The California ISO experience with price spikes and search for remedies

An overview of the conditions under which price spikes have occurred in California, and the attempts to eliminate those conditions are discussed. Several periods of price spikes have occurred since the competitive electricity market became a reality in California, usually at times of high system load.. Price spikes in the ancillary services (A/S) (one of the two markets run by the California Independent System Operator (CAISO), the other being balancing or real-time energy), occurred when the supply of competitive bids has been restricted either by bid insufficiency or gaming. Bid insufficiency is the failure of the market to produce enough bids for a particular product. Gaming is defined as taking advantage of an occasion when there is likely to be short supply due to transmission constraints or geographical distribution of generation and using the occasion to maximize prices. The key tool used by the CAISO to reduce price spikes has been to reduce and adjust procurement of A/S by instituting additional enforcement of market participants' ability to meet their requirements to provide A/S on command. If they fail to do so, they do not receive payment for capacity that has been bid, with the bids accepted, but not provided. Changes in the scheduling system to facilitate inter-Scheduling Coordinator trades of A/S obligations, designed to reduce procurement through the CAISO markets and thus potentially lower market clearing prices for A/S in those markets, has been another technique used. The institution of 'Rational Buyer' has been yet another, and more substantial, means used to reduce price spikes. This mechanism, involving demand substitution across the markets for A/S, has the effect of defeating attempts by a generator to place a high-priced bid in a generally lower value market in the expectation of a smaller number of bids in that market. Significant decline in the amount of A/S procured, and a significant decline in the ratio of the total cost of A/S compared to the total cost of energy produced has been the result of these actions to date. To illustrate, the ratio of A/S costs to energy costs has decreased from a high of 29 per cent in 1998 (12 per cent actual average) to a low of 1.8 percent in December 1999. 1 fig,