Analysis of the California WEPEX Applications to FERC

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The major theme of this report is that the WEPEX Applications prevent the ISO from clearing the market, and that this is the root of the most important problems. The proposed rules at fault (1) prevent the PX and other Scheduling Coordinators from passing on all of their bids to the ISO, and (2) prevent the ISO from dispatching beyond the point at which congestion is eliminated. Although it is generally accepted that these restrictions prevent the ISO from achieving the least-cost dispatch, many other consequences of this market-clearing failure have not been widely recognized. These include sub-optimal dispatches by the PX when the system is uncongested, congestion charges that reward power flow in the congested direction, and incentives for Scheduling Coordinators to ignore known intra-zone congestion. But the most pernicious effect of failing to clear the market may be decreased system reliability. Four minor themes will also be considered but in less detail. Most importantly we describe several examples of unequal treatment for the PX. Second, we will discuss the ambiguities introduced by zonal pricing. WEPEX's zonal system is based on a view of congestion that largely ignores loop flow and consequently has not been well defined. A replacement definition is offered. Third, WEPEX appears to have invented a new definition of the transmission congestion contract (TCC) that is based on actual instead of pre-specified flows. We will show that this ruins the incentive properties of TCCs, but that this problem is partially rectified by the market in TCCs. Lastly we will discuss losses. The WEPEX proposal intentionally avoids marginal-cost pricing of losses. It is known that this avoidance will cause some inefficiency, but what has not been recognized is that it significantly increases use of the power grid. Because this effect is greatest during peak usage, it will necessitate costly grid expansion.

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