Re: Bitten by NIMBY, CA power system goes socialist...

Date: Thu Jan 18 2001 - 11:37:42 MST

Chris Hibbert wrote:
> said:
> > Is there other evidence available that the California markets actually
> > follow this highest-price-of-the-day policy?
> I'll try to contact Michael Lynch and see what his evidence was. I thought
> I had heard this before I saw this article, but as you point out that could
> just be due to contagious misinformation.

I appreciate your efforts to track this down. I've been looking at trying
to dig through the tariffs for the PX and ISO markets but I can't even figure
out what the chapter titles mean, so I don't know where to begin.

> If this isn't the case, what alternative hypothesis explains the role of
> the $150/MWh price cap?

The price cap makes a certain amount of sense in the context of a
traditional single price market. The idea is that you use the highest
bid price that hour to set the price for all the electricity delivered
during that hour, except above the price cap you use as-bid rules.

For example suppose you could buy 50% of your "noon" electricity at $100,
another 30% at $150, and the remaining 20% at $250. Under the original
single-price auction rule you would pay $250 for all the noon electricity.
Under the new rule you would pay $150 for the first 80% and $250 only
for the last 20%. In effect the single-price rule is used up to $150
and as-bid pricing is used above that cap.

I think the theory is that prices above $150 are due to exercise of market
power and are not really legitimate. Normally the single price auction
has the advantage that sellers can bid their marginal costs and still
get the advantage of higher rates bid by others, which encourages sellers
to bid lower. However if the highest prices are not true marginal cost
bids but represent monopoly power, first-price rules have bad effects.

So they're retaining the single price rule for "normal" auction behavior
but abandoning it when prices get into a regime which they judge to be
abnormal and an indication of market manipulation. The FERC document
goes to some lengths to argue that $150 is a reasonable breakpoint given
current costs of production. However, many participants in the market
have strongly criticized this rule, from all directions.


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