115% of the coming
month's peak demand.  ACAP resources can be the LSE's own generation,
generation under contract, etc.  Failure to procure sufficient ACAP would
lead to penalties.  Also, CAISO appears to suggest that it would be in the
middle of arrangements between a LSE and the capacity supply as it would
penalize the supplier for failure to be available, operate as dispatched,
etc.  That wrinkle seems like it calls for 3 party contracts or some element
of complexity that shouldn't necessarily be required.  Its not clear from
the paper how costs for CAISO-dispatched ACAP resource would be allocated to
other SCs, particularly where a LSE contracted for the capacity, but CAISO's
running it to cover someone else's short energy schedule?  

It is not particularly clear how DWR resources fit into the mix (there seems
to be a contradictory statement in the paper).  However, CAISO is proposing
a two-year "transition" mechanism where CAISO would provide the ACAP
resources (based on their stellar creditworthiness?? or DWR resources??).
There could be tension here with the proposals at the CPUC proceeding.
Also, it appears that an argument can be made that DWR is a LSE under the
terms of AB 1x.  

CAISO is also moving toward a forward nodal-based congestion mechanism,
similar to the PJM type of design.  It is based on a 3000 bus network model
with simplified modeling of adjacent control areas.  Dispatch will be on an
optimized basis that on resource constraints (that appears to be dynamic)
including transmission capacity changes (increased ATC when ETC rights are
freed up, etc.) and generation availability.  There will be some degree of
node aggregation (in the form of demand locations and trading hubs).  It
appears that RMR contracts could disappear under this approach, although
that is not completely clear.

Creation of the forward congestion approach with security based optimization
effectively removes the need for the "balanced schedule" requirement.  Under
the proposal, CAISO would make trades happen in realtime through the
optimization to the extent not addressed through the forward markets. CAISO
calls for the resurrection of a day ahead energy market (FERC has called for
that).  CAISO says its open to that market being run outside of CAISO, but
that the need is for a centralized day ahead energy market that could help
shape resource needs.

CAISO would have the ability to dispatch identified ACAP resources not
already scheduled by the LSE.  They speak in terms of a "residual unit
commitment" requirement ... something akin to the "long lead time" proposal
under the "must-offer" requirement.  Their start and min load payment
proposal would be continued, subject to loosing it for unavailability or
participation in the market.  

Note that CAISO states they will need to mitigate bids due to "locational
market power", particularly in relation to congestion.  I thought that
locational market power was addressed via RMR.  This raises the "black box"
issue if CAISO is going to say on a realtime basis that they have some
dynamic problem and only a particular generation asset could address the
problem so we're mitigating your bid curve based on some form of proxy
pricing mechanism.  To some extent, in a nodal system, CAISO could argue
that more folks have "locational market power."  We'll need to review other
markets' treatment of this issue.

The future of the AS markets is questioned in the paper, and there's the
specific suggestion that the replacement reserve market is unnecessary if
ACAP is put into place.  This is probably the largest hole in the paper,
because there's a clear implication that something should happen and
presumably CAISO has at least come up with some set of options on the issue
(i.e., kill AS, have AS markets but alter products, have one AS product but
expect low volume, etc).

One element that seemed missing was a discussion of demand response.  In
many respects that element has been consistently missing in the market, save
the extraordinary conservation last summer.  There is a suggestion that the
ACAP requirement could be addressed by demand response, but presumably that
would need to be demand that could be dispatched by CAISO, and those
resources are particularly limited under the current CAISO demand-side
design.  While efforts on interruptible programs has occurred at the CPUC,
it is not clear that the two entities are heading in the same direction.

It was noted earlier that the ACAP proposal is similar to what IEP (and
others) suggested at the CPUC Procurement OIR.  Based on a lone comment by a
CPUCer during the CAISO media call yesterday, the CPUC is very far behind
the curve on these issues, and there is absolutely no coordination on this
issue.  Given that the same "solution" is popping up in both venues, there
is a real need to make sure that the two pieces can fit together, while
avoiding a bureaucratic paralysis that could happen if a formal attempt to
"coordinate" the venues is proposed.

ABB




Andrew B. Brown
Ellison, Schneider & Harris, LLP
2015 H Street
Sacramento, CA  95814
Phone: (916) 447-2166
Fax: (916) 447-3512
mailto:abb@eslawfirm.com