CPUC urges Cal-ISO to act to ward off potential system market power abuse

Washington — Even if the right fix is unclear right now, California Independent System Operator should still launch a proceeding to investigate and address concerns that there is a growing potential for energy sellers to exercise system market power, state regulators said.

The issue is significant because abuse of market power can drive up power prices. And some say factors -- like gas-fired plant retirements -- that are raising worries about a capacity shortfall could also worsen the potential for market power abuse.

In the past couple of years, Cal-ISO's Department of Market Monitoring raised concern about a possible increase in the ability of energy suppliers to exert market power in the day-ahead market at the system level. Cal-ISO has measures to mitigate local market power, but it does not have measures to mitigate system-level market power.

In April, Cal-ISO found its market was likely structurally uncompetitive in 55 hours in 2018. In June, DMM countered that Cal-ISO was likely structurally uncompetitive in over 300 hours in 2018.

GROWING CONCERNS

Now, stakeholders are divided over what Cal-ISO should do about these findings. Some say Cal-ISO should focus on other issues, and they worry that system market power mitigation could suppress prices, spur more plant retirements, and discourage imports.

But staff at the California Public Utilities Commission says that even if the right fix is unclear, Cal-ISO should still launch a proceeding on this issue, because it is likely to get worse, according to comments posted Thursday.

"Given expected retirements of once-through cooling facilities in California, the potential retirements of coal facilities throughout the West, and the variability in hydro conditions over time, Energy Division staff believe that the number of structurally uncompetitive hours are likely to increase, not decrease over time," staff said.

Similarly, the DMM earlier this month reiterated its concerns over future trends that suggest the potential for system market power is likely to increase significantly in the next few years.

KEY TRENDS

These trends include: the retirement of gas-fired capacity, the increasing portion of resource adequacy requirements met by renewables and imports, tightening regional supply, and the growth of community choice aggregators that have more fragmented procurement processes, the DMM says.

The DMM noted some of the same trends are driving the looming capacity shortfall that Cal-ISO has warned about in recent comments to the CPUC.

"Thus, if the ISO is concerned about reliability in the next few years due to tight supply/demand conditions under peak load conditions, the ISO should also be very concerned about the potential for system market power in many other hours," the DMM said.

OTHER FACTORS

There is not strong evidence of market power abuse in the Cal-ISO energy markets at present, said Morris Greenberg, an analyst with S&P Global Platts Analytics. It might develop in the future if reserve margins tighten, but that is not certain, he said.

"More elastic demand and a broader regional market could counter that trend," Greenberg said. "Also, given concerns about resource adequacy, clamping down on market prices seems ill-timed," he added.

Cal-ISO is set to discuss the issue of system market power with its Market Surveillance Committee on August 19. The MSC is expected to present an opinion to the Cal-ISO board in November and staff are developing a straw system market power mitigation design to be a base for potential further policy development after November, according to a presentation that is slated to be given at the meeting.

-- Kate Winston, kate.winston@spglobal.com

-- Edited by Mark Watson, newsdesk@spglobal.com