POWER March 2017 - 59
POWER MARKETS
The Roots of CAISO
The roots of the California Independent
System Operator (CAISO) date to the state's
1990 gubernatorial
election. Republican
Pete Wilson, a former San Diego mayor and
U.S. senator, succeeded outgoing two-term
Republican Gov. George Deukmejian. In
1991, Wilson named a University of California,
Davis law school contracts professor,
Daniel Fessler, to run the California Public
Utilities Commission (CPUC).
California at the time had a conventional,
vertically integrated utility market.
The CPUC regulated the three large investor-owned
utilities (IOUs), Pacific Gas &
Electric (PG&E), Southern California Edison
(SCE), and San Diego Gas and Electric
(SDG&E), while big public power systems,
including the Los Angeles Department of
Water and Power and the Sacramento Municipal
Utility District, were not subject to
CPUC jurisdiction. Rates in the state were
well above the national average. Utilities
were not building new generation. Wilson
and Fessler believed the state's stagnant
electricity market was a drag on California's
economic growth.
Fessler argued the solution to California's
electric woes was to bring competition to
the investor-owned utility market, where
PG&E, SCE, and SDG&E had carved the state
up into regional monopolies. Bolstered by
the federal 1992 Energy Policy Act, which
encouraged electric competition, Fessler's
CPUC in 1993 began a three-year inquiry
into restructuring the state's electric system.
The eventual outcome was state
legislation (AB 1890), which passed the
California Legislature unanimously in 1996.
The result was near-disaster. The edifice
that California erected as a result of AB
1890 collapsed in a political and economic
inferno just four years later, after Wilson
had vacated the governor's office and Democrat
Gray Davis replaced him.
Stanford University's James Sweeney,
examining the failure of the California restructure
soon after it cratered, said that
" the final legislation was not bad, but
the implementation was severely flawed. "
Those flaws caused the collapse of the
newly created wholesale competitive market
and led, as a result, to the current incarnation
of CAISO.
The original restructuring created the
March 2017 | POWER
California Power Exchange (PX) to manage
the competitive auctions and the ISO
to dispatch the power that was successful
in the auctions. Following the lead set
by other states, the new law required the
investor-owned utilities to divest most of
their generation.
But problems arose quickly, including
confusion between the PX and CAISO. As
Sweeney diagnosed it, " Utilities were required
to sell what remained of their power
generating capacity and restricted them
from buying back that capacity, or any
other capacity, under long-term contracts.
This created a high-risk situation for the
investor-owned utilities. "
In June of 2000, electricity prices on
the PX shot up. An April 2000 price of $30/
MWh spiked to $100 by June and to $450
by November. Yet it got worse. Sweeney
noted, " The first five months of 2001 were
characterized by soaring wholesale prices,
energy emergencies, and a small number of
rolling blackouts. The pain was severe. "
The utilities were bleeding money and
not credit-worthy. Without credit, they
couldn't buy electricity. Rolling blackouts
resulted. The state stepped in to become
the only buyer of power for the IOUs.
The problems were exacerbated by energy
marketers, including the criminal
Enron Corp. (on the verge of one of the
largest business failures in U.S. history),
which were able to manipulate the opaque
PX to their financial benefit. Still, Sweeney
argues that it wasn't marketers but the
failure of the state's political leadership to
understand the situation that led to the
market collapse.
State officials, starting with Gov. Davis,
faced intense political pressure to correct
www.powermag.com
the situation. They responded by capping
retail prices (which hamstrung utility income)
even as wholesale prices (where the
utilities had to spend their cash) continued
to soar. California " did not rise to the
challenge and allow price signals to pass to
the consumer, " wrote Sweeney, " thus creating
a crisis. " PG&E, one of the nation's
largest utilities, had to file for Chapter 11
bankruptcy protection; SCE came close,
avoiding filing only through a rescue from
the state government.
By June 2001, demand had dropped in
response to the extraordinary prices, new
gas-fired generation was coming online,
and the crisis finally abated. The PX died,
and its market-making functions were
moved to CAISO, which was able to create
a successful independent system operator
with well-understood policies and practices
(Figure 3).
The political fallout essentially ended
career. Angry
Davis's
voters
threw him
out of office in a special recall election in
2003, largely in reaction to the power crisis
and his ham-fisted responses, making
him only the second governor in U.S. history
to be recalled.
Hollywood star and newly minted Republican
Arnold Schwarzenegger replaced
Davis in the special election. Since then,
noted Natural Resources Defense Council
California electricity maven Ralph Cavanagh
in an interview, California's governors,
who pick the ISO's board of directors, have
appointed experienced energy experts, not
figures with political agendas. Likely still
gun-shy after what happened to Davis,
the political system has not attempted to
influence the ISO's policies or operations
since.
59
3. Overwatch. CAISO's control center in Folsom, Calif., watches over a far-flung service
territory from the Mexican border to the Pacific Northwest. Courtesy: CAISO
http://www.powermag.com
POWER March 2017
Table of Contents for the Digital Edition of POWER March 2017
Contents
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POWER March 2017 - Cover2
POWER March 2017 - Contents
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